Standing atop several long, sturdy wooden tables at an industrial park in Escuintla, Guatemala, 40 young men and women pull shirts, dresses, slacks and other garments out of a 10-foot-high wall of clothing imported from the US. They wear T-shirts in the bright orange favored by their employer, Megapaca, the largest importer and retailer of used clothing in Central America. In a seven-hour shift, they’ll sort thousands of garments into bins designated for shoes, trash and men’s, women’s and children’s clothes. It’s the first stage of an intricate winnowing process at this 475,000-square-foot distribution center.

Last year, Megapaca imported 45 million pounds of used goods from the US and sold 70 million items. To pull that off, it employed 6,000 people in Guatemala, Honduras, El Salvador and southern Mexico, where it collectively operates 123 stores. The money is very good: Megapaca says that it generated $200 million from its in-person and online retail business in 2022, and that this year it’s on target to do better.

Mario Peña, the company’s boyish 53-year-old co-founder and general manager, walks around the wall of apparel. On the other side, workers are lifting 80-pound bags of sorted clothes into a shipping container bound for a thrift shop in Gold Coast, Australia—a new wholesale side of the business that Megapaca has been developing. “We buy the clothes from the US, sort them, then sell and ship them,” Peña says. “We’re cheaper than sorting in Gold Coast, and we do it better.” There are, according to Peña, 29,540 pieces of clothing in those Australia-bound bags, sorted to appeal to Gold Coast surfers and others who like to thrift.

On Sept. 15, Megapaca is set to open a US website, targeting Central American expatriates who grew up loving the brand. It won’t be easy. Online thrift stores such as ThredUp Inc. have struggled to turn a profit. But Peña isn’t discouraged—within three years, he expects to open Megapaca’s first physical store in the US. Emerging markets, long the destination for clothing castoffs from rich countries, are ready to sell them back.

From 2002 to 2022 the quantity of used clothing Americans exported annually to the world more than doubled, to 1.66 billion pounds. This growth was enabled by the rise of fast-casual clothing sold at places such as H&M and Forever 21, which many Americans treat as disposable and flip into donation bins. In 2022, Guatemala imported just over 250 million pounds, more than any other country.

The trade in used clothing is often depicted as a kind of “dumping,” whereby affluent countries offload their unwanted fashion on emerging markets. Yet the commercial reality is more complex: Every container exported from the US is purchased by an importer, who also assumes the cost of shipping and the risk that the clothes will turn out to be less than profitable.

Peña isn’t the sort of person you dump on. He sees trash as a cost—the stubborn leftovers that can’t be monetized. “We have enough garbage in Guatemala,” he says as he strides through the Escuintla distribution center, roughly 30 miles south of Guatemala City. The lush area is surrounded by farms and, increasingly, large South Korean-owned textile and apparel factories that export fast fashion to the US.

Peña grew up comfortably in Escuintla, one of three sons of an engineer and homemaker. He describes himself as sensitive to Guatemala’s economic inequalities. As we observe the sorting, he grows reflective about a gardener employed by his family. “One day he was working, slipped and tore up his knee. Instead of saying something about his knee, he said, ‘Thank goodness it wasn’t my pants.’ Guatemala was poor.”

Before us, the sorters categorize clothes into bins representing 26 categories, from “sleeveless blouses” to “casual pants.” Arriving garments are culled and separated into finer and finer categories, then moved along for pricing and delivery. Some items, such as shoes, are cleaned to increase their value.

Peña leads me up a set of metal stairs to a landing where 15 employees in rubber aprons stand over wash basins, scrubbing grime from newly arrived shoes. An experienced employee—paid the minimum wage (roughly $400 per month) plus benefits (Megapaca says these run about $250 per month)—can turn muddy sneakers into a collector-quality pair in roughly three minutes. “Washing adds two to three dollars to the selling price of the shoe,” Peña tells me. That adds up quick: During my visit, Megapaca’s inventory in Guatemala included over 150 tons of shoes.

The company employs a 54-person information technology department and a sophisticated in-house data management system connecting warehouses to stores and its Guatemalan e-commerce site (a Honduran site is also in the works). Among other advantages, the system provides real-time data on what customers are buying and for how much. That data is fed back to warehouse floors like the one in Escuintla, where touchscreen monitors are positioned throughout the last stage of the sort line. The most experienced and accurate sorters are responsible for pricing. They tap the monitors to bring up apparel categories and survey prices suggested by an algorithm.

I watched one sorter who was going through clothes bound for Guatemalan stores examine a small floral-print girls sweatshirt. There were small tears, but the color was still bright. Guatemala is hot year-round at its lower elevations though, and moving a long-sleeved garment means selling it at a lower price. The computer suggested prices ranging from 17 quetzales to 91 quetzales ($2.17 to $11.56). Accounting for the tears, the sorter chose 29 quetzales, then affixed a newly printed price tag to the collar.

The tag included a QR code that would track when and where the garment was sold—information that would in turn be fed back into Megapaca’s database, allowing the algorithm to further refine and update the suggested prices shown on the warehouse floor. The QR code also includes the original source of the garment (in this case, a US thrift chain). That data in turn becomes a tool to procure better used clothes. Steven Bethell, co-founder of Bank & Vogue Ltd., a large Ottawa-based clothing supplier to Megapaca and other sorters worldwide, explains how it works: “They can tell me, ‘Get us [items from] that part of New York, not that part of New York.’ They know where stuff that they can sell is located.”

It’s a level of precision more commonly associated with new apparel retailers than Central American thrift shops, and Peña knows it. “In a Third World country, we can never do something better than the US or Germany,” he says to me with a clear note of sarcasm. “I say, ‘No, we can do better.’?”

When Peña was 14, he spent a few weeks in Montgomery, Alabama, as a sister-city exchange student. He was astounded to see American students toss unused ketchup packets in the trash. “That’s when I started thinking about bringing waste to Guatemala.” As an adult, he served in the military, sold auto parts, sold time shares and spent 10 months managing a McDonald’s. Then, in 2001, with the backing of his brother Gustavo and one other partner, he went to the US, rented a car and drove around the country, visiting used-clothing dealers. In New Jersey, he purchased his first shipping container full of clothes, from a Chilean-born exporter.

In the early 2000s, used clothes were already flowing into Guatemala, scooped up with enthusiasm by a poor population eager for new fashions. Then, as now, the country’s consumers perceived that East Asian manufacturers were sending better-quality apparel to developed countries while reserving lower-quality items for countries with lower price points. Guatemalans keen to emulate American styles were also more likely to find them in clothes imported from the US.

The Peñas figured they’d wholesale the goods to dealers who would handle the retail end. “Then one day the power bill came due, and we needed cash flow,” Mario says with a laugh. So they opened their warehouse doors to the public, let people pick through the inventory and made $66 in a day. “That’s when we knew we had a retail business.” Today they mostly sell through their own retail operation.

Early one weekday morning, Jose Rivera, back-office manager at Megapaca, is driving down Escuintla’s Fourth Avenue, a busy street overflowing with narrow shops and carts selling everything from plastic dishware to used underwear. “You can see the old way of selling used clothes here,” Rivera tells me. He points to vendors operating closet-size street-side booths, from which T-shirts and trousers hang. In Guatemala, shops like this are informally known as pacas. (The word translates more directly as “bales.”)

Rivera slows the car as we approach a small, dark storefront with a handmade sign. Ropa Americana (“American Clothing”), it says, and from the car we see some poorly lit inventory. “For locals, the price point is around 5 quetzales,” Rivera says, referring to the sweet spot for all garments on Fourth Avenue and places like it. “At Megapaca, we’re about three times that. But we don’t compete on price. We’re into service and better stores.”

They’re also into fashion and marketing. Rivera turns onto the highway, and as he accelerates, we pass a truck emblazoned with Megapaca’s bright orange logo and a woman in a bikini photographed from behind. Images like this have become ubiquitous in Central America. Megapaca’s brand presence exceeds that of Walmart Inc., which operates 10 Supercenters in the country, and of Zara, which operates exactly one store. Indeed, Megapaca’s target market is the same up-and-coming middle-class consumer targeted by these lesser-profile (in Guatemala) brands. “A few years ago, we noticed that people who show up in cars spend three times more than people who don’t,” Rivera recounts. “So we like a big parking lot for our stores.”

To prove the point, he drives to the Interplaza Escuintla, a shopping mall with a parking lot lined by fast-food chains, including Panda Express, Pizza Hut, Taco Bell and Little Caesars. Inside the mall, we ride up an escalator, gliding past a second-floor gym with a dozen women in name-brand athletic wear jogging on treadmills. Above them, on the third floor, an illuminated Megapaca sign stretches across a gaping entrance.

The store is a 20,000-square-foot expanse reminiscent of a Target. Clothes are hung on racks, organized by size and color. The shoes are similarly organized and impeccably clean—an employee is pushing a mobile orange shoe-washing station up and down the aisles, wiping away scuffs and dirt acquired when customers try them on. Color-coordinated fashion displays drawn from the current inventory are hung along the walls, providing inspiration to shoppers. One of them alternates pink hoodies and black sequined T-shirts, differentiated up close by Nike and Minnie Mouse logos or by Zara tags.

Once an item arrives in the store, it’s placed alongside others that have come in that week. Pieces are discounted weekly, across a cycle that can last up to nine weeks, eventually ending up at a 90% discount. The discount levels are pegged to color-coded dots included on the price tags affixed at the distribution center. The colors rotate weekly, allowing store staff to know within seven days when a garment was placed on the racks. Signage tells shoppers which color is 30% or 50% or 70% in a given week.

This system—a Dutch auction, whereby an item’s price drops until a buyer is found—provides Megapaca with what it says is a sell-through rate in excess of 80%. In comparison, the average US thrift store has a sell-through rate of about 33%. The affluent Guatemala City professional in search of something stylish to wear out to the club pays full price; what he leaves behind may eventually go to a young family, a working mom or a low-income coffee farmer. As for the 20% or less of Megapaca’s inventory that doesn’t sell in the stores, it goes back to the distribution center, where it’s sold to wholesalers who supply markets in the countryside.

Other thrift stores, both online (ThredUp) and physical (Goodwill Industries International Inc. and Japan’s Bookoff), use some version of a Dutch auction, too. But they lack sophisticated pricing algorithms at the buying and sorting stage, and they’re generally far less disciplined than Megapaca in their discounting. Goodwill typically marks down from full price directly to 50% off; Megapaca’s first price drop is 15%, and it doesn’t hit half off until a garment has lingered on the rack for a month.

On the morning I visit, I see a couple of families browsing the 30% and 50% off racks in search of children’s clothes. In the shoe section, parents debate between New Balance or Skechers sneakers for their preadolescent son. Elsewhere, teenagers browse through branded team apparel, pulling out the occasional Major League Soccer T-shirt. The 90% discount racks are largely empty save for oversize clothes and winter apparel. It’s quiet, but on the weekends, when Megapaca does more than half its business, the stores are packed with phone-wielding treasure hunters who post pics of the crowds—and their finds—on Instagram, TikTok and YouTube.

On the way back to Megapaca’s warehouse, Rivera stops at a Cafe Barista drive-thru for coffee. As the attendant passes a black coffee through the window, he notices the logo on Rivera’s shirt. “I love Megapaca,” he says. “I need to get back, it’s been too long.”

After work, Peña sits at the bar in his sprawling home overlooking Guatemala City and his private helicopter pad, watching baseball on TV. (He’s a huge New York Yankees fan.) He’s drinking red wine and enjoying fish ceviche prepared by his wife, Dinora. Recently, he says, she showed him a dress she’d purchased from Shein, the ultralow-cost Chinese fast-fashion retailer. “?‘That’s the enemy,’ I told her. They’re the competition.”

In 2015, Peña recalls, he held a meeting with his shareholders and told them they could either expand across Central America or “sit here rubbing our bellies.” That year, Megapaca established warehouses, IT and retail stores in Honduras. It added Mexico in 2020 and El Salvador in 2021.

“My main goal,” he says, “is to open stores in the US, because that’s the only way to be the No.?1 used-clothing retailer in the world. And I think we can do better than the US because we can sort clothes cheaply here.” Goodwill, whose inventory is donated, has more than 3,000 stores and has been generating over $5 billion in annual revenue for years. (It provides social services with the money it earns.) Savers Value Village Inc., the largest privately held thrift chain in the US, generated $1.4 billion in revenue from over 300 stores in 2022.

So what does Megapaca bring to the table? “There’s a whole generation of people in Guatemala, Honduras and El Salvador who grew up with Megapaca and moved to the US,” says Antonio Gallizio, chief strategy officer with Muran Group, a 70-year-old used-clothing trading company that operates out of South Carolina. Earlier this year, Muran and Megapaca formed a joint venture to launch the US Megapaca site. “Ultimately the goal is to bring that joy in thrifting—whatever it is Mario invented down there—to that squeezed US consumer,” Gallizio says.

As of 2021, there were 3.8 million Central American migrants in the US. And they have money: Every year, tens of billions of dollars are remitted from the US to Guatemala, Honduras and El Salvador. Given this financial interchange, Megapaca and Muran’s marketing plan for the US site includes advertising—in Guatemala. “Refer a friend or relative to the US store and get 10% off your next purchase at a Megapaca store,” Gallizio says, by way of an example. Guatemalans who want to send clothes to friends or relatives in the US will also be able to do so via the site.

The new online shop will offer items at Central American prices, but it will also have a larger selection of higher-quality (and higher-priced) used items than the ones found in Central American stores. The US site won’t be using a Dutch auction. Instead, it will offer weekly discounts and promotions, with discounts pegged to the changing seasons, a shift the partners say will be more familiar to American consumers. “It’s another way that Megapaca is pushing the envelope,” Bank & Vogue’s Bethell says. “If you go to LA and visit the Latino parts of the city, there are all kinds of groceries that are Latino-facing. This could be a similar thing.”

Goods will be shipped from warehouses in the US, where Muran is deploying AI-enabled image-recognition software to assist with sorting and reduce labor costs. (Megapaca plans to deploy the technology in Guatemala eventually.) Shipping costs could end up eroding some of Megapaca’s price advantages, but the company and Muran are confident the brand will still resonate with its target consumers.

The US site isn’t intended only to make money—it will also provide Megapaca with market intelligence that would help it take the next step into US stores. “What do people want in Texas? California?” asks Rivera. “This helps us find out.”

There’s precedent for an emerging-market secondhand dealer to sell clothes right back to the US. For years, imported-clothing sorters in Pakistan have been trained to recognize vintage items such as 1970s-era Led Zeppelin T-shirts. These are typically sent back to the US and marked up at a premium. (In 2022 the US imported nearly $15 million in used clothing from Pakistan, at least some of which was originally acquired at ’70s rock concerts.) Megapaca recently entered the vintage export business, too. The company also sends to the US recycled fibers that it produces from leftover cuttings at Guatemala’s apparel factories.

But Megapaca doesn’t just want to export Led Zep T-shirts and fibers; it wants those once-rejected midmarket Gap tees going back, too. “For years, product moved one way,” Rivera tells me as we step out of the car. “Now we’re learning it can go in other directions.”