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Great Expectations

The RealReal is all the rage, but its business model is shaky at best.

The inside of the TRR store in Dallas. Photo Credit: Culturemap

This weekend, I travelled to Dallas to see some friends. Naturally, shopping was the first thing on our agenda. After hitting up NorthPark, wandering through the dreamy Neiman Marcus shoe salon and attempting to pick our way through Zara’s manic sale rack, we decided to go to The RealReal’s new Dallas storefront in Knox-Henderson. My friend Isabell was interested in looking at and potentially purchasing a pre-owned bag, and I wanted to see their business model in action—and, of course, look at handbags, too.

Considering the hype The RealReal has garnered from investors, with many hailing it as the ultimate pre-owned luxury destination and the “next big thing” for Gen Z consumers, I expected to be wowed. Having already visited TRR’s flagship in SoHo a couple of years ago, I not only wanted to see how the Knox-Henderson location compared, but I wanted to understand why investors were so enamored of a company that, ten years since its founding, still isn’t profitable.

The TRR storefront in Knox-Henderson. Credit: Dallas News

From the outside, the storefront was basic. Unlike the SoHo location, Knox-Henderson had few, if any, windows. In fact, without the TRR logo over the door, you probably would have missed it entirely. Upon walking in, I was struck by how small the showroom itself was. Composed of only two small rooms, there was extremely limited space for merchandise. Taking a quick glance around the boutique, I noted that there were only about thirty handbags on display and three jewelry cases, with random pairs of shoes and racks of clothing slotted in here and there. I was stunned. Given Dallas’s massive market and the company’s constant boasting about its more than $1 billion in gross merchandise value (GMV), I was surprised that TRR didn’t have more available.

Inside TRR in Dallas. Credit: Culturemap

While the lack of items was confusing, it was TRR’s pricing that raised immediate red flags. When we walked in, Isabell immediately gravitated toward the uber-trendy Prada Re-Edition 2005 nylon crossbody. Even from high up on the shelf, I could tell it wasn’t in “pristine” condition—TRR’s highest classification for used goods---nor was it in “excellent” condition—TRR’s second-highest classification for its used goods. To me, it appeared “very good,” the next step down in terms of wear, as the nylon was a touch puckered near the zipper, likely indicating that it had been worn on multiple occasions, not just once or twice. A sales assistant removed the safety wire attached to the bag and took it down for her to try on. Not seeing a price tag, Isabell asked how much the bag was. “So, it’s $1895, but today it’s 5% off, so $1800,” she said, glancing at her iPad. I was stunned—that same bag retails new for $1390, and there’s no waitlist for it. It was simply illogical. Who would pay more for an obviously-used bag that they could go to Neiman Marcus or Prada and buy for $500 less? It simply didn’t add up.

The Prada Re-Edition, new. Credit: Prada
TRR's used Re-Edition. Credit: The RealReal

After the Prada purse debacle, I probed a bit further, checking the price on every purse in the showroom. From a 2010 Louis Vuitton pochette with visible wear listed for $1400, to a scuffed Fendi micro baguette for $800, I couldn’t believe the prices I was seeing. Every single bag in the store was listed for more than its original retail price, with most marked up by almost 40% from their original retail price, even with obvious signs of wear.

The entryway of TRR in Dallas. Credit: Dallas News

This was a huge red flag for a number of reasons. First, TRR’s “luxury specialists” don’t know how to price their goods—a massive problem that could seriously hurt its credibility, especially considering that TRR is considered the “first name” in luxury resale. This inability to realistically price merchandise also makes it harder to move inventory, which, in turn, hurts TRR’s revenues and strains its relationship with those who consign their pieces with them. Goods must be priced to sell in order to keep the business afloat.

Second, by pricing its goods so unrealistically, TRR is alienating its largest consumer base: Millenials and Gen Z. As I argued in my most recent article, The Prediction Predicament, the main reason Gen Z is currently “big on resale” isn’t because it’s “sustainable;” it’s because most of Gen Z is under thirty, and therefore doesn’t have the money to drop on a new designer bag. However, they still want designer labels; and, as such, turn to resale to find deals on used designer goods. This is the primary function of luxury resale: To rehome pre-owned goods at a substantially discounted price. Thus, by listing pre-owned luxury goods for more than their original retail price, The RealReal is shutting out nearly 40% of its clientele.

Just like with a car, luxury goods lose substantial value over time. In fact, as soon as you buy a handbag in a boutique and take it home, that handbag loses around 10% of its value. Thus, even if you listed it the next day on eBay or another resale site as “new with tags,” you would still have to take a considerable cut on what you paid for it in order to sell it. Save for select items like Birkins, Kellies, or in some cases, Chanel bags and rare or limited edition finds, bags always lose value. TRR is somehow ignoring this basic principle.

A TRR Snapchat ad for "90% off retail." Credit: Snapchat

Ultimately, instead of offering items at “up to 90% off retail,” as it has claimed, TRR seems to be imposing some kind of sustainability premium instead. Essentially, it seems like TRR is just trying to cash in on the popularity of the sustainability movement, hoping its “circular luxury” business model will attract consumers looking to stick it to “wasteful” fashion companies by paying more for pre-owned items. While this logic may apply to 1% of consumers; in general, it is a sure-fire path to business model collapse.

While I went in with great expectations, TRR simply couldn’t live up to its hype. Regardless of its popularity, TRR’s business model is fundamentally unstable. And, if the company is precarious at a base level, it’s no wonder that it fails to meet profitability, quarter after quarter. In order to stay in business, The RealReal needs to stop focusing solely on its growing GMV and instead seriously reevaluate the basic elements of its business model, from its pricing to its store experience. If it doesn’t, The RealReal will face a serious reckoning from investors and customers alike that could destroy the company.

In closing, as the old adage goes: Buyer beware.

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