How to make the rental work

Hellen Moffitt has always loved the idea of ​​renting clothes.

For a time, she was a subscriber to Rent the Runway. But it was expensive for a recent college grad, she said, and the selection was a bit too formal for her laid-back lifestyle in Charlotte, North Carolina. Plus, with shipments coming from out of state, the speed was sometimes frustrating, Moffitt added, and so she looked for a local alternative.

Finding none, Moffitt decided to create his own, Ponybox, in 2020.

Users rent items for $15 to $30 a piece, usually from small wholesale brands, which they can keep for a week or two. Since its launch, Ponybox has had more than 2,000 customers (each rental is unique; the company does not offer subscriptions). It’s a fraction of the size of Rent the Runway, which has over 2.5 million users. But Ponybox has outperformed the rental giant by one key metric: as of this month, it’s been fully profitable.

Managing a fashion rental service is not easy. These companies have all the usual challenges of a retailer – stocking the right inventory at the right price, marketing and customer service. But they are also in the business reverse logistics, the industry term for when a customer returns an item to the seller. Most retailers try to minimize returns, which are complicated to process and restock; A successful rental service means accepting, cleaning, and reshipping as many items as their warehouses can handle.

Rent the Runway, one of the first and still largest rental services, posted a net loss of $76.4 million in the six months ending July on revenue of $131.4 million. Since its IPO a year ago, its stock value has fallen more than 90%. Unlike resale, consumers have been slow to adopt rental; Rent the Runway has approximately 124,000 active subscribers. Poshmark alone has 8 million active buyers.

But Rent the Runway counts as a success in the category: formal wear rental service Armarium, menswear rental company Seasons and peer-to-peer rental company Villageluxe have all closed in the past two years.

Even so, new entrants continue to flood into the market, betting that their twist on the formula will solve the category’s problems. B2B company Caastle, for example, works with 150 brands to enable rental of some capacity, including operating rental services for Maje and Scotch & Soda. Vivrelle, a luxury handbag and jewelry rental startup, raised $35 million from investors last week.

The proposition behind all of these ventures remains unchanged from a decade ago: convincing enough people to rent clothes instead of buying them, and the math behind shipping, storing and cleaning countless dresses or bags hand will start to make sense. While growth hasn’t always matched these companies’ forecasts, there are signs of broader adoption: Urban Outfitters’ rental service Nuuly doubled its subscribers this year, north of 100,000, according to Dave Hayne, the retailer’s chief technology officer and president of Nuuly.

“If you think about renting 10 years ago, that was behavior that no one had,” said Jenn Hyman, co-founder and CEO of Rent the Runway. “Today, [millions] women have interacted with it in one way or another.

One size does not fit all

The first wave of rental services presented themselves as substitutes for their customers’ entire closets. Rent the Runway, Le Tote and others promised to dress their customers for the office, a destination wedding or the club.

These days, rental services target niches, some more successfully than others. Moffitt attributes Ponybox’s profitability to its hyper-local approach: The company only rents to customers within a 10-mile radius of downtown Charlotte, with deliveries often handled by Moffitt itself.

UK-based Hurr has found that consumers are more likely to experience leasing by borrowing for one-off occasions rather than a full subscription. There is also a men’s suit rental service, Black Tux, and Illinois-based Saris and Things offers Indian formal wear rentals.

Daily dressing, however, remains the bread and butter of Rent the Runway, which generates 80% of its revenue from monthly subscribers. Customers in its single segment, called Reserve, as well as those who buy resale on Rent the Runway, account for the rest of the sales.

For large retailers, rental has become a way, often alongside resale, to target customers who may not be ready to buy at full price.

Vince, who launched his Unfold with Caastle rental service in 2018, demonstrated that renting creates a pipeline of new, younger customers who will buy retail down the line. Also among Rent the Runway customers, 80% end up buying from a brand they discovered on the platform.

With uncertain market conditions creeping into 2023, some believe leasing could be relatively recession proof.

“Our customers tell us that our value proposition is very compelling,” said Hayne of Nuuly, who charges $88 per month for a six-piece subscription. “How this translates to a potential recession, I feel pretty good.”

Accessories for victory

When Vivrelle launched in 2018, it was one of the few rental services in the US market to offer users high-end handbags from brands such as Chanel, Gucci and Prada. Vivrelle does not work directly with these brands. Still, the value proposition is undeniable. A standard subscription costs $99 per month and allows customers to rent one bag at a time, although the entry-level subscription costs $39 per month.

In Europe, Cocoon offers a similar service, charging £79 for access to one bag per month from brands like Saint Laurent or per month. Last year, Kering invested in the company, which raised a total of £2.5m.

Luxury leather goods and fine jewelry require a significant initial investment. But bags and earrings can be rented many more times than dresses or pants because they hold up better after multiple uses, according to Wayne Geffen, who founded Vivrelle alongside his wife Blake in 2018.

Vivrelle and Cocoon also don’t have to spend millions cleaning up facilities and assembly lines like fashion rentals do; Packing a tote bag for her next rental is a whole lot easier than scooping red wine out of a dress.

Apparel-focused services take this into account; Vince Unfold is rolling out more products in the accessories space for tenants.

The power of resale

Once faced with competition, resale has become an important outlet for rental services.

In recent years, Rent the Runway has expanded its resale offering, partnering with Saks Off Fifth to supply the off-price chain with formerly rented merchandise.

“The retailer of the future is going to offer the ultimate choice and flexibility to the customer, whether they want to buy it new, buy it used, rent it a la carte or use it as part of their rental subscription” , Hyman said. “For us, resale is giving him that choice.”

Nuuly also launched a resale vertical last year. Nuuly Thrift allows the retailer to liquidate rental-worn parts and users to list their own used items as well.

For Ponybox, holding periodic consignment sales has become a major marketing strategy and helps with cash flow, Moffitt said. The company is about to open a vintage consignment right next to its rental outpost.

“Since launching Thrift, we’ve tapped into a new customer base — college-aged girls who love second-hand fashion, but we also train them for hire,” Moffitt said.

Make the logistics work

For rental companies, nothing matters if the logistics are not there to support customers and their selection.

Rent the Runway angered customers in 2019 when a warehouse software update resulted in hundreds of canceled or delayed orders. The following year, it got rid of its popular $159 unlimited program, where customers can trade coins as many times as they want per month. A new tiered subscription now charges $144 per month for eight rooms and $235 for 16. There’s also a four-room subscription that costs $69, and users of any plan can add additional spots.

Much of Rent the Runway’s dispensing capacity is now automated; machines that automatically identify the type of cleaning returned items need and use RFID to track the location and condition of each item.

Caastle still offers unlimited redemptions for members, but on retailer terms. The platform encourages users to select at least six to 10 items at all times and packs every order from this “cupboard”.

“We run a matching algorithm that says you have these things in your closet and someone else has these 10 things in their closet, how can I allocate inventory smartest if we want the same things ?” said Christine Hunsicker, Founder and CEO of Caastle.

Rental companies also reduce shipping costs by taking delivery in-house rather than working exclusively with traditional carriers. Moffitt said traditional carriers charge twice as much as packing and delivering rental orders themselves.

Rent the Runway has found that delivery startups like Veho and Returnmates can help save on shipping costs. They’re also more convenient for customers, who can schedule door-to-door pickups for returns.

Ultimately, leasing’s biggest opportunity, whether for growth or profitability, lies in improving logistics. Identifying which products to invest in, how many to buy, and how to get them to the customer should be a constant work in progress.

“Starting the rental is really, really tough,” Moffitt said. “One of our biggest challenges is determining how much inventory to keep.”

Still, she added, “renting is the future.” Looking ahead, she hopes to launch Ponybox in other small but emerging cities in the southeastern United States, such as Nashville or Austin.

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