Fashion Briefing: Why buy-now, pay-later companies are tanking despite rising consumer adoption

In this week’s briefing:

Buy-now, pay-later companies tank despite rising consumer adoption

In the last five years, retailer adoption of buy-now, pay-later services has exploded. Companies like Affirm, Afterpay and Klarna have partnered with hundreds of thousands of retailers like Nike and Lululemon and grown to massive valuations.

Despite great adoption and growth, those same companies have found themselves struggling financially. Afterpay, which was reportedly valued at $39 billion last year when it was sold to Square, is now worth a fraction of that, at $22 billion. Between 2021 and 2022, Klarna lost 85% of its value, dropping from $45 billion to just $15 billion. It laid off 10% of its workforce in May. Affirm was also valued at around $45 billion in 2021 and has lost 80% of its value this year.

At the same, the number of users these services cater to is increasing. Klarna reached 150 million users this year, as its stock valuation was tanking and layoffs began. In 2022, Affirm’s users grew by 137% year-over-year to reach 12 million.

This misalignment is due to the nature of how these companies earn revenue. According to Kelly Goetsch, CSO at the commerce platform Commercetools, no matter how many users buy into BNPL, it’s fundamentally an unsustainable business model.

“There was a massive fintech bubble in the venture capital community in the last few years,” Goetsch said, citing Afterpay raising more than a billion dollars from VC investors beginning in 2019. “A lot of investors were dumping money into these companies in a sort of arms race to see which one could outlast the others and become dominant, even if they’re losing money the whole time.”

Goetsch compared the situation to what happened with Amazon Web Services, Amazon’s cloud computing platform which holds up the vast majority of the internet. AWS is four times larger than its next biggest competitor, Azure. 

“Tech is not an industry that lends itself to 50 different companies competing in the same space,” Goetsch said. “One or a few big players become the universal option.”

BNPL is a capital-intensive, low-margin industry where none of the major players are profitable and may never be. According to Goetsch, most are propped up by massive amounts of fundraising.

But on the consumer brand side, BNPL is still highly desirable. As the recession rolls in, cash-strapped customers will likely continue to turn to BNPL for high-price items like luxury fashion. Brands, seeing the demand for BNPL among customers, will continue to pay the relatively low 2-8% fees required to work with an Afterpay or Klarna. Rebecca Minkoff said this was exactly the calculus behind her own continued partnership with Klarna.

“A huge percentage of our customers, like 30%, use Klarna to buy with us,” Minkoff told Glossy. “We’ve been talking to them for several months and have some more in-depth, co-branded partnerships coming up with them all throughout this year.”

It should be noted that an investor-fueled bubble based on giving people too-good-to-be-true loans that they were unable to pay back is how the 2008 financial crisis began, as well.

BNPL companies clearly know that profitability should be a goal. In a third-quarter earnings report in May, Affirm founder and CEO Max Levchin spoke at length about profitability.

​​”With excellent unit economics, consistent focus on risk management and a diversified capital access strategy, our plan is to achieve a sustained profitability run rate on an adjusted basis by the end of the next fiscal year,” he said. 

But while the recession may be good for BNPL companies’ user growth, it won’t be good for their more vital resource: fundraising.

“Fundraising has been a lot more difficult since February,” Goetsch said. “Affirm and Klarna both took big write-downs. It’s a huge hit to the system. In today’s climate, unless you have a profitable business or a very clear set path to profitability, you won’t get funding. And right now, I don’t see this business model having a very clear path to profitability.”

An article from the satirical website The Onion on the pros and cons of shopping with buy-now, pay-later is a good example of why BNPL is attractive to customers but risky for stakeholders. The article lists “App could lose funding and fold before you have to pay” as a possible upside of the business model.

4 questions with Verishop CEO Imran Khan

Following Verishop’s latest, $40 million funding round led by Lions Capital, co-founder and CEO Imran Khan shared how the company plans to grow. Three-year-old Verishop, which sells 4,000 independent and emerging brands across fashion, home and beauty, reported one million active monthly users in 2021 and boasts $1.4 billion in inventory. 

How do you approach your merchandising strategy? 
“Our merchandising partnerships team vets everything, from the brands we carry to the products being sold. Verishop’s approval process ensures quality control and a curated selection. Personalization is an important tool that fuels discovery for our brands and our customers.”

How has the pandemic impacted your product assortment?
“Not only the pandemic, but also the rising cost of advertising have made it increasingly difficult for small brands to be discovered. We’ve created a community and tools to help them connect with consumers. Everything we do is designed to drive more conversion for brands and elevate the customer experience.”

How important is it for brands to control their presence on the platform?
“Extremely important; The more tools they have, the better they can communicate their story, and we’re here to help. In addition to our content feed, shop parties and livestream shopping, [they can use] Verishop’s centralized system to control designer and product descriptions and product images.” 

What do the next six months look like for Verishop?
“We will continue to grow our selection and invest in solutions for our brand partners to help them thrive, so we can provide a superior shopping experience for our customers. We’re currently rolling out a data program that provides detailed analyses of how all products are performing on the platform, so brands can better optimize sales. We’re also introducing an A.I. image retouching system and a better returns solution.” 

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