A Look at The RealReal’s IPO, and How It’s Becoming the TJ Maxx of High-End Watches

Luxury online consigner The RealReal (TRR) has gone public on the Nasdaq, raising $300 million in an initial public offering, valuing the company at $1.6 billion. The IPO comes just days after sneaker marketplace StockX raised a new round of funding at a $1 billion valuation. and brought in a grown up to be the new CEO (sorry, backwards hat guy). The pre-owned, used, retail, whatever you want to call it space is heating up, and investors have been taking notice.

The RealReal, along with Poshmark and Thred Up, are the leading players in the resale sector. TRR offers a diverse selection of luxury items, including clothing, jewelry, art, home goods, and yes, watches. The company, founded in 2011, seeks to separate itself by authenticating every item that it consigns on its site. To consign goods on the site, you schedule an appointment with one of their authenticators, who checks out your goods and makes sure they’re legit.

I’ve seen any number of “authenticator” and “valuation” analyst positions posted on LinkedIn over the past few months. No doubt it’s a labor-intensive business, but with the proliferation of well-done fakes, it’s only going to get more difficult to figure out what’s legit and what’s not. For companies like TRR or StockX to be profitable, they’ll have to find a scalable solution, no doubt some combination of technology and people, to authenticate goods. This might be easier with some products than for others.

As The RealReal tells it in its S-1 filed with the SEC before they went public:

The total addressable market of luxury products in U.S. homes potentially available for resale … is approximately $198 billion according to Frost & Sullivan. We are well positioned to benefit from several favorable industry and consumer trends, including the accelerating shift of luxury to digital channels, the increasing acceptance of resale, a rising value consciousness and a desire to embrace sustainability.

Never mind TRR’s defining its market as luxury goods “potentially available for resale” (like, what does that mean — every bored housewife’s Louis Vuitton bag in the back of a closet is potentially available?). Bain (the consulting firm your smart asshole friend from college worked at for two years) estimated the actually luxury resale market at $6 billion in 2018, a fraction of the entire $24 billion resale market for clothes, accessories and footwear (though the market is expected to double in the next 5 years).

Still, so-called "re-commerce" upstarts are growing 20 times faster than the broader retail market and five times faster than off-price retailers, which offer a similar treasure hunt. It’s not just cost considerations that lead people to buy/sell on the second-hand market either: it’s the sea turtles. 56% of The RealReal’s consignors cite environmental impact as a reason why they sell their unwanted goods to the company.

The RealReal by the Numbers

Let’s take a quick look at The RealReal’s numbers, as report in their S-1:

• Revenue: $207 million for the year ended December 31, 2018, a 55% YoY increase from $134 million in 2017

• Net losses: $76 million net loss for the year ended December 31, 2018, a 44% increase from a $52 million net loss in 2017

• Take-rate on consigned goods: 35.5% for the year ended December 31, 2018

• Orders processed: 1.6 million as of December 31, 2018, up 42% from 2017

• Number of members: 11.4 million members as of March 31, 2019

(Fun fact: The RealReal’s CEO, Julie Wainwright was also the CEO of infamous dot com poster child Pets.com when it went bust less than a year after its IPO).

And TRR’s not the only one focused on authentication as a means of differentiation. Last year, eBay launched eBay Authenticate, allowing easier verification of luxury handbags. Authentication has also been StockX’s primary value proposition.

But, the efforts of these online marketplaces and retailers to become authenticators has not been without challenge from the brand incumbents. As The RealReal notes in its S-1, in 2018 Chanel filed a lawsuit against The RealReal, bringing various trademark- and advertising-related claims. Chanel alleges that The RealReal’s resale of Chanel products confuses consumers into believing that Chanel is affiliated with us and involved in authenticating consignors’ goods and that only Chanel is capable of authenticating second-hand Chanel goods. Chanel alleges, in particular, that TRR made false representations concerning the Chanel-branded goods sold on TRR and that a number of these goods were counterfeit (read more about the suit here).

The RealReal and Watches

So what is The RealReal doing in the watch industry? Well, not much. If you go to the watches tab on their site, you’ll see a pretty random assortment of pre-owned modern watches, something like this:

It’s page after page of modern-ish Rolex Oyster Perpetuals, Datejusts, and other random offerings from luxury brands — a lot of diamonds and two-tones especially. Nothing you’d be caught dead bringing to a RedBar meetup, in other words. The day I looked at their offerings, there were no stainless steel Submariners available for purchase; so, just like your local Rolex AD in that respect. And there are no vintage Rolex GMT-Masters, Submariners, or anything like that. But hey, there is a first generation Apple Watch — can’t buy that at the Apple Store! In other words, it’s basically TJ Maxx for people who don’t blow enough money on bath bombs and shitty Aldos at TJ Maxx already (the 1%, in other words).

In its S-1, The RealReal says its women’s clothing category accounts for 67% of its sales; the company is hoping to penetrate high value categories — like watches! — to continue its rapid growth. The company says that its has horologists authenticate and inspect all its watches, and each piece comes with an authentication certificate, so that’s cool. For jewelry, they’re working with the University of Arizona to develop proprietary technology to inspect gemstones faster and more accurately, without unmounting the stone. But can technology provide a scalable solution to authenticate watches?

I suppose it’s easy enough to authenticate a modern Rolex: get the watch in your hands, analyze the case shape, dial, pop open the back to look at the movement. There are any number of Instagram accounts that spend their time “busting” fake Rolexes that others post; perhaps the people running those accounts would like a job at TRR. But to date, TRR hasn’t been able to get people to sell their real valuable stuff on its site. For modern watches, I’m talking about the stainless steel Pateks, Daytonas, and the like that sell for twice MSRP.

Perhaps it’s because the people buying these watches know exactly what they have and don’t want (or need) some middleman like TRR coming in to take 15% of the sale. In reality, the watch community is pretty small, and buyers dropping a solid five figures on a watch tend to be pretty savvy and careful before buying from a dealer, forum poster, or eBay. They don’t need a middleman to “authenticate.” So, TRR is essentially stuck consigning boring modern watches for people that are too lazy to go through the work of posting it on a forum or running an eBay auction (or watches that wouldn’t sell on a forum), or just want a quick payout without that hassle. For TRR, it’s not a bad business to be in, but it’s not disruptive to the watch industry by any stretch. It’s TJ Maxx, for watches.

TheRealReal Can’t Do Vintage

And when it comes to vintage, it’s not clear TRR would have any expertise in authenticating. Is a San Francisco-based ecommerce company going to invest the time and resources into making sure some Reference 1680 Submariner has a period-correct bracelet and hand lume that matches the dial’s? First, there’s not a ton of people that have the professional expertise to do that, and they mostly work at auction houses or as independent dealers. Alternatively, there are the part-time “authenticators” who hang out on forums and help others make purchases, but those guys have day jobs (during which they lurk on forums when their boss isn’t over their shoulder).

I completely believe that transparency, trust, and authenticity still need to be brought to the vintage market, but it’s not clear that TRR offers a path towards these goals. Whenever I buy a watch from a private seller, I still get nervous. I’d love to have a trustworthy platform to fall back on; but they have to add value that justifies the increased price they’ll undoubtedly charge. Meanwhile, while they catch heat, auction houses serve this role admirably for the small portion of sales they facilitate. But at the end of the day, they still represent the seller who is trying to offload the watch. Buyer beware. Because of its role as a marketplace and its financial interest in not having returned products, TRR is likely a more neutral platform. But if I’m a collector with a vintage Rolex, Longines, whatever, why in the world would I ever try to consign with a place like TRR? It’s not clear that they have the knowledge and expertise to properly evaluate a vintage watch, tell its story, and get a fair price for it on the market. Just go to the watches tab of their website; it’s a shit show. Rolex! Cartier! Burberry! There’s no cohesion, no story, no anything. Just a website with a bunch of brand names trying to sell the consumer some idea of luxury. And in that way, TRR is no different from every other luxury goods company that has come before it.

It kind of reminds me of an Onion article from a few years ago: “T.J. Maxx Recreates In-Store Shopping Experience With New Website That Randomly Scatters Products All Over The Place”. Is TRR actually offering anything different? While TJ Maxx tries to offload goods that retailers decided they don’t want anymore, TRR serves the same function for consumers. Sure, they slap the word “luxury” on it to make it feel exclusive, but is it really that different?

But then again, that’s what watches are about too. A Rolex isn’t a watch, it’s a feeling.