Faro Raises $6M to Tackle Clothing Waste in South Africa

The Challenge of Unsold Inventory and Textile Waste

Many international fashion companies are facing difficulties with substantial amounts of merchandise that remains unsold, representing billions of dollars in value.

Typically, these brands refrain from reselling these items within their primary markets, such as the United Kingdom and the United States, to avoid negatively impacting existing sales.

The Secondhand Clothing Market in Africa

Conversely, developing regions like Africa are significantly dependent on imported secondhand clothing.

However, a considerable portion – between 30% and 40% – of these imported garments are found to be unusable when they arrive, contributing to environmental problems through the disposal of textile waste.

A Paradox and Emerging Opportunities

This situation presents a clear contradiction: an overabundance of new, unsold clothing in wealthier nations exists alongside environmental damage caused by secondhand imports in less developed countries.

This dynamic, however, also generates distinct arbitrage opportunities for new businesses operating within the global resale market – frequently referred to as recommerce – which is projected to attain a value of approximately $350 billion by the year 2027.

FARO: A South African Solution

Recognizing this potential, FARO, a relatively new company based in South Africa, launched last year.

The company recently secured $6 million in funding to advance its goal of providing affordable fashion options while simultaneously addressing the issue of textile waste throughout Africa.

FARO aims to capitalize on the growing recommerce market by offering a sustainable alternative to traditional fashion consumption.

Utilizing Emerging Markets for Surplus Inventory Sales

Many African markets do not possess the financial strength to sustain full-priced retail operations for globally recognized brands such as Calvin Klein, Tommy Hilfiger, and Zara. Despite this, a significant demand for genuine products remains within the continent. FARO facilitates a second market for excess stock originating from these brands in South Africa, where demand is strong. This process generates value for both the originating and receiving markets, while simultaneously minimizing waste.

The recommerce company specifically focuses on consumer returns exhibiting minor imperfections. These items are frequently discarded or destroyed by brands due to the expense associated with repair and refurbishment, as explained by co-founder and co-CEO David Torr in an interview with TechCrunch. FARO acquires these goods and employs its specialized facilities – including industrial laundries and steam tunnels – alongside cost-effective labor to restore them. This strategy not only prevents unnecessary waste but also allows the company to procure inventory at exceptionally low costs, occasionally as low as £1 per item, for subsequent resale after undergoing value-added procedures.

Torr details that the company’s business model is based on a consistent margin target of 45% after accounting for all expenses, including labeling and processing. He further notes that, rather than maximizing profits when margins surpass expectations, FARO reinvests in offering more competitive pricing to its customer base.

Currently operating four retail locations, FARO has outlined ambitious expansion plans. The goal is to establish 1,000 stores over the next ten years across Africa, South America, Asia, and the Middle East. The company’s inventory is composed of approximately 40% reconditioned returns and 60% overstock merchandise. FARO obtains these clothing items through collaborative agreements with prominent brands including ASOS, Boohoo, G-Star, Jack & Jones, and Levi’s, often providing discounts of up to 70% compared to standard retail pricing.

“We firmly believe that prioritizing exceptional value for the customer is the key to building brand loyalty and fostering long-term engagement,” states Torr. “Our path to reaching 1,000 stores hinges on maintaining a relentless focus on customer satisfaction.”

• Key Brands Partnered With: ASOS, Boohoo, G-Star, Jack & Jones, Levi’s.
• Inventory Composition: 40% reconditioned returns, 60% overstock.
• Target Margin: 45% after all costs.

The Problem of Waste in Fashion

Brands often dispose of returned items due to the costs associated with repair. This contributes to significant textile waste.

FARO offers a solution by restoring these items and giving them a new life in markets where they are highly sought after.

Integrating Artificial Intelligence into Retail Shopping

South Africa possesses a remarkably advanced retail sector compared to other African nations, boasting more than 2,000 shopping malls. This makes it an ideal location for the distribution of off-price merchandise through brick-and-mortar stores.

Digitizing and listing off-price inventory – frequently consisting of consumer returns and unique, one-of-a-kind items – online is often prohibitively expensive. Therefore, a physical retail presence remains crucial.

Even large off-price retailers, such as TJX, largely maintain offline operations. They benefit from established supplier networks and effective, pre-existing systems, which reduce the impetus for innovation.

However, the limitations of these current systems are becoming increasingly visible. Inventory control still depends on outdated, labor-intensive methods, with planners relying on manual data handling within Excel spreadsheets.

FARO’s AI-Driven Solutions

Torr explains that FARO is creating AI-powered agents to deconstruct these intricate purchasing processes into smaller, more manageable tasks, ultimately improving efficiency.

“A significant number of brands employ over 15,000 individuals at their headquarters solely for data manipulation in Excel,” he notes. “Considering the capabilities of AI, an agent could be developed to perform this function, and we have done so.

Our initial buy models are already being deployed, capable of completing these tasks—not within hours, but in seconds. Furthermore, the accuracy of these agents will surpass that of a human performing the same work.”

Enhancing the Customer Experience with Personalization

The startup also intends to incorporate personalized shopping features. Customers with an interest in particular brands or products could receive notifications when comparable items are scheduled to arrive at a nearby store, thereby improving their overall shopping experience.

Successful implementation of this strategy could provide a significant competitive advantage. E-commerce in Africa continues to encounter obstacles related to logistics and population distribution, resulting in high delivery costs.

While platforms like Takealot and Jumia have maintained a presence for several years, the emergence of extremely affordable, trend-focused platforms such as Temu and Shein poses a threat. This challenge extends not only to their market leadership but also to fast-fashion brands in South Africa that cater to the continent’s cost-conscious consumers.

• Key takeaway: AI offers a solution to streamline off-price retail inventory management.
• Future outlook: Personalized shopping tools will enhance customer engagement.

FARO's Path to Expansion: Reaching a Thousand Retail Locations

FARO is establishing its market position by concentrating on optimizing internal processes and strengthening relationships with its supply chain partners, rather than pursuing e-commerce. This strategy, coupled with a focus on customers who seek branded products for their status and quality, is proving successful, according to Torr.

Initial Success and Rapid Growth

The company initiated 2023 with a trial pop-up store in South Africa, which generated $100,000 in revenue during its first month of operation. Initial projections estimated that seven stores would be necessary to achieve $2 million in annual revenue, based on conventional retail standards.

However, FARO surpassed these expectations. Operating in urban centers, mid-sized markets, and established retail locations, the company reached $2.3 million in revenue with only four stores. This represents a 20x increase in revenue compared to the previous year. Torr indicates that the recommerce startup is targeting a fivefold growth in the current year.

Strategic Scaling and Regional Adaptation

The plan to expand to 1,000 stores is contingent upon the company’s ability to develop localized pricing strategies that align with regional demand and the availability of specific brands. Expansion into other emerging markets is also a key component of this growth plan.

Understanding that consumer behavior differs across regions is crucial. A successful strategy in South Africa may not be effective in countries like Kenya or Nigeria due to varying preferences and market dynamics.

Founding Team and Investment

FARO was founded by JP Torr, alongside Will McCarren, Chris Makhanya, and Amber Penney-Young. The founding team brings a wealth of experience from companies such as Amazon, Jumia, UCOOK, Superbalist, Spice & Roots, and Zumi.

The latest investment round was led by JP Zammitt, President of Bloomberg. Participating venture capital firms include Presight Capital, Gharage Ventures, and E4E Africa. Individual investors such as Mato Perić (MPGI), Leonard Stiegeler (Pulse), Oliver Merkel (Flink), Vikram Chopra (Cars24), Tushar Ahluwalia (Razor Group), Sudeep Ramnani (885 Capital), and Kresten Buch (88mph) also contributed to the funding.