Item 1. Business
Item 1. Business.
Overview
The RealReal is the world’s largest online marketplace for authenticated, consigned luxury goods. We are revolutionizing luxury resale by providing an end-to-end service that unlocks supply and creates a trusted, curated online marketplace for buyers globally. Since inception, we have cultivated a loyal and engaged consignor and buyer base through continuous investment in our technology platform, logistics infrastructure and people.
We offer a wide selection of authenticated, primarily pre-owned luxury goods on our online marketplace bearing the brands of thousands of luxury and premium designers. The top-selling luxury designers on our online marketplace include Cartier, Chanel, Christian Louboutin, Gucci, Hermès, Louis Vuitton, Prada, Rolex, Tiffany & Co. and Valentino. We offer products across multiple categories including women’s, men’s, kids’, jewelry and watches, and home and art.
Gross Merchandise Value
(In Millions)
A strong network effect drives the growth of our online marketplace. As we bring more consignors onto our platform, we unlock more high-quality, luxury supply, which increases our merchandise assortment and attracts more buyers. This, in turn, increases sales velocity and commissions for our consignors. In addition, a meaningful share of our consignors become buyers and vice versa, which creates a differentiated flywheel that enhances the network effect of our online marketplace.
We also operate our larger footprint flagship retail stores, or Flagship Stores, in West Hollywood in Los Angeles, California, Union Square in San Francisco, California, SoHo and Upper East Side in New York, New York and in Chicago, Illinois. Our Flagship Stores are typically 8,000 to 12,000 square feet with thousands of unique items for sale and are located in highly desirable, densely populated locations with strong foot traffic. In addition, we operate smaller footprint neighborhood retail stores, or Neighborhood Stores, on the Upper East Side and Brooklyn in New York, Newport Beach, California and Palo Alto, California. Our Neighborhood Stores are typically 2,500 to 4,500 square feet with items for sale focused in one category and are located in an area with large number of potential customers who are interested in that category.
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Our Market
The existing luxury resale market is outdated, fragmented, difficult to access and laden with counterfeit goods. Primarily due to these challenges, a vast quantity of consignable luxury goods languishes in homes, and buyers can be hesitant to purchase pre-owned luxury goods. We are transforming the luxury resale experience by addressing these challenges.
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We provide a seamless consignment experience enabled by our proprietary technology platform and data . We leverage our proprietary technology and data analytics to provide world-class service, making consignment easy, convenient, reliable and fast. As a result, we unlock luxury supply from first-time consignors, convert consignors who typically consign at local brick-and-mortar shops to our online marketplace and drive high repeat consignment rates. We leverage data from millions of previous transactions and current market data to optimize pricing and sales velocity for our consignors.
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We offer buyers a vast, yet curated supply of primarily pre-owned luxury goods and instill trust in the buying process . We build trust in our buyer base by thoroughly inspecting the quality and condition of every item and putting every item through our authentication process. This trust drives repeat purchases from our buyer base and instills confidence in first-time buyers to purchase pre-owned luxury goods.
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We also operate Flagship and Neighborhood Stores . In 2020, our stores generated approximately $52 million in GMV and approximately $81 million in retail supply value. Our stores improve unit economics by acquiring higher value buyers and consignors, increasing lifetime value, increasing average order value, and lowering return rates. We also benefit from increased brand awareness that accelerates overall market growth.
Our Consignors
By making consignment easy, convenient, reliable and fast for our consignors, we aim to unlock a vast quantity of desirable, high-quality, primarily pre-owned luxury goods. Our sales professionals remove friction from the consignment process and build lasting relationships with our consignors. In 2020, approximately 83% of our GMV came from repeat consignors. Our unique service model incentivizes consumers to consign by making the process easy.
Our sales and service organization is responsible for obtaining exclusive supply for our online marketplace. Our sales professionals generate a robust pipeline of new consignors and build lasting relationships, which cannot be easily replicated. They consult on the consignment process and leverage data to advise consignors on pricing, expected selling time and market trends.
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We deliver an end-to-end service experience. We remove friction from the consignment process by providing multiple consignment methods. We offer White Glove in-home consultation and pickup , subject to safety requirements related to the COVID pandemic, and meetings with consignors via online face-to-face platforms, or Virtual Consultations. Consignors may also drop off items at our luxury consignment offices . Our Flagship and Neighborhood Stores provide an alternative location to drop off consigned items and an opportunity to interact with our experts. Consignors may also utilize our complimentary shipping directly to our authentication centers.
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We do the work on behalf of consignor . Once consigned items reach one of our four authentication centers, we authenticate, write the associated copy, photograph, price, sell and handle all fulfillment and returns logistics, making the consignment process seamless. Improvements in our automation of pricing, copywriting and photo retouching have improved the efficiency of our operations.
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We generate high commissions for consignors . Our scale and global reach combined with our technology-driven online marketplace and proprietary data enable consignors to realize optimal value for their pre-owned luxury goods. Our consignors earn up to 85% in commissions and achieved an average commission rate of approximately 64% in 2020.
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We offer a range of payment options for consignors and businesses. Consignors are generally paid after an item has sold, however, we also offer trade-in terms and “Get Paid Now” options to both businesses and individuals. “Get Paid Now” is a program whereby a consignor’s items are evaluated, authenticated and priced and the consignor receives payment based on this process in advance of the sale of the item.
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We drive rapid monetization . Our online marketplace efficiently matches supply with demand resulting in exceptional sales velocity. In the first three quarters of 2020 and for the full year 2019, approximately 60% and 80% of the products on our online marketplace sold within 30 days and 90 days, respectively. In addition to sales velocity, we measure the ratio of demand versus supply in a given period, which we refer to as our online marketplace sell-through ratio. Sell-through ratio is defined as GMV in the period divided by the aggregate initial value of items added to our online marketplace in that period. In 2020 and 2019, our online marketplace sell-through ratios were 99% and 94%, respectively.
In addition to consignments from individuals, we also receive items directly from business sellers such as resellers, wholesalers, brands, retailers, or Vendors. These Vendors consign primarily on consignment terms, but also on a “Get Paid Now” basis. We source primarily high-value products in the handbag, jewelry and watch category and sneakers from Vendors. We intend to continue to establish these relationships with Vendors and to develop our operational and technological capabilities to meet the unique needs of these Vendors.
In 2020, our GMV value was comprised of 78% from In-Home, Virtual Appointments, and Direct Ship, 14% Flagship and Neighborhood Stores together with Luxury Consignment Offices, and 8% from Vendors.
2020 GMV Value By Source
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Our Buyers
We make it easy for buyers to shop our vast, yet curated selection of authenticated, primarily pre-owned luxury goods. In 2020, we had approximately 649,000 active buyers and approximately 83% of our GMV came from repeat buyers. As we continue to unlock exclusive luxury supply, we aim to attract new buyers and drive repeat purchases from our existing buyers.
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We offer a seamless buying experience . Buyers access our omni-channel online marketplace through our website, mobile app and retail stores, enabling them to purchase anytime, anywhere. Our Flagship and Neighborhood Stores also offer our buyers world-class service, surrounded by a beautifully designed space, where they can shop our dynamic curation of authenticated pre-owned luxury goods across all of our categories.
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We build trust by putting every item through our authentication process . We continue to invest and innovate in authentication. We believe we have the most rigorous authentication process in the marketplace. We have highly trained gemologists, horologists, brand experts and art curators who collectively inspect thousands of items each day. All items pass through a rigorous brand-specific authentication process before they are accepted for consignment. This process includes inspecting the item for attributes such as appropriate brand markings, date codes, serial tags and hologram stickers. Our gemologists and horologists authenticate and inspect our fine jewelry and watches, and each piece comes with an authentication certificate. In addition, our team of fine art curators and specialists research and validate art pieces for authenticity. In 2020, we augmented our authentication process with proprietary item and consignor risk scoring algorithms. We have a zero-tolerance policy when it comes to counterfeit goods. Items that are deemed to be counterfeit are confiscated. We are also working with the University of Arizona to develop proprietary technology to inspect gemstones faster and more accurately, without unmounting the stone.
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We provide access to unique, highly coveted and exclusive products . We provide buyers with access to a vast, yet curated selection of unique, authenticated, pre-owned luxury goods. In 2020, we sold goods bearing the brands of thousands of luxury and premium designers, including highly coveted items such as rare watches and handbags.
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We provide a gateway to luxury brands . We believe we are expanding the overall market for both new and pre-owned luxury goods, as the ability to experience and engage with luxury brands through our online marketplace results in an earlier appreciation for high-quality, well-crafted items, and inspires consumers to purchase new luxury items. As of December 31, 2020, while we had no contractual or other affiliations with luxury brands other than our partnerships with Stella McCartney, Burberry and Nanushka, we believe our online marketplace cultivates customer relationships for luxury brands.
Our Technology
Technology powers all aspects of our business, including our complex, single-SKU inventory management system. Our supply comes from thousands of individual consignors and businesses across the United States. Each item we sell is a truly unique, individual stock keeping unit (“single-SKU”) and is exclusively available on our online marketplace. Given the complexity of our inventory model, we developed and continuously innovate specialized, proprietary applications to optimize inbound processes, such as authentication, copywriting, photography and photo-editing. We increasingly use our technology platform to automate pricing, copywriting and photo retouching for goods sold through our online marketplace.
Our powerful data analytics capabilities enable us to improve both consignor and buyer experiences. Our online marketplace generates and aggregates hundreds of millions of unique data points, including data from approximately 733 million views of items on our online marketplace in 2020 by potential buyers, which we refer to as item views, and approximately 17.1 million item sales since inception. Each consigned item also has up to 50 unique attributes. Informed by this data, we have developed proprietary algorithms and business processes to optimize our operations, including supply sourcing, merchandising, authentication, pricing and marketing.
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Environmental, Social and Governance
All of our stakeholders are essential to our business—shareholders, consignors, buyers, employees, and the communities in which we do business. We are committed to operating our business with positive economic, social and environmental impact. We have taken steps in human capital initiatives that drive equality through equal pay and equal opportunity, including linking Diversity and Inclusion goals to corporate goals. We provide information on our Environmental, Social and Governance (ESG) progress on our Investor Relations at https://investor.therealreal.com/investor-relations.
Our board of directors and its committees provide oversight on certain human capital matters, including our Diversity and Inclusion programs and initiatives. As noted in its charter, our Compensation, Diversity and Inclusion Committee is responsible for reviewing and recommending to our board of directors compensation plans, policies and programs intended to attract, retain and appropriately reward employees, as well as provide oversight of the Company’s policies, programs, and initiatives focusing on leadership and workforce diversity and inclusion. Our Corporate Governance and Nominating Committee provides oversight of the Company’s policies, programs and initiatives focusing on social responsibility, including environmental and sustainability and social and human rights matters. Our Audit Committee works closely with our management to discuss current and emerging risks related to our workforce and what steps management is taking to manage and reduce the Company’s exposure to risk. The action of these committees and the work of our board of directors and management seeks to attract, retain and develop a diverse and inclusive workforce that is motivated to achieving the Company’s business objectives.
Our Sustainability Program
Sustainability is woven into the fabric of our business. We believe a growing awareness of the environmental impact of recirculating luxury goods significantly contributes to the appeal of consigning and purchasing on our online marketplace. Based on our survey data, approximately 50% of our consignors cite environmental impact or extending the lifecycle of luxury as key motivators for consigning with us and a third of our buyers say they shop our website as a replacement for “fast fashion”, half of which is disposed of in less than a year. At a time when one garbage truck’s worth of textiles is landfilled or burned every second, driving awareness of resale and sustainability is crucial. That’s why we put sustainability in the spotlight: in our marketing and advertising, throughout our shopping experience, and in conversation with both our community and the industry.
We are committed to extending the lifecycle of luxury goods by promoting their recirculation, rather than creating waste. By creating a circular economy and reshaping consumer purchasing behavior, we contribute to a more sustainable world.
Our sustainability efforts include:
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Carbon Neutral Pledge . In November 2019, we were the first company to take the pledge in the CEO Carbon Neutral Challenge issued by Gucci CEO Marco Bizzarri. The RealReal has pledged to be Carbon Neutral in 2021. To become fully carbon neutral in 2021, The RealReal has engaged third-party experts to accurately measure The RealReal’s total GHG emissions, as part of the Challenge’s guiding principles. Upon completion of measuring our total GHG emissions, we will chart a path to carbon neutrality by implementing reductions and annually offsetting emissions that can’t be eliminated.
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National Consignment Day . We founded National Consignment Day as a national recognition day that occurs on the first Monday of October. National Consignment Day celebrates the positive impact consigning has on the environment. Each year we create a National Consignment Day campaign as an opportunity to encourage people to consign.
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Sustainability Calculator . In 2018, we launched our Sustainability Calculator on National Consignment day as a tool to quantify the positive impact consignment has on the planet. This calculator, vetted by sustainability experts, focused solely on women’s apparel, our largest product category, and measured the environmental savings of women’s clothing items consigned to The RealReal compared to buying new items. In 2019, we expanded our calculator to include Men's clothing. Since our inception in 2011 through December 31, 2020, consignment with The RealReal saved 17,023 metric tons of carbon and 827 million liters of water.
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Sustainability Taskforce . In 2020, we formed a cross functional Sustainability Taskforce to identify projects throughout the organization that have the potential to reduce our environmental impact. The Taskforce prioritizes high impact projects, meets bi-weekly and is actively embedding a focus on sustainability across the organization. Regular updates are provided to our executive steering committee.
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Ellen MacArthur Foundation . We are a member of the Ellen MacArthur Foundation Circular Economy 100 USA, which connects organizations that are rejecting the traditional linear economy in favor of a self-sustaining circular economy. This network brings together a diverse set of stakeholders to encourage collaboration on issues related to sustainability. The Ellen MacArthur Foundation advised us on the methodology used to create our proprietary Sustainability Calculator, which quantifies the greenhouse gasses, energy output and water usage offset by the most popular items consigned on our platform.
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United Nations Climate Change’s Fashion Industry Charter for Climate Action . In April 2019, we became the first company in the resale industry to join the UN Climate Change’s Fashion Industry Charter for Climate Action, which aims to limit global warming within the fashion industry and inspire climate action. The Charter endeavors to achieve a 30% reduction in carbon emissions in the fashion industry by 2030 and net-zero emissions by 2050. We are helping to create a clear path to achieve the actions outlined in the Charter by joining the Charter’s working group on promoting broader climate action.
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Repair Program. We have several repair and alteration programs that put our brand’s mission into practice, further extending the life cycle of luxury goods. The repair services help reduce the number of condition-based rejections and create a streamlined process to help keep items in circulation.
Human Capital Resources
Our employees are guided by our mission to empower consignors and buyers to extend the life cycle of luxury goods. We have an incredibly diverse global community, and we aim to reflect that diversity within our team. We believe diversity and inclusion foster a collaborative culture, which fuels our ability to innovate as we work to create a more sustainable future. We proactively seek feedback and guidance from our employees, whom we see as our partners in building a strong organizational culture.
As of December 31, 2020, we had 2,604 full-time equivalent employees. Additionally, we rely on independent contractors and temporary personnel to supplement our workforce, primarily in our authentication centers. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relations with our employees to be good.
Diversity and Inclusion
We work to inspire and empower our employees to think creatively and authentically, share their ideas, bring their whole selves to work, and strive for greatness every day. We're proud to have a diverse team, and we recognize there's opportunity for us to continue improving representation, particularly among our senior leadership. We support and celebrate all diversity, and are committed to providing an equal employment opportunity regardless of race, color, ancestry, religion, sex, national origin, sexual orientation, age, citizenship, martial status, disability, gender identity or expression, or Veteran status. Below is a breakdown of how our team self-identifies as of December 31, 2020:
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All
Corporate
Management
Executives
Board
Black
14%
5%
18%
0%
20%
Hispanic/Latinx
23%
12%
15%
0%
0%
Asian
12%
20%
9%
29%
0%
White
37%
47%
55%
71%
80%
Female
68%
60%
65%
57%
60%
In 2020, our DEI journey focused on listening and learning. We have since hired a head of Diversity, Equity and Inclusion, established and invested in Employee Resource Groups, and we are creating structures and policies that empower employees to form and participate in these critical communities. We have delivered training on Managing Bias to nearly all managers of people, which we will continue to deliver to new managers. We have also invested in a proactive tool that encourages employees to report bias, discrimination, and harassment, and provide feedback on culture, as well as in the retention and advancement of our BIPOC talent through differentiated leadership development programs.
We implement our diversity strategy by working to embed diversity values and goals across all strands of employee management including recruitment, talent development and promotion, and awareness and education. We’re also implementing stronger systems to support and empower our team. We’ve formed a Diversity Task Force, and we are establishing Employee Resource Groups, conducting listening sessions, holding unconscious bias training for all managers and engaging a diversity consultant. This work helps us continue to evolve and be a better advocate and ally.
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In addition, our Board believes that in order to fulfill its overall fiduciary responsibility to its stockholders and the Company, it must maintain a strategic composition that includes the experience, qualifications, skills, and diversity needed for each Board member to complement the others. When searching for new directors, the Board actively seeks out women and individuals from minority groups to include in the pool from which Board nominees are chosen. As of December 31, 2020, five of our nine board members were female, and two of our nine members represented a minority group.
Talent Development and Training
We believe that the training and development of our employees is critical to our long-term success. We offer a variety of employee training programs, including onboarding, technical skills training, product and services training, and managerial soft skills training. These programs include training specific to each of our business functions, enabling us to provide our consignors and buyers with a consistent luxury experience. For example, we support our sales professionals by providing a 10-day virtual onboarding sequence conducted through peer-to-peer, facilitated and self-learning sessions, followed by continuous professional development programs. Our authentication team receives training depending on one of five levels. Entry level authenticators receive a minimum of 40 hours of training, while our expert authenticators receive a minimum of ten months training. In 2020, we also delivered a Manager Development Series to all people managers across the organization and offered a Leadership Development Program to our people managers at the director and above levels .
As a valued member of our team, each employee receives training appropriate to the scope and nature of their role. Our employees receive an annual performance review and our people managers have quarterly meetings with their employees to address performance and development. As a part of our onboarding program, we have developed an engagement monitoring plan for our employees in the form of personal check-ins and questionnaires.
This past summer we launched our first employee engagement survey. All of our employees were offered an opportunity to participate, of which 75% submitted a response. The survey consisted of 50 questions on which employees were asked to indicate their level of agreement with a statement based on a five-point scale from Strongly Agree to Strongly Disagree and five free-text questions to which employees were asked to write a response. The responses returned an overall favorable engagement score of 66%, 23% neutral and 11% unfavorable. Our senior leaders built department-level action plans in 2020 that focus on employee engagement.
Health, Safety and Wellness
We are committed to ensuring the health and safety of all employees and require compliance with all applicable local laws and regulations governing working conditions, working hours, fair wages, and compensation.
We recognize that in addition to minimizing work-related injuries and illness, a safe and healthy work environment supports employee retention and morale and enhances the quality of products and services. We treat all applicable health and safety regulations as a minimum standard as we are committed to high standards for our working environments that protect the well-being of all employees. We encourage consultation and cooperation between management and employees in developing occupational health and safety mechanisms through ongoing dialogue. We expect senior management to integrate health and safety mechanisms in all business activities and monitor the program’s effectiveness.
In response to the COVID-19 pandemic, we implemented changes that we consider to be in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. We have implemented additional safety measures for employees continuing critical on-site work. We believe we have been able to preserve our business continuity without sacrificing our commitment to keeping our employees safe during the COVID-19 pandemic.
Most importantly, we recognize the importance of supporting our employee’s overall well-being. To that end, we invested in new company-paid benefit programs in 2020 including, parent programs to support both birth and non-birth parents.
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Seasonality
Before the COVID-19 pandemic, we had observed trends in seasonality of supply and demand in our business. Specifically, our supply increases in the third and fourth quarters, and our demand increases in the fourth quarter. As a result of this seasonality, we typically see stronger average order value (“AOV”), and more rapid sell-through in the fourth quarter. We also incur higher operating expenses in the last four months of the year as we increase advertising spend to attract consignors and buyers and increase headcount in sales and operations to handle the higher volumes. However, the adverse impacts of COVID-19 on our business has made it difficult to evaluate the impact of seasonality in our business. While we expect supply will continue to be negatively impacted by COVID-19, we believe its growth will accelerate in 2021. Additionally, we expect higher advertising spend and demand increases in the fourth quarter.
Intellectual Property
Our intellectual property, including copyrights and trademarks, is an important component of our business. We rely on trademark, copyright, trade secrets, patents, patent applications, confidentiality agreements and other practices to protect our brands, proprietary information, technologies and processes. We primarily rely on copyright and trade secret laws to protect our proprietary technologies and processes, including the algorithms we use throughout our business. Our principal trademark assets include the registered trademark “The RealReal” and our logos and taglines. Our trademarks are valuable assets that support our brand and consumers’ perception of our services and merchandise. We also hold the rights to the “therealreal.com” Internet domain name and various related domain names, which are subject to Internet regulatory bodies and trademark and other related laws of each applicable jurisdiction. We continually review our development efforts to assess the existence and patentability of new intellectual property and intend to pursue patent protection to the extent we believe it would be beneficial and cost-effective.
We control access to and use of our intellectual property through confidentiality procedures, non-disclosure agreements with third parties and our employment and contractor agreements. We rely on contractual provisions to protect our proprietary technology, brands and creative assets with consignors and buyers.
Corporate Information
We were incorporated in the state of Delaware in March 2011. Our principal executive offices are located at 55 Francisco Street, Suite 600, San Francisco, California 94133, and our telephone number is (855) 435-5893. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports (and amendments thereto) filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the Securities and Exchange Commission (“SEC”), as well as proxy statements filed by us, free of charge on our website at www.therealreal.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on, or that can be accessed through, our website is not incorporated by reference into this or any other report we file with, or furnish to, the SEC , and you should not consider information on our website to be part of this or any other report we file with, or furnish to, the SEC . Such periodic reports, proxy statements and other information are also available at the SEC’s website at http://www.sec.gov.
The RealReal, Obsessions and other trademarks or service marks of The RealReal, Inc. appearing in this Annual Report are the property of The RealReal, Inc. This Annual Report contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, the trademarks, service marks, logos and trade names referred to in this Annual Report are without the ® and ™ symbols, but such references are not intended to indicate that we will not assert our rights in these trademarks, service marks and trade names.
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