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Luxury Resale’s Quiet Reckoning

High-end re-commerce sites like The RealReal and Vestiaire Collective do big business, but the luxury resale market faces challenges ahead.
Vestiaire Collective's logistics hub | Source: Getty
  • Lauren Sherman

NEW YORK, United States — With the luxury resale market on track to hit $6 billion globally in 2018, according to Bain, consumer appetite for used fashion goods continues to grow. But the boom that has fuelled the rise of major luxury re-commerce players like The RealReal and Vestiaire Collective will only last if the market is fed with product that people actually want to buy.

Many of the leading players in the luxury resale space have raised significant capital, in part to ensure they are able to source enough covetable product. (By taking on investors, these companies can afford to woo potential sellers with higher-than-average commissions that eat into profit margins.) San Francisco-based The RealReal has raised $173 million. Earlier this year, a report in Recode cited multiple market sources suggesting the company is aiming to raise another $100 million. Its primary European competitor Vestiaire Collective has raised over $140 million. Grailed, a much smaller new entrant focused on selling street-savvy luxury menswear to millennials, recently announced that it raised $15 million in a Series A funding round.

While there is still plenty of competition coming from more broadly positioned re-commerce players, the crowd focusing solely on the high end of the resale market has thinned out significantly. Those that remain are thriving. The RealReal, for instance, will drive about $750 million in gross merchandise volume in 2018 and says it is on track to pay out over a billion dollars in commissions within a "few" years, according to the company.

"I do think The RealReal has tapped into an important market need," said retail futurist Doug Stephens, noting that while many luxury brands are still reluctant to fully embrace online shopping, marketplaces like Amazon, Alibaba and Ebay have yet to completely eliminate counterfeit luxury items from their inventory. "This leaves an opportunity for a business like The RealReal that can offer consumers the ease and convenience of online shopping, while also giving them the trust required to spend [thousands of dollars] on a single item."

The rise of re-commerce also reflects shifting cultural values and consumption habits: for a new generation less obsessed with ownership, being able to flip a handbag — and buy another one for a fraction of the original price — is a compelling proposition.

But while online luxury resale can be a highly profitable business, it can also be costly, with services, authentication, shipping and handling — as well as high commission rates for sellers and customer acquisition — cutting into margins. “Because you don’t have variable costs associated with the model, scale doesn’t help the business,” said Sucharita Kodali, a retail analyst at Forrester Research.

There are plenty of challenges ahead for the market’s top players as they continue to chase scale — and profitability.

The right inventory remains hard to come by. "The biggest challenge for any consignment business — particularly one that deals in high-end goods — is maintaining their supply of inventory," Stephens said. "While consignment businesses tend to be recession proof, they're not recovery proof. When the economy is in recovery or growth mode, people are less inclined to re-sell their high-end items." Unlike high-low Poshmark or Tradesy — two other heavily funded resale sites — The RealReal, Vestiaire and Grailed are positioned more narrowly within the market, meaning there are inherent barriers to scale. These companies must continue to find sellers who not only want to sell, but want to sell the right items, whether that's through paid customer acquisition, word of mouth or direct deals with brands.

Discount culture is dangerous. While Grailed's business is built around a community of enthusiasts who are often willing to pay a premium for specialised product, The RealReal and Vestiaire have both used discounting to drive sales. On America's 4th of July holiday, for instance, The RealReal ran two promotions: one offering a discount (20 percent) on select items, another offering a boosted consignment payout rate (85 percent instead of the typical 60 percent, though this was limited to watches over $2500). Moves like these cut into already slim margins. Although this practice is common in the primary market — and has the same negative effects — resale has never been a business reliant on promotions.

For a new generation less obsessed with ownership, being able to flip a handbag is a compelling proposition.

The costs of doing business remain high. Grailed takes just a 6 percent commission on sales, but, as with eBay, the seller is responsible for shipping the product to the buyer and there is no third-party quality verification. Vestiaire, which takes a higher commission — 18 to 34 percent — is also peer-to-peer, but there is a vetting process in between: the seller sends the product to Vestiaire, which authenticates it and checks it for quality before sending it along to the buyer. The RealReal, which takes a 15 to 50 percent commission on each sale, actually holds inventory in a warehouse, operating within a more traditional consignment model. "Actually taking possession of the inventory and physically inspecting inventory adds a pretty substantial labour cost," Kodali said. "The more goods you get, the more people you need. And the broader the market, the more fraud there will be."

Authentication is still an uphill battle. While some products are relatively easy to authenticate — for instance, handbags with serial numbers — others, like clothing, are less so. Earlier this year, fashion watchdog Instagram account Diet Prada called out The RealReal for selling a Tibi dress that had been re-tagged with a Prada label. "The most significant challenge these sites face is maintaining high standards for authenticity and item condition," Stephens said. While resellers can continue to put more and more manpower into authentication, that effort costs more money, once again cutting into margins.

Stolen goods remain difficult to identify and can damage a site's reputation. While it's unknown what percentage of the luxury resale market consists of trading in stolen goods, it's certainly a part of the business. US retailers lost $48.9 billion in 2016 during to inventory "shrinkage," — which includes lost, stolen and damaged goods — according to the National Retail Federation.But it's not just items being stolen from retail stores that can surface on these sites. In fashion publishing, many editors consider free swag to be a part of their income, with hauls to resale sites a regular occurrence. Brand public relations representatives troll these sites for stolen samples and editor gifts, sometimes finding items as mundane as coat hangers and garment bags up for sale.

If luxury brands truly embrace the secondary market they may eventually want to handle re-selling themselves.

But while it creates further tension between brands and resellers, there is only so much resellers can do to prevent these sorts of transactions. "When a consignor consigns with The RealReal, they sign a legally binding contract stating that the merchandise they are consigning, is in fact, theirs," a spokesperson for The RealReal told BoF. "If there's any question about the items from law enforcement, we fully cooperate with officials, investigate the situation and take appropriate action based on the findings."

Brands are slowly getting hip to the second-hand market. Generally, this is a good thing for resellers. (The RealReal inked a deal with Stella McCartney and is in talks to work more openly with luxury conglomerate Kering; Virgil Abloh recently posted an Instagram Story on swag from his debut Louis Vuitton show priced at $2,000 on Grailed.) But if luxury brands truly embrace the secondary market — which will likely take years due to widespread belief that it's brand damaging and enables counterfeiters — they may eventually want to handle re-selling themselves. In that case, middlemen like the existing crop of re-commerce sites could be cut out of a significant volume of sales, just as department stores and other multi-brand retailers have been cut out at full price. "If Gucci takes possession of items again and sells them as certified pre-owned, it gives the brand an opportunity to recapture some of that secondary market," Kodali said.

Editor's Note: This article was revised on 16 July, 2018. An earlier version of this article misstated that The RealReal's chief executive Julie Wainwright said the company was aiming to raise $100 million in new funding. In fact, the suggestion that the company was aiming to raise another $100 million appeared in a report in Recode, citing multiple market sources. This was never confirmed by Wainwright or the company. The article has also be edited to clarify that a promotion offering a 20 percent discount run by The RealReal over the recent 4th of July holiday applied to select items only, while another promotion run at the same time offering a boosted consignment payout rate (85 percent instead of the typical 60 percent) was limited to watches over $2500.

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