The Real Real

As many have noticed, I took a little pause in posting. All is good, I have been busy, and a little burned out and just needed to take a bit of a break. I soon start to post regularly, but during my "pause" many sent me emails on the Real Real. Both good and not so good. First, the New Yorker did an interesting background piece on the Real Real as it relates to the circular economy.

In addition to the many emails on the New Yorker article, I also received a few notifications from fellow appraisers on a recent Forbes article on the Real Real and their authentication process, which many appraisers are aware of. According to the Forbes article the Real Real has reported nearly $93 million in operating losses, and goes on to say that unless authentication and confidence in purchasing objects improves, they will have a difficult time growing and sustaining collectors and investors.

Both articles are too long to post in their entirety, so I recommend you follow the below source links and read both.

The New Yorker reports

There are currently about six hundred and twenty thousand items by fifty-five hundred different designers on TheRealReal’s Web site, ranging from a four-hundred-and-eighty-eight-thousand-dollar loose ruby to a fifty-dollar Marc Jacobs headband. Every listing is unique and requires its own sku—stock-keeping unit, which is how all stores keep track of inventory—so inventory control is something of a technological feat. The company also has three stores (two in New York City, as well as the one in West Hollywood), which add the complication of a store shopper approaching the cash register with something that an online shopper in Australia just bought. There is now a system for “freezing” an item online while someone in a store is trying it on. TheRealReal plans to open one or two new stores a year. This might seem to contradict the Internet-based nature of the business, but it gives consigners somewhere to drop things off in person, and serves as a street-level advertisement for the company. Also, the stores sell a lot of clothes. In fact, everything in the stores is for sale, including the lights and the staff’s desks and chairs; if a shopper buys one of the store fixtures, a replacement is often found on the Web site, in an actual demonstration of the circular economy.

The day after the trip to Palm Desert, I stopped by the West Hollywood store, where a young man named Aidis Malinauskas, a business-analytics consultant, was meeting with Lauren Hunt, a jewelry and watches valuation manager, to consign a few things. “I’m a watch fan,” Malinauskas said. “You could call it a hobby, or a passion—or maybe a bit of craziness.” He took two boxes out of a tote and handed them to Hunt. “I see this as an opportunity to evolve my collection. My budget is not infinite.” He added, “I have some exciting pieces here. ” He opened one of the boxes. Hunt’s eyes widened.

“A Rolex GMT-Master II, released in 2013,” Malinauskas said, with a flourish.

“The Batman!” Hunt exclaimed.

“Yes, the Batman,” Malinauskas said. “Very hard to get one. I’m consigning it because, honestly, it doesn’t get as much wrist time as others in my collection. Also, I have my eye on something new.” He explained that his grandfather had given him a watch when he was in first grade, which started him down the path of watch collecting. In the meantime, Hunt was tapping away on her laptop, looking up prices and discussing the watch on Slack with the rest of her department. Malinauskas opened the second box, which contained a Bell & Ross Regulateur with a big, moony face and a stainless-steel bezel.

While Hunt was looking up the Bell & Ross, I asked Malinauskas about the watch he was wearing. “It’s a Zenith with four complications,” he said, pointing to four small dials on the watch face. I’m not sure if he came in that morning planning to sell the Zenith, but after talking about it for a few minutes he slipped it off and handed it to Hunt. She glanced at it, then sat up straight and began talking pricing. TheRealReal sells clothing and jewelry strictly on consignment, but takes watches either on consignment or as an outright sale. Malinauskas opted to sell. “For the Rolex, we can give you $15,995,” Hunt said. Malinauskas smiled. She added, “The Zenith El Primero, we can offer you $7,595, and the Bell & Ross, $2,795."

 Source: The New Yorker 

Forbes reports on the Real Real

”What The RealReal Says

I asked The RealReal about the fake bag I ended up with. The company asked me to return it and said (in part) the following: “We reexamined the Book Tote you returned and are not able to definitively confirm its authenticity. … Authentication is extremely complex. It’s both an art and science. We make every effort to accurately authenticate the items we receive, arming our authenticators with tools and technology, authentication guides and daily training. We follow a thorough authentication process and qualified, trained authenticators examine every item we receive. We stand by our authentication process and will always work with our customers to make things right.” Regarding fakes, the company said: “The RealReal has a zero-tolerance policy for counterfeiting. We help brands and government agencies working to track down the source of stolen or counterfeit items, including sharing the contact information of consignors submitting counterfeit goods.”

In my correspondence with the RealReal about the fake bag, I kept asking this question: How can a bag from a brand as well known as Christian Dior, being sold for over $3,600, escape your scrutiny? So far I haven’t gotten an answer.

Why This Is So Wrong

There are a host of reasons what’s happening is wrong. The first is that it’s bad for consumers. Most people don’t have access to experts who can tell them that the $3,600 bag they bought is fake. What’s even worse is that when a maker of fake bags succeeds in selling a fake on The RealReal, it encourages that maker to produce more fake bags, and that compounds the problem.

The other group of victims is investors. When I read the prospectus, the chart above and The RealReal website, I get the clear impression that the authenticators and the copywriters are different people. There is no mention of having two tiers of authenticators. Investors putting up money in The RealReal might make a different decision if they were told more about how the authentication process works. They would be more likely to suspect that $3,600 bag being sold was as fake as the bag I bought. That would make The RealReal a less interesting investment opportunity.

How To Fix This Problem

Products sold by The RealReal need more scrutiny by knowledgeable people in order for the company and the entire resale market to have the credibility it needs to develop. But there are a couple of problems. First, it’s very hard to find experts who have enough knowledge to authenticate a wide range of products. Second, having more highly qualified experts on staff will increase costs. The RealReal can’t afford that. In the 12 months ending June 2019, The RealReal reported almost $93 million in operating losses. The company needs to drive toward profitability, and adding additional authentication experts, even if they could find them, would the company in the wrong direction. Even if The RealReal eliminated its entire marketing budget, it would reduce the loss by only about half. Covering the other half of the losses would be a big lift for a company the size of The RealReal, and adding authentication costs would stretch its time frame for ever reaching profitability.

One possible solution for The RealReal to have the authenticity it needs and still be financially sustainable is partnering with brands. It has started to do that in its marketing efforts, having recently announced a relationship with Burberry, which complements a previous relationship with fashion designer Stella McCartney.

The best way for the authenticity issue to get resolved in the resale market is for the brands to get much more involved. So far, brands have not been encouraging about resale because they want to sell more new stuff and resale inhibits that. But over time, as consumers demand it and sustainability becomes an increasingly popular commercial proposition, brands will think about it again.

At this point, that change in attitude is only a trickle. The best examples are in a small number of brands, like Nudie Jeans, Taylor Stitch and Eileen Fisher. Nudie offers free repairs of jeans for life and a 20% discount on new products when you turn in an old pair, and you can buy its own branded used jeans in its stores for less than the cost of new. Taylor Stitch has a sub-site called Restitch where it buys back its own product and resells it. Eileen Fisher will take back your product, refresh it and resell it at lower prices to consumers.

Over time, the pressure on brands to address resale and authenticity will increase, and we will see more brands get more involved in the resale market. Recently, H&M announced the purchase of Europe-based resale site Sellpy. And bigger brands are starting to notice. In a recent announcement, Madewell said it would team up with resale company ThredUp to offer used Madewell jeans in its stores. (It is not just fashion that’s getting involved in resale. Even Best Buy is getting into resale, as this article explains.) If The RealReal can get more brands to be involved in its authentication process, or to handle it themselves, it will access more knowledge about the products, and that’s exactly what it needs to overcome the problem of fakes.

Ultimately, this problem can be fixed only if management commits to make it happen. Management needs to acknowledge that long-term success is built on the credibility of the authentication, and having fakes continue to show up for sale works against that. Based on what we’ve seen so far, it appears that only pressure from consumers and investors will create the change that’s needed.

As long as fake bags are unwittingly sold to unwitting consumers, authentication standards won’t improve. That puts a question mark over the business model of resale companies and threatens the continued development of The RealReal’s business, its market value and the entire resale industry.

Source: Forbes

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