What’s Driving Recommerce Growth? (And What’s Slowing It Down)

Karri: What type of tailwinds do you see at the moment that is kind of driving into the re-commerce?

Tuomo: I think there’s the usual suspects like, okay, consumer behavior. So most researchers list that, for example, Gen Z wants to buy more sustainable products and kind of re-percapable products and all of that. So there’s these consumer preferences.

Also, there are things like regulation pressure. So in European Union, like digital product passport, right to repair. There’s this kind of pressure going on as a kind of a tailwind. Depending on how—tailwind for maybe re-commerce providers like us, maybe someone in the more mainstream linear side of things might see it as a headwind.

But then I think there’s this—like, I like to also think about just brutal financial things. To me, in the current economy and the global kind of economy, it seems that manufacturing costs are going up in many cases. Manufacturing might be moving closer to the end market in some categories. Usually this means also that the manufacturing is moving to a more expensive labor market.

So these are all kind of market movements that increase the cost of manufacturing or the sales side of things, which means that the margins are getting squeezed unless you can move that price to the consumer.

Now, looking at the consumer purchasing power, the world doesn’t seem to be going to a place where the income diversity would be—kind of, incomes would be going to a better place. So the purchasing power of consumers seems to be not growing as fast as the cost of supplying, which would indicate that with the traditional model, you need to sell more in order to secure enough gross margin to finance your operation or growth targets.

But at the same time, this manufacturing move—it’s kind of the cycle, it doesn’t anymore work that “let’s go somewhere and manufacture more cheaper,” which then gets you to a place where, okay, so how can we improve the margin? And then you start to look into things like, I need to sell this one item more than once—so twice or more.

So then you go into these re-commerce models and try to pick the one that fits your product category and your kind of end customer profile the best. And then in most cases end up in a world where you would make more profit over long term, but it is a disruptive paradigm in the market and you need to invest a bit in order to get there.

Karri: So in a way it’s also—re-commerce can be considered a tool to kind of fight the inflation?

Tuomo: Yes, I would say so. And usually I like to think that if there’s big market disruptions, it can only be good.

So if we go to the far end of one scenario—let’s imagine a world where everything’s serviced, so you don’t own anything—I think, was it World Trade Organization? Someone kind of put out this statement a while back that by 2030 you don’t own anything and you’re going to be happy, which is a little bit of a controversial statement maybe—maybe the “you’re going to be happy” part.

So there is of course that if everything’s serviced, it kind of means that you’re living in the subscription economy. So your access to goods and quality is dependent on your net income—how much you can pay out of those subscriptions. And if you have a situation where that net income takes a hit, all of a sudden your beds and chairs and fridges start to disappear from your home. And that’s probably not ideal.

So maybe it’s a question of basic income or whatever models there might be, or maybe we don’t go full subscription economy. Maybe there are still categories of goods that you want to hold on to at least—or have the right to own it if you want it.

Karri: I think the white t-shirt is the famous example of like, you probably don’t want anybody’s used white t-shirt.

Tuomo: Yeah, you’re probably like—there’s no business in renting white t-shirts. But even for that, I think we usually say that there’s no business in renting white t-shirts, but there might be a business in remanufacturing white t-shirts. So when you get those old t-shirts back, maybe you can turn those into fiber and remanufacture that t-shirt. So you save a little bit on the material costs—at scale, hopefully.

Karri: Maybe a quick word also about any possible headwinds that are slowing down the re-commerce.

Tuomo: There are a lot of headwinds. I think these headwinds are such that—it’s exactly correct to say that it slows it down, it probably won’t prevent it.

Figuring out financing is one. If you go in the servitization model, someone needs to finance those goods. That can be hard, especially for micro merchants. They probably need some kind of aggregate provider there.

The other one is the fact that it is not only a storefront end-user innovation. It is an actual operational innovation in material flows and so on. That has to do with both operation and software infrastructure that needs to be built. So for that item to be able to come back and go to an inventory from which it can be sold, there are things like reverse logistics or refurbishment inspection at minimum that needs to be done. And that is either a human process or then a specialized machine that needs to be invested into.

Also, the whole commerce software layer—which is kind of our focus area as a company—needs to be rebuilt or extended. As a simplified example, if all of the world’s point-of-sales is missing the buttons to press when a customer comes back to, I don’t know, H&M, and gives you those old white t-shirts, if the employees at the store do not have a button to press that says, “Okay, I just received 20 white t-shirts,” that would trigger a bunch of stuff in ERPs and the supply chain. If that doesn’t exist, it can’t really scale.

So we had 20 years or whatever in e-commerce innovation—or more, 30—companies like Shopify, Amazon, and everyone building commerce infrastructure. And it’s a similar effort that we need to do for circularity. And maybe we can just do it in 10 rather than 20.

But yeah, I think those are the headwinds. There are some true headwinds, but it’s probably non-debatable that it’s going to happen over some period of time. So it’s a market timing thing—great for venture capital and all of the other market timing speculative things.

Karri: Maybe as a final question: what is your prediction or where do you see that the whole re-commerce space and circular business model—where is it going to be in five years? Is it going to be in a substantially better place or is there more adoption or how do you see it?

Tuomo: Well, at least the market is saying that re-commerce is growing faster than e-commerce in general. That would mean that it is in a lot bigger place.

I kind of feel that there are certain product categories that will probably be more mature in this change. So maybe the white t-shirts aren’t the first ones. I don’t know. Anytime you put a prediction, it’s the best way of making sure that that doesn’t happen.

But there are of course like phones, where this is already a mature market. You have companies like Swappie and others making a good business out of it. Yeah, I think probably the resales and refurb market is the fastest growing one for various categories.

Servitization side of things—like rentals—are then more geared probably to sporting goods or power tools, like do-it-yourself markets, and cars. And I think those will kind of popularize there.

Probably the bigger shift is then driven also by the manufacturers—how much they start to design their products for re-commerce. So the composability and repairability of those.

I would say that it’s going to be a great market in five years’ time. Maybe that’s where I’m going to… that’s as close of a prediction that I feel comfortable making.