The Dangerous Economist: June 2019

Sunday, June 30, 2019

How does a company selling used luxury goods spot fakes? (signalling and conspicuous consumption)

A recent article in The WSJ made me think of both signalling theory and conspicuous consumption. But first, let's hear from a famous psychologist:

See RealReal’s Biggest Hurdle Will Be Keeping It Real After IPO: Seller of used Gucci dresses and Rolex watches fights fake luxury goods; 20 hours to vet a necklace. Excerpts:

"The startup sells preowned Louis Vuitton handbags, Gucci dresses and other designer items that people list on consignment."

"Key to its success is battling a booming trade in counterfeit goods and getting shoppers to trust it enough to pay $4,700 for a used Chanel jacket or $7,500 for a Rolex watch. Like other sellers of secondhand merchandise, RealReal gets almost no help from brands in identifying genuine products from copycats."

"That makes the authentication process time-consuming and filled with educated guesswork. It is also hard to scale as the company grows. It took 20 hours to measure every diamond in a Graff necklace the company vetted for sale this year, said Julie Wainwright, RealReal’s founder and chief executive, in an interview in January."

"Despite uncertainty over provenance, demand for previously owned luxury goods is on the rise, particularly among millennials who don’t attach a stigma to used products the way previous generations did. They see the secondary market as a way for fashion to be more sustainable by giving products a longer life. Designer brands have faced criticism in recent months for burning unsold goods. In September, Burberry Group PLC said it would discontinue the practice."

"Bain & Co. estimates that the U.S. luxury resale market totaled $6 billion in 2018. The overall U.S. resale market for clothing, accessories and footwear is far larger and growing fast. It is expected to reach $51 billion by 2023, up from $24 billion last year, according to GlobalData PLC, which prepared the research for a report published by online reseller ThredUP."

"RealReal employs more than 100 gemologists, watch and brand experts and art curators, who inspect items for “attributes such as appropriate brand markings, date codes, serial tags and hologram stickers,” according to documents it filed in connection with its stock offering. It also uses algorithms and data analytics and is working with the University of Arizona to develop technology to speed the inspection of gemstones, the documents say.

Graham Wetzbarger, RealReal’s chief authenticator, shared some clues his team uses to spot fakes in an October 2018 post on the company’s website. The heat stamp on an Hermès Kelly bag is located below the front strap and will be either silver or gold to match the hardware. The Balenciaga Triple S sneaker will always have four lines at the heel, according to Mr. Wetzbarger.

“All of the signature elements of the Kelly bag are copyable—that’s the whole problem with the counterfeit industry,” said Mr. Anthos, the seed investor.

Ryan Yagura, an intellectual-property lawyer, who polices websites for counterfeit goods but doesn’t work with RealReal, said: “The more expensive the item, the more money the counterfeiters spend to make it look real.”

The global trade in fake goods jumped 10% to $509 billion in 2016, the latest year for which figures are available, from $461 billion three years earlier, according to the Organization for Economic Cooperation and Development.

The brands are best-positioned to ferret out copycats. But so far they are unwilling to work with sellers of preowned goods. They worry that a booming secondary market will depress prices of first-run goods, industry executives said."