The RealReal's Secondhand Swank Shines in Stock Debut

(Bloomberg Opinion) -- The RealReal Inc. made its stock-market debut Friday morning, a milestone for a star in a small constellation of companies trying to use e-commerce to upend the market for selling secondhand goods.

Shares of The RealReal jumped by as much 50% from their offering price in the first hour of trading, an early sign of investor enthusiasm about a digital destination for used luxury fashion items. Yet even though I believe The RealReal’s healthy revenue growth isn’t going to cool anytime soon, its path to profitability is too uncertain to get quite this excited about its prospects.

The RealReal accepts designer handbags, watches, clothes and other items from consignors. It inspects each item before listing it for sale on its website and eventually shipping it off to the buyer, taking a commission on each sale. In 2018, some $711 million in sales took place on the RealReal platform, generating $207 million in revenue for the company.

The RealReal's Secondhand Swank Shines in Stock Debut

The RealReal’s site is squarely aligned with key trends shaping consumer behavior. Sustainability concerns are starting to factor into fashion-buying decisions the way they have for years in the food and beauty businesses, and shopping for secondhand items is a way to feel good about your ecological footprint. Plus, at a moment when we’re renting a stranger’s home on Airbnb Inc. or commuting in someone else’s car thanks to Lyft Inc., it simply feels less weird than it once did to shell out for a used handbag.  

In the increasingly crowded digital market for secondhand goods, The RealReal has proven itself a formidable player. By focusing specifically on the luxury tier, it stands out from other startups such as ThredUp and Poshmark. And it appears to be cultivating loyalty, with 80% of the total value of merchandise sold on its platform in 2018 coming from repeat buyers.

The RealReal's Secondhand Swank Shines in Stock Debut

For all these positives, I worry that The RealReal’s own business model could limit its ultimate growth potential and profit prospects. A key promise of the platform is that its staff of gemologists, horologists, art appraisers and other experts authenticate every item listed on its site. For context, the company said it processed up to 14,000 items a day in 2018. Every single one of those items must be individually priced, photographed, and precisely described. 

Unsurprisingly, The RealReal is using technological innovation to aid this process, including proprietary algorithms that help set pricing. It says it is working with the University of Arizona to develop technology that would help its team inspect gemstones more quickly. But for the foreseeable future, this is a people-heavy process, and one that requires quite specialized workers. Think about it: How many horologists do you know? That’s a good hint these experts probably don’t come cheap. Also, consignors have the option of starting their RealReal selling process with services such as complimentary in-home consultations. One-on-one interactions like that don’t easily get cheaper with scale. 

All of this makes me doubt that The RealReal will be able to achieve profitability. And it demonstrates why I am skeptical about the viability of a wave of startups embracing a similar model. In particular, I’m thinking of websites such as StockX, Goat, Flight Club and Stadium Goods, which are emerging as popular destinations for sneakerheads to buy pre-owned shoes. Investors don’t seem to share my concern: Foot Locker Inc. invested $100 million in Goat earlier this year, while StockX said this week it had raised $110 million in new financing at a $1 billion valuation.

Authentication and category expertise are huge reasons for shoppers to choose these resale specialists instead of a generalist site such as eBay Inc. or Craigslist (or a mom-and-pop consignment shop, for that matter). The anti-counterfeiting measures provide a reason for trust that will be critical in bringing new shoppers to the secondhand market. But I’m not confident that the authentication processes will get efficient enough, quickly enough, for these businesses to last.

The RealReal's Secondhand Swank Shines in Stock Debut

This may explain why The RealReal didn’t look to be headed for quite as splashy a one-day debut as Revolve Group Inc., the fashion e-commerce company that went public earlier this month and saw its shares pop 89% on its first day of trading.

Revolve’s isn’t a secondhand site and its model isn’t particularly industry-shaking; it simply sells ultra-trendy clothes to relatively affluent millennial women. But it does have some important points of differentiation, including a stable of private-label brands that accounted for 27% of sales last year. Plus, the company is already profitable.

The RealReal's Secondhand Swank Shines in Stock Debut

That gives me reason to believe it has greater staying power than The RealReal and the rest of the digital secondhand stores. The consumer interest in the resale model is the real deal – but so are the attending challenges to scaling it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

©2019 Bloomberg L.P.

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