Operational Genius

1. The Most Efficient Operation I’ve Ever Seen

Welcome back to our exploration of the Guatemalan retail giant, Megapaca.

We’ve already talked about how Mario Peña is turning your old clothes into $200M. Last year alone, the company imported a staggering 45 million pounds of used goods from the U.S., turning those goods into cash by selling a remarkable 70 million items in its 115 stores across Guatemala, Honduras, and El Salvador.

But they did it with an average transaction of $17 USD, begging the question:

How are they covering the cost of a retail footprint and a highly manual sorting process?

Even in a low-cost labor market, Megapaca would have to run incredibly lean to make this work. Well, we investigated and found a surprisingly efficient operation that extracts every last quetzal from the process. 

Turning Waste Into Capital

Anyone who is looking to maximize profitability right now should study Megapaca’s approach. There is simply no waste. 

Here are the six steps we identified:  

Step 1: Getting the Goods

First, the obvious. 

Megapaca leverages its scale to secure the best prices on pallets of used merch from U.S. resellers. Not only are these goods low worth to Americans, making them very very cheap to buy, the retail giant buys a lot. 

Massive blocks of clothes are shipped every week to Megapaca’s Guatemala central sorting center to be processed, priced, and distributed to retail locations. 

Step 2: Making Them Shine

Once there, Megapaca turns on the profit extraction engine. One of the ways they do that is simple: They clean everything, and clean it well.

All clothing is washed and inspected for wear. Torn and stained merchandise is separated and repaired or repackaged for downstream sales in the countryside. In a recent interview with Bloomberg, Peña shared that cleaning a pair of shoes can bring in 2-3 more dollars per pair (e.g., 100% value increase). 

So, the sorting factory has a dedicated shoe cleaning team. Its cleaners take only 3 minutes to get a pair looking fresh. 

And, they keep the merch clean up until it’s in customers’ carts. In store, dedicated associates patrol the aisles, looking to remove dirt and scuffs that happen during customer try-ons.

Step 3: Sorting Specialists

Megapaca uses sorting to identify profit from the start. They have their process down to an absolute science. 

Pallets of clothes and other goods come in weekly. At arrival, workers sort them into 26 different bins by category: casual pants, jackets, sleeveless blouses, t-shirts, and so on. But then, they get increasingly granular. 

Highly trained sorters known as Specialists further separate items into finer and finer categories, using their knowledge and experience to separate into quality tiers. International brands that are in good shape go into one pile; low end, worn t-shirts in another.

But the most critical part of sorting comes from weeding out items that won’t sell or that don’t fit their market. Workers package items, such as winter coats not needed in Guatemala’s hot climate, and send them elsewhere - sometimes back to the US to be thrifted in smaller, more niche stores. 

Unique items are identified and upcycled. For example, Megapaca might send a 1972 Led Zeppelin t-shirt to vintage dealers in New York or surf wear to resellers on Australia’s Gold Coast.

Step 4: Pricing for Profit

Once sorted, Megapaca uses real-time demand data from point-of-sale to strategically price each item. Workers use computers on the sorting line, pricing with inputs from a data system that seamlessly connects their warehouses, stores, and online site.

Here’s how it works: In the final sorting stage, experienced sorters input each item’s relative quality into a touchscreen monitor and receive a suggested price based on real-time sales data. 

The system looks at current sell-through data and suggests a price for the item using the algorithm’s suggestion. Once priced, the sorter attaches a QR-coded price tag to the item.

This QR code is a powerful tool. It tracks the garment's journey, feeding back information into Megapaca's database. The algorithm uses this data to continually refine and update suggested prices. 

But most importantly - the QR code reveals the garment's origin, empowering Megapaca to strategically procure better-used clothes. They can use this information to identify suppliers that provide higher demand, higher margin clothes, even getting as precise as picking clothes from one specific area of New York. 

This intricate system not only streamlines operations, but positions Megapaca at the forefront of data-driven decision-making in the second-hand retail landscape.

And you thought this was just a Guatemalan Goodwill.

Step 5: Merchandising Mind Games

Fast forward to the merch being racked in Megapaca’s 115 stores. Their stores are where they make the profit engine hum, using merchandising tactics based on psychological principles to drive foot traffic and sales. 

Remember when we detailed in our last blog how Megapaca refreshes its stock of trendy and high-quality clothes on a premium rack weekly? This is a smart move. It not only attracts customers looking for international brands, but also makes Megapaca the place to go for new finds every week. 

If these clothes don’t sell quickly, they use a Dutch auction system with color-coded tags that drops prices each week. This strategy is catnip for deal hunters who keep coming back to see what's new and cheaper. It's a great way to eliminate overstock and manage inventory without added cost. 

Using this model, Megapaca’s sell-through rate exceeds 80%. At the end of the chain, Megapacaa has a built-in liquidation customer – resellers. These customers buy the cheapest merchandise, taking it to markets and the countryside to sell. 

Shockingly, these resellers make up over 20% of store sales. This entirely relieves Megapaca of the cost and complexity of liquidating inventory. 

Step 6: Offloading for Liquidity 

But this machine can’t sell everything. Megapaca has built channels to quickly offload merchandise it can’t move, such as items removed during the sorting process or clothes that made their way through the Dutch auction and still sat on the shelves.

Important? Yes - this increases capital turns and frees up cash to bring in fresh pallets of merch that WILL sell. 

We talked about identifying high end items upfront during sorting. They act as downcycle suppliers, too. 

Most unsold shoes are sent to suppliers into Pakistan, where there's reseller import demand for used shoes. 

Clothes that aren’t sold or sent elsewhere get turned into fibers. For example, Megapaca is a key fiber supplier to French company Roche, which recycles those fibers to make fiber-based products like baby wipes. 

What Lessons Can We Use for Work in Higher Cost Markets?

So, what can we apply from Megapaca to our work with U.S.-based retailers? 

First, I think we have to admit that Megapaca has significant labor cost benefits. And, like any business that grows, they increasingly benefit from the scale advantages of buying in large quantities. 

And yes, while every retailer uses point-of-sale data for pricing and inventory management, we should look at them as a first adopter of the technology in a market that's not very high-tech. Dynamic pricing and QR codes are leading edge for them – the question is:

What’s leading edge for your clients? 

What sets Megapaca apart for me is their method to turn waste into capital.  They’ve built a merchandising process that accelerates capital turns. They’re selling up and selling down, and acting as a supplier to those further down the chain. 

That’s the part I believe most U.S.-based companies are not under pressure to think through – they can absorb loss. Or, thanks to the U.S. tax code, depreciate the loss or write it off. 

That prevents creativity in finding profit opportunities or cost-neutral sustainability.

What did you learn from Megapaca? Let me know at [email protected]. 

2. Strategic Framework: Mix Visualizations

You can move to insight quickly when you visualize how important a category is to growth or its size in relation to the market.  Use these Mix visualizations as a starting point for quant discussions. While they may understand these in concept, these visualizations, shown as either a simple mix chart or a complex Mekko diagram, will advance conversation and focus folks on the right levers.

Download the template now

3. Why You Need Ramp

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Join TheConsult.co to attend our first-ever workshop, Crossing the Chasm, on Jan. 24th to learn about and access our entire SaaS Stack. 

*The Ramp link above is our affiliate link, which means we may earn a commission if you decide to use it. It’s a great way to support us if you find our recommendations helpful. No pressure though!

4. The Case for Relentless Optimism

New year, new you right? With Gwyneth Paltrow on the board, Rent the Runway can get you an evening gown that didn’t come from your cousin’s wedding party. But how did it all come about? 

On your next commute take a listen to this compelling interview with Jennifer Hyman, cofounder of Rent the Runway and the 30th woman EVER to launch an IPO, on how relentless optimism brought her to where she is today.

Find the podcast and full transcript at Stanford GSB’s View from the Top.

Remember, the path to success is paved with continuous learning and embracing fresh perspectives. So let's stay connected, share ideas, and elevate your consulting business.

Stay curious, our friends.

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