Over the past few years, a number of so-called circular fashion and sustainable fashion startups have gone public, raising billions of dollars in aggregate. Circular Fashion is where people can sell their old clothing to new consumers online. Sustainable Fashion refers to clothes that are made from biodegradable materials which have a smaller carbon footprint than normal clothes. In recent years, the fast fashion industry has been the subject of increasing criticism due to its environmental impact.

Clothes are now so cheap and people buy so much of it that millions of tons of used clothes end up in landfills. With the younger generations of consumers caring more about environmental issues, clothing companies that can cut down on waste should be well positioned to gain market share. Circular Fashion seems like a win-win Sellers get some money from their old clothes instead of throwing them away. Buyers get name brand clothes for a fraction of the near price and less clothes end up in landfills.

Wall Street Wasted little time in hyping up the industry as the next big thing Paving The way for a number of sustainable fashion companies to go public over the past few years years. However, without exception, these IPOs have been complete disasters. Of the five. Pure Play Sustainable fashion companies, their share prices have declined between 57 and 95 since their IPOs one of the five companies Poshmark was acquired last October for 57 less than its IPO price, which was just one year prior.

Of the four sustainable fashion companies that remain publicly traded today, they have all suffered share price declines a Nexus of 80 percent In this video, We'll take a deep dive into circular fashion and see why profitability and sustainability may be mutually exclusive. A big reason why money losing circular fashion companies were able to go public in 2021 was because interest rates were near zero, so investors had nowhere better to park their cash. But thanks to the Fed's rate hikes, this is no longer the case. Treasury Bonds now offer yields as high as five and a half percent, which is backed by the full faith and credit of the US government.

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Firstly, there's circular luxury, Secondly, there's circular Mass market, and finally, their sustainable manufacturing. We'll look at each of these three business models in order. The idea of circular fashion seems to make a lot of sense at first. For example, a bride might spend thousands of dollars on a wedding dress, which they wear only one time.

This is clearly a massive waste of money. Beyond Special occasions like weddings. A lot of people buy expensive clothes, but then get bored of them so they end up sitting in the wardrobe 90 of the time doing nothing. The first company which seriously attempted to address this problem was Rent The Runway Founded in 2009.

They have a massive Warehouse with hundreds of thousands of pieces of clothing. Consumers can pay between 94 and 193 dollars per month to get access to between 5 and 15 articles of clothing at a time you choose to close from their website and they're delivered to your door. Whenever you get bored of the clothes, you can mail it back to them and get a new one. This should be much more efficient than buying clothes because the clothes are never sitting in a wardrobe doing nothing.

As soon as you're done with the clothes, they can be sent back for someone else to wear while Rent The Runway's business model sounds great. In theory, there are a few major problems in practice. Each time an article of clothing is returned, it must be dry clean, which is a costly process. Also, clothes experience wear and tear over time.

Rent The Runway employs large numbers of seamstresses who make repairs to the clothing on a regular basis. read: the Runway Sales plummeted during the pandemic. With people staying at home, there is less demand for designer clothes. As a pandemic subsided, their revenue gradually recovered.

In 2021, they ipo'd and used the proceeds to ramp up their marketing budget. In 2022, they finally surpassed their pre-coveted revenue. Despite the strong Revenue growth, Retina Runway has never been profitable. We can look at their unit economics.

For 2022. For every 100 of Revenue they generated, they spent 31 on fulfillment. This includes shipping the products to and from the customer's house, as well as cleaning and repairing the clothes. They spent 19 on technology, which includes operating the website and various other software that they use to keep track of their massive inventory.

They spent 28 on the cost of the clothes themselves. Eventually, the clothes are so worn out that they need to be thrown away and replaced. And finally, they had six dollars of depreciation in amortization. This leaves them with a contribution profit of 16 that is not enough to cover their marketing in general and administrative costs.

So, the company reported an operating loss. When a company has a positive contribution profit, they could theoretically become profitable by increasing their revenue. Hopefully, their overhead costs and marketing will decrease as a percentage of Revenue, but it doesn't look like this is in the cards for Rent The Runway Rent The Runway has extremely bad customer reviews with just 1.4 out of 5 stars on trustpilot. People complain of the closer of poor quality and excessively worn out.

Consumers also complain about deceptive advertising. They signed up for Rent the Runway after seeing online advertisements which show high quality clothes. When they actually start using the platform, the clothes on the advertisements are not available. Resolving these customer complaints would require expanding their warehouses, holding more inventory and replacing worn out clothes faster.

Improving the customer experience would cost money that Rent the Runway doesn't have as they're already losing money as is. Rent The Runway has failed as a business within just two years of going public. Look, the share price has declined by 94 percent. With a share price of 98 cents and a market cap of just 66 million dollars.

It is squarely within penny stock territory and will likely go bankrupt. The core problem for Rent the Runway is that they have to ship, dry, clean, and repair the clothes on a near weekly basis, which is a massive expense. Secondly, there's an incentive problem. when people own their clothes.

they're more likely to take care of them so they can last a long time. If you're just going to send the clothes back next week, There's far less incentive to take care of them. This creates a situation where the quality is subpar and customer churn is high. This requires the company to spend exorbitantly on marketing to replace lost customers, which has thus far prevented them from ever turning a profit.

The next circular: Luxury Company is the Real Real Founded just a couple years after Rent The Runway It also aimed to solve the problem of old designer clothes sitting in people's wardrobes doing nothing. The Real Real is an e-commerce platform which allows people to buy and sell luxury apparel and other accessories. You can buy second-hand luxury goods from Top designers like Gucci Louis, Vuitton and Prada at up to 90 off the original retail price. The main problem with secondhand luxury goods is that there's a massive incentive to counterfeit.

It can be very difficult to tell the difference between a well-made fake and the real thing. The Real Real has massive authentication centers where every single item sold on a platform must first go to to be authenticated by an expert. This is their main selling point and why the name of the company is Real Real. There have been incidents of fake products slipping through the cracks, but overall, Real Real does a pretty good job of verifying the authenticity and customer reviews are generally positive.

The problem is this process is extremely expensive. They have to hire hundreds of authenticators to look at every single item. Because of this, they are forced to charge exorbitant commission fees to sellers on the platform. If you send Real Real a product that they sell for 99, you'll only get nineteen dollars.

There's a sliding scale where the commission is lower the more valuable the item is, but even at the top bracket, they will still take a 30 commission. Despite these massive fees, Real Real is still losing huge amounts of money in 2022. For each one hundred dollars of Revenue they generated, they incurred forty two dollars for cost of Revenue. Cost of Revenue consists mainly of shipping costs and payment processing fees.

They spend a further 46 dollars on operations and technology, which mostly consists of their authentication centers. This leaves them with just 12 dollars of contribution profit, which is nowhere close to covering their marketing and overhead costs. Since its IPO in 2019, the Real Real share price has declined by 91 as investors have completely lost faith in their supposed paths or profitability. The idea of an online Marketplace for second-hand clothing makes sense.

In theory, it just doesn't work for luxury items because the cost of authentication is prohibitively high. But what about for cheaper clothes that wouldn't even be worth counterfeiting would secondhand e-commerce work there. In 2021, two mass-market circular fashion companies went public: Poshmark Ipo'd at a three billion valuation and thread up iPod at 1.3 billion valuation. Both companies saw their share prices surge on the first day of trading as investors were hyped about the circular fashion opportunity.

Poshmark is a peer-to-peer e-commerce platform very similar to eBay. If you have old clothes you want to sell, you can take pictures of them and list them on the Poshmark app. You set your own price and can negotiate with the buyer. The buyer pays for shipping.

You print out a prepaid shipping label and send it off to the buyer's address. Poshmark takes a 20 fee on the sale price of each item. The main bold case of Poshmark is that it has an asset light business model. They don't have any warehouses and never take physical delivery of any inventory.

In theory, this could make them very profitable as their only expenses are operating the app, marketing, and customer service. Thredup is also an online platform to buy and sell second-hand clothing. If you have a lot of clothing that you don't use anymore, Thredup can send you a large bag where you put all of your clothes and send it over to them. Thredup has massive warehouses where they sort through all the clothes, photograph them, and list them for sale on their website.

When your items sell, you receive 15 to 80 percent of the value based on the item price. The max payoff percentages for items that sell for 200 or more. Thread Up charges higher fees to sellers than Poshmark. This is to be expected given that they have thousands of employees at their warehouses.

Poshmark and Thredup Target Two different types of customers Poshmark Sellers are willing to put in the time to list the product themselves in an effort to receive the highest possible price for their used clothing thread up. Sellers are willing to receive worse prices for their clothes in exchange for the convenience of Thredup handling the listing and fulfillment. The third quarter of 2022 was Poshmark's last as a publicly traded company, so we'll use this to judge their unit economics. For every 100 of Revenue they brought in, Seventeen dollars went to the cost of Revenue.

This includes Payment Processing fees and the cost of operating their website. Poshmark takes a 20 Commission of the gross merchandise value and that's what they recognize as net revenue, but they have to pay Payment Processing fees on the entire value. A further eighteen dollars went to Operations and Support, which primarily consists of customer support representatives and the like. One dollar goes to depreciation and amortization.

This leaves them with sixty four dollars of contribution profit for every one hundred dollars of Revenue. That's a pretty good margin, but by construction asset light, businesses like Poshmark always have high contribution margins. The real question is how much it costs to keep customers on the platform. One thing to note is that Poshmark spends a lot of money on marketing almost half of their revenue.

The reason they have to spend so much on marketing is their High customer churn. The company has horrible customer reviews with just 1.3 stars out of 5 on trustpilot. The main complaint is that sellers are often unresponsive and the products are often in far worst condition than their photos would lead you to believe. Because Poshmark is a peer-to-peer platform, it is very difficult to police the quality and trustworthiness of the sellers.

This makes for a poor buyer experience. Poshmark needs to constantly spend on marketing to replace lost customers. This is never a sustainable strategy because eventually you run out of new customers to market to. In October of 2022, the South Korean Search Engine Company Naver acquired Poshmark for 17.90 per share, representing an all-cash consideration of 1.2 billion dollars.

Why they wanted to buy a money losing business on the other side of the world with a 1.3 star trust pilot rating is beyond me, but it allowed Poshmark's investors to cash out, albeit for a 57 loss compared to their IPO price less than two years prior. Given the asset heavy nature of Thredup's business model, their contribution margin is far lower than Poshmarks for every 100 of net revenue. They spend 33 dollars on outbound shipping and 48 on sorting, photographing, and listing the products on their platform. This leaves them with only nineteen dollars of contribution profit, which is not nearly enough to cover their marketing and overhead costs.

The marketing expense is necessary to bring in new customers to replace the customers who leave the platform. Threadup's customer reviews are almost as bad as Poshmarks, with just 1.6 out of 5 stars on trustpilot. While most of Poshmark's complaints come from Liars, most of Thredup's complaints come from sellers. Sellers complain about the exorbitant fees that Thread Up charges, as well as the fact that many of the items that they send in simply disappear without explanation.

The problem with Thredup is that the second hand clothes are just too cheap. The amount of profit that they make from selling each item is too small to cover their massive Warehouse expenses. This has caused them to cut Corners leading to a poor seller experience games. Unsurprisingly, Thredup's share prices lost 83 percent of its value since its IPO.

If circular fashion doesn't work, how else can a business benefit from consumer interest in environmentalism? Some Brands, including the shoe company All Birds have tried to incorporate environmental sustainability into their manufacturing process. The tops of Albert's shoes are made from wool, the sole is made from sugarcane. The laces are made from recycled plastic. This gives them a significantly lower carbon footprint than normal shears, which are typically made from polyester or nylon mesh.

From the outset, All Birds tried to position itself to investors as an environmentally responsible ESG company. They proudly boasted their status as a certified B Corporation B Certification is given out by a non-profit organization called B Lab, which judges companies based on their ESG characteristics. All Birds further claims that their commitment to ESG has turned them into a thought leader which will presumably boost their sales from environmentally conscious consumers. They brag that as a certified B Corporation, they do not aim purely to maximize shareholder value.

Instead, they have a vague mission of prioritizing positive outcomes for all stakeholders. They made good on their promise to neglect shareholder value as the share price has declined by 95 percent since the company went public. So why is all Birds performed so disastrously? All Birds goes out of its way to make its shoes out of environmentally sustainable materials which are far more expensive. Because of this, Albert's shoes are very expensive with the cheapest men's shoes costing over one hundred dollars per pair.

The thinking is that people will be willing to pay these high prices because it shows their support for the environment. All Birds has always been generously funded by Venture capitalists who bought into the idea of sustainable fashion in their first year in the business. In 2016, they secured a 7 million dollar series A funding round. They consumed cash voraciously and by 2020 they were already onto their series E-funding round where they raised another 100 million dollars.

They use the Venture Capital money to spend exorbitant amounts of money on marketing. Every year, they spend close to 40 percent of their gross profit on marketing. This massive marketing expense has allowed them to grow their revenue. When Alberts went public, they tried to position themselves as a thought leaders among environmentally conscious consumers.

These consumers would flock to buy All Birds shoes as a way to publicly show their environmentalism. Because of this, the stock price surged 90 on the first day of trading, giving the company a four billion valuation despite the fact that they had never turned a profit. The problem is the more Alberts grew their revenue, the more money they lost. In every single year, their operating losses have been greater than the prior year.

This indicates that their revenue growth was not the result of being a thought leader, but instead the result of an unsustainably expensive marketing campaign. Throughout 2022, they were burning through their IPO money at an alarming rate. By 2023, their cash position was getting uncomfortable and they pulled back on their marketing budget. This caused their sales to drop by 11 in the first half of the Year by positioning themselves as a growth stock.

Alberts was able to achieve a premium valuation despite the losses, but the knife Cuts both ways. as their Revenue growth decelerated and then turned negative growth. Investors dumped the stock and the share prices declined by 95 Since the IPO Despite the media hype, very few consumers actually care about environmental sustainability. When asked in a survey, people might say they care about the environment because it costs nothing to take a box, but very few people are willing to spend 100 on an ugly pair of shoes just because the brand claims to have a lower carbon footprint.

At the end of the day, people want cheap clothes and massive quantities regardless of environmental impact. and as long as that's what they want, that's what the market will supply. Alright guys, that wraps it up for this video. What do you think about sustainable fashion? Let us know in the comments section below.

As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.