With a “Richcession” threatening with affluent consumers expected to tamp down spending, the already-hot luxury resale market should enjoy an influx of new customers, spiking growth for the industry’s major players, like the world’s largest online resale platform The RealReal.
Luxury resale is already growing faster than the primary personal luxury market, up 50% from 2018 to 2022 compared with 35% for the primary market in the same period.
While still tiny compared to the primary market – $36 billion versus $382 billion in 2022 – it is expected to grow at nearly twice the primary market’s rate. Statista projects that the global resale luxury will experience a compound annual growth rate near 10% to reach $47 billion by 2025, while Bain predicts a 5% to 7% CAGR for the personal luxury market globally.
Given the rising demand for pre-loved luxury goods, revenues are the least of The RealReal’s worries. Gross merchandise value reached $1.8 billion in 2022, up 23% year over year, and the company’s total revenue increased 29% from last year to $603 million.
It also boasts 31+ million engaged members and increased its active buyers during the fourth quarter by 25% over the same period in 2021. And it fulfilled 15% more orders than last year, with an average order size of $496.
Despite its rapid growth, The RealReal still hasn’t figured out how to transfer more of its topline growth to the bottom line. It’s had over a decade to make it happen, since its founding in 2011 by entrepreneur Julie Wainwright and going public in 2019.
Then in June 2022, Wainwright made a hasty exit, leaving Rati Levesque, the company’s president and COO, and Robert Julian, CFO, to hold the fort as co-interim CEOs until a permanent replacement could be found.
That replacement has just been named, John E. Koryl, who hails from Canadian Tire Corporation (CTC), where he served as its digital president after guiding Neiman Marcus’ omnichannel operations as president stores and online. He will be joined by Luke Friang as chief technology and product officer after a 20+ career spanning Zulily, Lovevery and Costco.
Koryl’s initial mandate will be to streamline operations and improve client experiences, which for The RealReal is complicated because it involves both the customers who buy and the consignors who supply the products to sell.
But priority number one is achieving profitability, which has eluded the company so far. Not that the Levesque-Julian team hasn’t been focused on that too, but the hope is Koryl will super-charge the efforts while Levesque and Julian return to their old jobs.
As it stands, the company expects to reach adjusted EBITDA profitability by 2024, having ended fiscal 2022 with adjusted EBITDA -$112.4 million, an improvement over 2021 when it was -$126.9 million.
Currently, Koryl is studying up for the new job and acclimatizing to the company culture, so Levesque and Julian filled in to discuss the levers to profitability they’ve been advancing.
How Koryl adjusts them or if he pushes them all to full throttle will depend, but The RealReal seems to be moving in the right direction.
“There is a lot of talk about whether a company in the resale industry can thrive and be profitable. We’re really excited to prove that it can,” said Julian.
Operating expenses weigh heavily on the company, totaling $537.9 million in fiscal 2022 and up 10% over the previous year. And the direct cost of revenue was even more costly last year, up 31%, from $194.2 million to $254.8 million, rising faster than sales.
In a cost-cutting move, some 230 employees were laid off earlier this year, about 7% of its workforce. It also shuttered two flagship stores in San Francisco and Chicago and closed two smaller footprint neighborhood stores in Atlanta and Austin, plus two consignment offices in Miami and Washington, D.C. It currently operates 13 stores, down from 19 last year.
“Closing the stores was purely a financial decision,” Julian maintained. “We looked at the P&L of each store and shut down the least profitable.”
Complicating further cost savings is the overhead required to process over a million unique SKUs each month that it receives from consignors. Each item must be reviewed and authenticated before being accepted into inventory, then described, priced and photographed for the website.
“Not many, if any, retailers take in as much one-of-a-kind merchandise and have to do what we do with each one,” Levesque said.
To facilitate the process, the company has leveraged technology to authenticate some products, speeding the handling of selected watches, jewelry and handbags. “Almost 50% of our handbags are authenticated via machine learning,” she said, adding it uses patented technology developed with the University of Arizona.
Retailers live or die on margins and The RealReal’s take rate – the amount it keeps from each transaction – hovers around 35%. Because an essential part of its value proposition is that consignors can make more money with The RealReal, it can’t cut commissions. Instead, it is dialing up the acquisition of higher-value items and dialing back lower-value items.
“Everything we bring in sells, so we are always looking for the right supply,” Levesque said. “It means de-emphasizing lower-value goods, like key chains and children’s goods that are priced mostly under $50 or $100 and emphasizing higher-value goods.”
It also finds some price points are more elastic than others, so it optimizes pricing through machine learning to get the most yield out of each transaction. That will increase both the consignor’s commission and the company’s take.
And by relying on machine learning, it can adjust prices more strategically, not pulling the plug too soon.
“Within 90 days, 80% to 90% of products sell, so if it’s not moving at a certain price point, we are guided in markdowns by learning from the thousands of attributes we have stored in our database. We’ve got a rich database to use as our model and it gets richer all the time,” she said.
In addition, it has added a personalized tool to the website to allow consignors to calculate their potential earnings on an item before consigning.
Lean Into Sellers
Ultimately the company’s success hinges on attracting the right product and that means cultivating its sellers’ market.
“We are a supply-constrained business,” Julian said. “It’s a very unique business model in that regard. This company has never had a demand problem. The competition is all on the supply side.”
With its proven high-level customer experience, The RealReal has to flip the switch to improve the consignors. In support of that, it has launched a dedicated consignor concierge service, called RealService, to support every consignor through the entire process personally.
This completes the customer-seller circle to align the service experience luxury consumers expect in both roles. Luxury consumers are increasingly weighing the investment value of a new purchase against its potential value in the resale market. Bain identifies “luxury as an asset class” as one of the key drivers in the current luxury market.
“By prioritizing, investing in and providing a dedicated concierge team to each and every consignor, we can continue to provide the luxury service that we deliver. We are giving them the education and opportunity to make even more informed shopping decisions, in both the primary and secondary markets,” Levesque explained.
This attention to serving the consignor as well as the customer is critical to paving the company’s path to profitability. It is intended to ensure a steady supply of the most in-demand, high-value offerings are always available.
And in making the decision about which stores to close, one of the measures in each store’s P&L was the amount and quality of new products each store delivered.
“About 30% or more of our supply and 40% of our sellers come from the stores. And we found the smaller footprint, much more efficient to run neighborhood stores were bringing in as much supply, if not more than some of our flagship stores,” Julian shared.
Fiscal 2023 Is Reset Year
In closing, Levesque and Julian describe fiscal 2023 as a reset year for the company. “We’re looking to optimize both sides of our business for both customers and sellers. When you touch one side of our marketplace, the other gets affected,” Levesque said.
And Julian added, “It’s a flywheel effect, and in the past, we were focused on growth, sometimes at all costs, including unprofitable growth. The main pivot now is to really focus on profitability and to balance our fixed and variable costs.”
As Koryl takes control of The RealReal flywheel, he has a good start with the strategies that the interim co-CEOs put into place.
His challenge is to understand the intricacies of operating in a luxury marketplace business limited by available supply, unlike a traditional retail business where growing demand is the priority. He has two good teachers.
“The most unique thing about The RealReal is our supply constraints. Whenever we see a softening of business on a day-to-day basis, it all goes back to supply,” Levenque said.
“The natural reaction for anybody who’s worked in retail is to focus on the demand side and think about how do we drive more demand. We operate in an alternative retail universe where the only limit to our demand is supply,” she concluded.