What The RealReal’s store closures say about the future of luxury resale

, according to The Business of Fashion. The RealReal said last year that it expected to be profitable by 2024, but in the past year, its shares have lost more than 80 per cent of their value. So what went wrong? “It pursued a ‘growth at all costs’ strategy, which is fine when that’s what the market wants. But the pendulum has well and truly shifted to companies needing to demonstrate profitable growth,” Jon Bird, executive director at VMLY&R Australia, told Inside Retail.  He went on to say that as Scott Galloway, a professor at New York University, rightly says, this is the “year of efficiency”, with the market rewarding players that are trimming costs and moving towards profit.  “On the one hand these lay-offs are indeed a sign of the times, and very much aligned with the actions of other retail and tech companies, particularly publicly listed ones, who are trimming costs for two main reasons,” Rosanna Iacono, managing partner and advisor at The Growth Activists, told Inside Retail. She said that these companies are anticipating more challenging headwinds in the current inflationary environment, and many are recalibrating after going on pandemic hiring sprees.  A balancing act “The dichotomy for The RealReal is that theirs is a sector with higher growth projections versus traditional retail as sustainable consumption behaviours and the circular economy begin to really take off,” Iacono added. She also mentioned that it’s a counterintuitive move to close bricks-and-mortar locations when all signs are pointing to a return to in-store shopping, after a period of online over-indexing during the pandemic, with consumers craving experiential retail again. “To me this shows that their moves are as much about appeasing the investor community and projecting the right optics to protect share price, as about reducing costs,” she observed, Bird also believes that the company didn’t move fast enough to correct the course. At the same time, he feels there are some structural issues in its business model which are complicating matters. He elaborated that it is costly to authenticate luxury items, and the company broadened their category mix into home, art and kids – particularly in home, products can be expensive to ship.  “They also don’t have the game to themselves – there is “RealReal” competition from brands like Poshmark and ThredUp,” he noted. Chasing profitability Some wonder if the luxury resale market could ever be profitable? Bird thinks it can be. In the case of The RealReal, he wonders if the executives are ruthless enough to get it there. “They need to find a cheaper way to authenticate luxury items, they need to figure out a better real estate strategy, and they need to pass on the true cost of shipping – particularly shipping of goods back to consignors. In this environment, you need to run smart and lean,” he said. Iacono chimed in by saying the company has a very short runway left to achieve profitability by 2024, which has been their commitment to investors, so time is running out in terms of demonstrating that they are getting there. She noted that the company has a new CEO on board, John Koryl, who needs to rapidly build investor confidence in his leadership. So, she feels this is an important signal to Wall Street.  “However they also face a much more competitive market than ever before, because brands are finally joining the resale market themselves, often using ‘Resale as a Service’ (RaaS) platforms like Reflaunt,” she observed. From her perspective, the advantage for brands is that they already have existing customer relationships from which to build resale as an extension category, whereas The Real Real remains a two-sided marketplace with significant customer acquisition costs. Untapped potential  According to BoF Insights, the second hand market in the US alone could grow 20 per cent between 2020 and 2025 and reach $67 billion in size.  Bird is aware of the potential in the marketplace, but noted that The RealReal is “at the sharp, luxury end of the market” and its competitors like ThredUp, are more mainstream and seem to be performing more strongly. Can there be a magic sauce that will keep people coming back for more in the luxury resale market? Bird seems to think so. “Discovery at a discount. Fashion resale is a treasure hunt, and the reward is discovering something unique at a great price,” he stated. Iacono is also a firm believer that Fashion resale can and will be a profitable business, but what counts is the business model and how it is delivered. She feels that at this stage, RaaS platforms like Reflaunt in the US and Rntr in Australia offer a more profitable model. Compared to a traditional online consignment and authentication model like The RealReal, these platforms have an advantage. She also feels that decentralised bricks-and-mortar dominated operations may be more profitable than a centralised one. What’s next? Ultimately, Iacono feels that brands will realise that the circular economy is an inevitability, and companies will seek to own and control the customer experience for resale of their own branded goods, and those enabling this effectively may well emerge the winners. “One major call-out to brands is that the circular economy is already here, and consumers, particularly Gen Z, are already engaging in it through peer-to-peer sales on multiple platforms from ebay to Depop to StockX to Facebook marketplace and many more,” she observed. According to Iacono, to be successful, companies need to deliver confidence and trust through authentication and secure transactions, value through pricing strategy, and loyalty and engagement through customer-centricity and curated brand experiences.