Fast-growing project FARO in South Africa raises $6 million to source, refurbish and sell surplus clothing

Global fashion brands suffer from excess inventory. ASOS, for example, had more than £1.2 billion of unsold products in 2022. For the most part, these brands avoid reselling in core markets like the UK and US to prevent market cannibalization. Meanwhile, emerging markets like Africa rely heavily on imports of used clothing, but 30% to 40% of these items are deemed unusable upon arrival, leading to environmental degradation due to discarded textiles.

The situation highlights an obvious paradox: excess new unsold inventory in developed markets coexists with environmental damage caused by used imports in emerging markets. But this dynamic also creates unique arbitrage opportunities for startups in Global resale market – Also known as Re-trade – Which is expected to reach about $350 billion by 2027.

Trying to seize this opportunity Farrowa South African startup that burst onto the scene last year and recently raised $6 million to pursue its vision of making fashion affordable while combatting textile waste across Africa.

Selling excess inventory in emerging markets

Here’s how it works: African markets lack the economic capacity to support full-price retail stores for brands like Calvin Klein, Tommy Hilfiger, and Zara. However, the desire for indigenous products on the continent remains. FARO ensures that excess stock of these brands is brought back to life in South Africa, where they are in high demand, creating value for both markets and reducing waste.

The recommerce startup targets returns for consumers with minor defects that brands often ignore or burn through due to high labor costs, co-founder and co-CEO David Tur tells TechCrunch. FARO collects and recovers these items using its facilities equipped with industrial sinks, steam tunnels, and affordable labor. This approach prevents waste while enabling the startup to purchase inventory at very low prices – sometimes as low as £1 apiece – and resell it after value-added processes.

Tour explains that the company operates on a fixed margin model targeting 45% after all costs, including swing marks and processing. He also says that instead of inflating profits when margins exceed targets, FARO invests in better prices for its clients.

Currently, FARO has four stores with ambitious plans to expand to 1,000 locations over the next decade. Its inventory includes approximately 40% refurbished returns and 60% overstock items. FARO sources these clothing items through partnerships with major brands such as ASOS, Boohoo, G-Star, Jack & Jones and Levi’s, offering some at discounts of up to 70% off retail prices.

“Our fundamental belief is that we can be the most exciting driver of great value to the customer, this is how we create loyalty and commitment, and how we get to 1,000 stores just by focusing 100% on customer centricity,” Toor says. .

The South African retail market, unlike the rest of Africa, is highly developed, with over 2,000 shopping centres, making it a prime location for the physical distribution of off-price retail. This approach is necessary because off-price inventory — often returned to the consumer with one-of-a-kind pieces — is too expensive to digitize and list online.

Even large off-price retailers, like TJX, operate primarily offline, relying on entrenched supplier relationships and legacy, profitable systems that leave little incentive to innovate. However, the shortcomings of these systems are becoming increasingly apparent, as inventory management still relies on outdated, labor-intensive processes, with planners manually handling massive data in Excel.

FARO is developing AI-powered agents designed to break down complex buyer workflows into small, manageable tasks, thus streamlining processes, Tor says.

“Some brands have over 15,000 people working at head office level just dealing with data in Excel,” he says. “If you look at what AI can do, you can build an AI agent for that purpose, and that’s what we’ve done. We’re starting to deploy the first purchasing models that can do that — not in hours, but in seconds. Their accuracy will be infinitely better than The precision of a human who would otherwise have done so.

According to Tor, the startup also plans to add personalized shopping tools. For example, customers interested in certain brands or items can be notified when similar products are about to arrive in one of its stores, enhancing the shopping experience.

It can serve as a useful distinction if it works. E-commerce continues to face obstacles in Africa due to logistical challenges and population density, which makes delivery models expensive. While you love platforms Takealot and Jumia These platforms have survived for many years, but the rise of ultra-cheap, trendy platforms like Temu threatens not only their dominance, but also the fast fashion brands operating in South Africa that attract price-sensitive consumers on the continent.

The road to a thousand stores

By eschewing e-commerce altogether to optimize its internal operations and partner supply chains, and by targeting aspirational buyers who value branded goods for their condition and perceived quality, FARO finds its niche, says Tor.

FARO started 2023 with a pilot pop-up store in South Africa, generating $100,000 in its first month. Initially, the company expected it would need seven stores to reach $2 million in annual revenue, based on traditional retail standards.

Instead, FARO, which operates in urban centers, mid-market centers and formal retail spaces, says it reached that milestone — $2.3 million — with just four stores, and achieved 20-fold revenue growth last year. Now, the recommerce startup aims to grow five-fold this year, according to CEO David Tur.

As for its plans to expand to 1,000 stores, that depends on how effectively it can build local pricing profiles tailored to meet regional demand and the specific brands available as it looks to expand into other emerging markets. Consumer behavior and preferences are not universal and can vary significantly between regions. A strategy that thrives in South Africa may not resonate in Kenya or Nigeria.

Tor launched FARO with three other co-founders: Will McCrane, Chris Macania, and Amber Penny Young, who collectively brought expertise from Amazon, UCook, Live, Jumia, Rocket Internet, and Zumi.

Bloomberg Chairman J.B. Zammit led his new primary round. Venture capital firms such as Presight Capital and Garage Ventures and individual investors including Mato Peric (MPGI), Leonard Stiegeler (Pulse), Oliver Merkel (Flink), Vikram Chopra (Cars24), Tushar Ahluwalia (Razor Group), and Daniel Funk, Managing Director . Thiel Capital participated.