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The RealReal Is Still Battling Fakes. It Won’t Be Easy To Get It Right.

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This article is more than 3 years old.

If you doubt whether the market for second-hand clothes and accessories (“resale”) is exploding, a conversation with a fashionista friend will dispel your concerns. What you’ll hear, as this Vogue writer wrote last week, is, “Practically everyone I know is addicted to vintage and resale sites, spending untold hours both looking for things to love and consigning things that, despite their exquisite provenances, they just don’t want anymore.” BCG says resale of apparel, footwear and accessories is a $30-$40 billion business worldwide and growing at 15-20% per year.

The logistics of companies selling resold products are complex. Where new products are created and shipped from the factory in crates of identical products, each resold product is sourced from a different place, gets authenticated individually and is uniquely singular. The largest seller of second-hand fashion with its own proprietary marketplace is The RealReal. The RealReal is valued at over $1 billion in the public market and lost no less than 30 cents (operating loss) on every dollar of revenue in its most recent year which was its best year so far.

Almost 18 months ago I wrote an article about a fake Christian Dior handbag I bought on The RealReal for $3600. That was followed by an investigation and multiple articles on the subject by CNBC. All these months later, my article gets viewed 10-15,000 times per month. Now ask yourself: When was the last time you read a news article almost 18 months old? That much attention to the topic makes it clear that the level of concern about fakes on The RealReal is sky high.

With good reason. A consumer named Linda contacted me recently about a pair of Christian Dior sneakers she bought from The RealReal for over $1000. Linda got the shoes home and felt suspicious about their authenticity so she sent them to be authenticated by LegitGrails which does third party authentication. Unlike The RealReal, where products can be authenticated by as little as one person, LegitGrails has no less than four people authenticate everything they review. Angelina Kildjaskina, Co-founder of LegitGrails, told me Linda’s high-tops are a very popular model and most of the ones that LegitGrails reviews are fake but the pair Linda sent in was a “lower grade replica” than what they usually see. She added, “it’s fascinating to me how The RealReal did not spot it because those flaws cannot be mixed up with factory flaws.”

I asked The RealReal how it’s possible, yet again, that a high-priced product from a well-known brand escapes their scrutiny. The RealReal refunded Linda’s purchase without acknowledging that the shoes were fake and I didn’t get an answer to my question. Instead, they told me, in part, that they have “the most rigorous authentication process in the marketplace, and [are] ... the only resale company in the world that takes possession of and authenticates every single item we sell. There is no other resale company doing more to remove fakes from the market ... We keep tens of thousands of counterfeit goods off the market every year ... Our authentication process is always evolving ... In the past year, we have deployed advanced artificial intelligence and machine learning to support our authentication experts ... [W]e stand behind our authentication team and process. we get it right an extraordinarily high percentage of the time and we have an authenticity guarantee, allowing our customers to buy with confidence ... we make it right, as we did in this case by issuing a full refund to the buyer.” After receiving that statement, I asked The RealReal how the number of authentications has grown, how the number of people doing authentication has grown and how the number of products rejected for authentication reasons has grown. The company declined to answer and referred me to its quarterly letter to stockholders where the only mention of authentication is about automating the authentication process with artificial intelligence.

Why does this happen? Why does The RealReal not have as much expertise as a small startup like LegitGrails to see the difference, as you can plainly see in the picture at the top of this article, between the label on the fake and the one on the real shoe? The answer has to do with The RealReal’s business model and its conflicting incentives. On the one hand, The RealReal’s business is only sustainable if consumers believe what they’re buying is authentic. It would make sense for The RealReal to spare no expense in authenticating every product. But The RealReal went public in 2019 and it has to have a path to profitability. In its most recent financial report, The RealReal had almost $400 million in cash on its balance sheet and lost over $100 million (in Analyst Normalized EBITDA) in the previous 12 months. If The RealReal continues to operate at that rate, it will run out of cash before turning profitable and it will be difficult or impossible to raise more money and stay in business, destroying shareholder value. The RealReal has to find a path to profitability before the cash runs out. But the vast range of product knowledge required for successful authentication of millions of products is challenging to maintain all in one place. So it’s inevitable that fakes wind up going through the system without being detected and no one knows how many.

How can resellers have the best knowledge about fakes to keep fraudsters out of the market? The most knowledge about products does not reside in resale companies like The RealReal, the knowledge is domiciled at the brands who make the products. The RealReal has some partnerships with brands like Burberry, Stella McCartney and Gucci, but those partnerships are for marketing and not for authentication. Resellers need to tap into makers’ product knowledge base in order to have the best chance of preventing fraud. One of The RealReal’s competitors, Vestiaire Collective, recently announced a partnership with the fashion brand Alexander McQueen in which the brand will also participate in authentication. Another company called Reflaunt, puts a button on a merchant’s website that facilitates the return and resale of worn products that have been purchased online by a consumer. But as a complete business model that leverages the knowledge of brands at all levels including authentication, I have only seen one. That’s a company called Trove (Forbes writer Lauren Debter recently wrote a great article describing Trove). As a consumer, you’ll probably never know you’re transacting with Trove when you encounter them. But if you go to the resale site of Patagonia and REI, it looks like the sites are operated by those brands; in reality, Trove runs their resale businesses as a subcontractor. That gives Trove access to the product knowledge it needs to ensure authenticity, gives the brands a new stream of income and a new consumer to market to and gives consumers the confidence that what they’re buying is real and that the brand backs it up. All other things being equal, it’s more comforting to a consumer to buy from a reseller where the brand implicitly endorses the authentication. Leveraging a brand’s authentication knowledge is also a great way to reduce authentication costs and build a sustainable resale business.

MORE FROM FORBESGold In Your Closet: Trove Cashes In On The Resale Boom

One of the obstacles to authenticity in resale right now is that many brands believe resold products will cannibalize their traditional businesses. That’s a reasonable concern but there are other countervailing factors. Most important is that consumers want resale which makes its growth impossible to stop and when consumers buy fakes unwittingly, it destroys brand value. Resale also brings new consumers into the market by giving them access to brands they otherwise couldn’t afford. And it changes the nature of very expensive products by allowing consumers to recapture much or most of their purchase price when the product is sold into the second-hand market which brings a new type of consumer into a brand’s ecosystem.

No one knows how the resale market will shake out but it’s clear that trends towards value, sustainability and transparency will continue to drive resale industry growth. No one knows who will succeed in resale but it’s clear that very deep product knowledge, which resides in the makers of products, is needed for authentication. Without that knowledge, fraudsters will continue to create product, sell in the second-hand market and be incentivized by their successes to create more and more. If The RealReal doesn’t tap into the authentication expertise that resides at brands, it’s hard to see how it gets to a profit before the money runs out. Despite The RealReal’s leading position in scale and consumer awareness, its unproven business model means the market is wide open for whoever can develop the authentication expertise to become the most successful entrant in a booming market.

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