VERGE

What the unicorn IPO of The RealReal says about the circular economy for fashion

The RealReal

For the past eight years, online luxury consignment platform The RealReal’s virtual marketplace has been open for buying and selling everything from Gucci sneakers to Coach bags 24/7. Earlier this season, it opened up for trading in another market: the stock market.

San Francisco-based The RealReal had been valued at $1 billion when it was private — officially placing it in "unicorn" territory, as a privately held startup with a valuation of $1 billion or more. When it filed to go public in the spring, its initial market cap was roughly $1.7 billion, and it finished that first week with shares trading for a total of around $2.5 billion.

The timing of The RealReal’s IPO comes among a spate of IPOs this year for startups pioneering shared and sharing service models: mobile ride hailers, Uber and Lyft; home-sharing platform, AirBnb; and online marketplace for third-party and in-house fashion brands, Revolve (there are also rumors of The RealReal’s main rival, Poshmark, another online apparel marketplace, IPO-ing soon).

Among these, though, The RealReal’s achievement stands out — its success comes at a time where brick-and-mortar retail consumption patterns are changing, while the unsustainability of the apparel space grows greater every season. It also shows just how much consumer interest there is in the "sharing model," which will be key to scaling the circular economy.

In the transition to a circular economy — moving our society and economy from an extractive linear system to a closed-loop, circular one — we need stories that show the new model is viable. As for fashion, it is notoriously one of the highest-emitting industries. With long global supply chains for its crops, fibers and other associated parts, as well as the swift rates of disposal for these garments by consumers, it is one of the largest polluters in the world. Still, there are major opportunities for the fashion sector to counter its negative environmental performance — from better materials to takeback schemes to anti-waste regulations.

The resale model that The RealReal employs takes advantage of one opportunity: the innovative circular business model. According to the report, "The Future of Circular Fashion: Assessing the Viability of Circular Business Models," by Accenture Strategy and the NGO, Fashion For Good: "In transforming how fashion brands and retailers create value, circular business models present an opportunity to fulfill consumer demands, drive innovation and simultaneously reduce environmental impact."

"It’s trying to get to a place where needs are met, by the service economy and the experience economy," Deborah Drew, associate for the Business Center at the World Resources Institute, who works on sustainable consumption and alternative business models, explained to GreenBiz. "For example, with cars — people don’t need cars, they need to get somewhere. We’d like to see clothing get that way."

Alternative business models in the apparel space vary across specific models and market segments. These models range from one-time rentals (or short one-offs) to subscription rental (or recurring one-offs) to recommerce (or recovery, refurbishment and resale usually by the original retailer, or potentially a secondary reseller), according to Fashion For Good. And while many clothing retailers target consumers based on gender, age and lifestyle groupings, the companies themselves fall into price-segmented categories, according to McKinsey and Co. (PDF): discount; value; mid-market; premium; and luxury. 

core variables for circular business
Fashion for Good and Accenture Strategy

The secondhand retail market is set to outgrow conventional fashion by 2028, according to a report by reseller ThredUp. The luxury secondhand goods market is one of the most valuable market segments within it: In 2018, it was estimated by Bain & Company to be $25 billion.

That’s encouraging news for companies. While the recommerce market, like most circular models, can be logistically tricky and run into problems verifying authenticity, the low price point of highly desired goods ensures a constant revenue stream. Some consumers who previously thought luxury goods were out of reach are actually able to purchase the luxury products for the first time.

And it’s good news for the planet, too. Resellers aren’t extracting resources from the ground but instead are helping divert them from landfills and extending useful lifespans. And this environmental benefit isn’t just part of the package — it’s a key driver for those reselling, according to The RealReal’s own research. The company’s filing noted that 56 percent of resellers list extending the life cycle of luxury items as a key reason they sell used luxury goods to the company. Among millennials, that number is even higher.

A few apparel companies are trying to bypass the external reseller and take control of their own value streams with take-back schemes, too. Patagonia, Eileen Fisher, Stella McCartney and REI are all working on their own secondary markets — a major opportunity to encourage direct connection with consumers, maintain proprietary goods and avoid post-consumer waste. Many companies working on this are working with companies that specialize in takeback logistics, such as Yerdle and The Renewal Shop.

Market Analysis retailers
Fashion for Good and Accenture Strategy

Luxury and premium fashion might not be known for sustainability, but consumer awareness and engagement are growing. Drew told me: "People are realizing the impact the industry has, and that it’s not sustainable. Consumers now are more and more aware of how their choices and the goods that they buy impact people and the planet.”

The RealReal isn't profitable yet, but its early growth is promising. CEO Julie Wainwright discussed the company's strategies and goals last year at the Ellen MacArthur Foundation Summit: "All we sell is used things. But we sell beautiful used things that are made well. We're changing what the circular economy looks like."

"Because of our ability to reduce friction for the consigner and inject trust for the consumer, we are just getting started," she had predicted. "We may be the first billion-dollar circular economy company out there." Wainwright predicted The RealReal's success — as of July 30, the company's shares were trading around $25 each, compared with its opening day close of about $28  — and now, it's time to scale the rest of the circular economy.

Tags: