The thrift store business has gone big-time. The vast volume of processed goods opens the door to fraud and deception. Especially with designer handbags, because the quality of authentic replica bags got better and better, you can not be sure you bought a luxury brand original. We say the educated consumer would only buy a CHANEL bag in an official CHANEL store or an original quality replica or super fake.
Facilitated by venture capital and private equity, the resale business (as it’s now known) has scaled up.
What used to be a local, mom-and-pop business has been tech-enabled, allowing what were local inventories of unique items to be available worldwide. Facilitated by venture capital and private equity, the resale business (as it’s now known) has scaled up, handling thousands of items and hundreds of millions of dollars of product.
The appeal is manifold: Consumers save money on brands they love and help the environment by giving old products a new life. Consumers who’ve grown tired of (or just plain grown out of) what’s in their closets can turn their stuff into money to buy replacement products or other products they prefer. The impact goes well beyond resale and has the potential to further chip away at the performance of department stores and off-price retailers like Burlington Coat, TJX (owner of TJ Maxx, Marshalls, HomeGoods and others) and Ross Stores.
One of the key aspects of a resale company is authentication. There are a lot of fakes in the market, especially if the brands are high-end. Having an intermediary with expertise who vouches for authenticity is an enormous value-add for consumers because it often takes an expert to detect forgeries.
On the morning of this article’s publication, the company’s market capitalization was over $1.7 billion.
The Real Real, a large and important player in the online luxury resale business, has been so successful that it went public in late June. On the morning of this article’s publication, the company’s market capitalization was over $1.7 billion. According to its latest financial report, it has no debt and over $60 million in cash (including short-term investments) on hand.
One of the keys to the company’s success has been its position on the authentication of every product it sells. The prospectus for its going public transaction says right upfront: “We build trust by expertly authenticating every item. Each item is put through a rigorous, multi-point authentication process by our highly trained gemologists, horologists, brand experts or art curators.”
Also in its prospectus is a chart (Page 93) that shows the process The RealReal undertakes for all the items it receives to put on sale. It looks like this (in part):
Yet a recent report by consumer protection group The Capitol Forum (as described in this article on Fashionista) is consistent with information I got from two informed, confidential sources. They all say the actual process for authentication at The RealReal is different from the impression you get by reading the prospectus or visiting the company website.
Here is the nub of the problem: A great deal of the authentication at The RealReal is done by people whose title is “copywriter.” According to my sources, a majority of products sold are authenticated by these so-called copywriters. Normally, a copywriter is a person who, well, writes copy. And indeed the copywriters do write the copy–the words that accompany the pictures next to an item for sale on The RealReal’s website–but they are also doing authenticating.
The problem is that the copywriters have a small fraction of the training that the more expert people have. That’s a problem because, without the training that the true experts have, the copywriters can miss things, which are often things they shouldn’t miss. The RealReal would not say anything about the depth of copywriters’ authentication training except that they “are trained and tested on our authentication best practices.” I was not able to find out how much training the copywriters get before they start authenticating, but everything I’ve heard and read about the copywriters indicates that they come to the job with little or (usually) no experience in authentication.
Luxury brand Chanel has sued The RealReal with allegations of trademark infringement, counterfeiting, false advertising, and unfair competition, among other things.
There has also been pushback about the company’s authentication from the industry. Luxury brand Chanel has sued The RealReal with allegations of trademark infringement, counterfeiting, false advertising, and unfair competition, among other things. (There have also been good articles about the issue on Refinery29 and the now-defunct Racked.)
The RealReal has denied the allegations. In response to the Fashionista article that described the findings of the Capitol Forum report, The RealReal said: “This company’s actions and misrepresentations are clearly calculated to sell their subscriptions and improperly manipulate the market for the benefit of short-sellers on behalf of their subscribers. These people are not journalists, and they are not credible. The RealReal stands 100% behind our state-of-the-art authentication process.” In response to the Chanel lawsuit, according to WWD, The RealReal called it “an alarmingly thuggish effort to stop consumers from reselling their authentic used goods.”
And to be fair, one of my sources says The RealReal “is the West Point of authentication.” But even if it is better than others, there is much left wanting, and that brings the entire resale industry’s authentication processes into question.
I contacted The RealReal about these authentication concerns, and the company invited me to tour its center in Secaucus, New Jersey, where it receives, authenticates, prices, posts and ships products. I accepted the invitation and was given a tour by the senior director of merchandising, who is responsible for all of the company’s facilities. The company took me through the authentication process, and I talked to both experts and copywriters, all of whom showed me how they do their authenticating work.
Most of what I saw about spotting fakes has to do with certain “tells”: They look for small signs that indicate the product can be fake. Screws, bolts, linings, labels, zippers, and other fittings are monitored closely because they are expensive to produce and forgers may try to skip or fake them. The RealReal counts on that to detect forgeries.
The employees I met were open about having copywriters doing the authenticating, and I saw it myself. They do it by dividing products into what they consider to be “high-risk” or “low-risk” categories. Products that are known to attract forgers–either because they are very desirable, very popular, very expensive or some combination of the three–are sent to high-risk authenticators, who have more training and knowledge.
As a result, consumers are buying fakes, and no one knows how many because too many products are authenticated by copywriters.
My sources say that the high-risk authenticators do as good a job as any human can; the problem is that not enough of the products go to them, and that’s how fakes get through. As a result, consumers are buying fakes, and no one knows how many because too many products are authenticated by copywriters.
That is likely how I came to spend over $3,600 for a fake Christian Dior bag on The RealReal. I’m referring to a bag called the Toile de Jouy Dior Book Tote.
I asked The RealReal about the fake bag I ended up with. The company asked me to return it and said (in part) the following: “We reexamined the Book Tote you returned and are not able to definitively confirm its authenticity. … Authentication is extremely complex. It’s both an art and science. We make every effort to accurately authenticate the items we receive, arming our authenticators with tools and technology, authentication guides and daily training. We follow a thorough authentication process and qualified, trained authenticators examine every item we receive. We stand by our authentication process and will always work with our customers to make things right.” Regarding fakes, the company said: “The RealReal has a zero-tolerance policy for counterfeiting. We help brands and government agencies working to track down the source of stolen or counterfeit items, including sharing the contact information of consignors submitting counterfeit goods.”
In my correspondence with the RealReal about the fake bag, I kept asking this question: How can a bag from a brand as well known as Christian Dior, being sold for over $3,600, escape your scrutiny? So far I haven’t gotten an answer.
There are a host of reasons what’s happening is wrong. The first is that it’s bad for consumers.
There are a host of reasons what’s happening is wrong. The first is that it’s bad for consumers. Most people don’t have access to experts who can tell them that the $3,600 bag they bought is fake. What’s even worse is that when a maker of fake bags succeeds in selling a fake on The RealReal, it encourages that maker to produce more fake bags, and that compounds the problem.
The other group of victims is investors. When I read the prospectus, the chart above and The RealReal website, I get the clear impression that the authenticators and the copywriters are different people. There is no mention of having two tiers of authenticators. Investors putting up money in The RealReal might make a different decision if they were told more about how the authentication process works. They would be more likely to suspect that $3,600 bag being sold was as fake as the bag I bought. That would make The RealReal a less interesting investment opportunity.
Products sold by The RealReal need more scrutiny by knowledgeable people in order for the company and the entire resale market to have the credibility it needs to develop. But there are a couple of problems. First, it’s very hard to find experts who have enough knowledge to authenticate a wide range of products. Second, having more highly qualified experts on staff will increase costs. The RealReal can’t afford that. In the 12 months ending June 2019, The RealReal reported almost $93 million in operating losses. The company needs to drive toward profitability, and adding additional authentication experts, even if they could find them, would the company in the wrong direction. Even if The RealReal eliminated its entire marketing budget, it would reduce the loss by only about half. Covering the other half of the losses would be a big lift for a company the size of The RealReal, and adding authentication costs would stretch its time frame for ever reaching profitability.
Ultimately, this problem can be fixed only if management commits to make it happen. Management needs to acknowledge that long-term success is built on the credibility of the authentication, and having fakes continue to show up for sale works against that. Based on what we’ve seen so far, it appears that only pressure from consumers and investors will create the change that’s needed.
As long as fake bags are unwittingly sold to unwitting consumers, authentication standards won’t improve. That puts a question mark over the business model of resale companies and threatens the continued development of The RealReal’s business, its market value and the entire resale industry.
The article was adapted from forbes.com