Why Fashion Still Hasn’t Cracked Rental

KEY INSIGHTS

• Menswear rental companies Seasons and The Rotation both shuttered recently.
• Most established players like Rent the Runway are struggling to reach profitability as logistics costs remain high.
• Newer concepts, including peer-to-peer rental marketplaces and services focused on accessories, look to address the rental model’s issues.

When Regy Perlera founded his menswear rental start-up Seasons in June 2019, the former Nike product designer believed he could draw new customers to the rental market by offering the most recent styles from in-demand brands, instead of buying excess inventory and deadstock as many competitors did.

Seasons raised about $5 million in funding and spent much of it buying fresh, seasonal items through brands like Acne, Marni and Bode.

But other costs began to add up as well, including dry cleaning and logistics. Last week, Perlera announced he was shutting down Seasons and was beginning a liquidation sale.

“The lesson we took away was for any of this to work, you can’t purely do rental,” he said.

Seasons isn’t the only rental service to falter. The Rotation, another menswear monthly subscription that offered customers access to brands like Heron Preston and Alexander McQueen, ceased operations last year. The company’s former publicist said in an email that it had become a “casualty of the pandemic.”

And Rent the Runway, which popularised the then-virtually unknown idea of renting clothes online in 2009, has seen its stock drop by two-thirds since its October 2021 initial public offering. In its most recent quarterly earnings report, the company said its net loss widened to $87.8 million, up from $44.3 million in the same period a year prior.

Amid the sea of new retail concepts introduced over the last decade, rental is proving a uniquely difficult business. The logistics of sending clothes to customers, arranging for their return, plus storing and cleaning them is proving prohibitive for small start-ups, and resistant to the economies of scale. At Rent the Runway, about a third of its most recent quarterly revenue — $59 million — was spent on fulfilment costs, chief financial officer Scarlett O’Sullivan said in a call with analysts (Rent the Runway did not respond to a request for comment).

On the front end, creating an easy-to-use experience requires considerable investment, and usually around-the-clock customer service to resolve the inevitable problems that crop up.

“Most e-commerce businesses struggle with returns rates that could be as high as 50 percent, but for Hurr and Rent the Runway, the return rates are 100 percent,” said Victoria Prew, founder of the UK-based rental service Hurr, which offers both men’s apparel and womenswear. “This means to get it right is very difficult.”

Unique Cost Structure

Rental start-ups have tried different approaches to keeping costs down. Rent the Runway, Nuuly, which is owned by Urban Outfitters, and Seasons handle services like dry-cleaning and shipping themselves, while fashion companies like Banana Republic and Vince outsource this work to third parties like CaaStle. Peer-to-peer rental startups like By Rotation and Wardrobe operate as marketplaces and only take a commission.

Whatever the business model, key costs, including warehousing and shipping, have risen during the pandemic.

“There’s a really heavy operational cost structure to this business and the labour-cost dynamic is definitely one that is increasing,” said Dave Hayne, chief technology officer at Urban Outfitters.

For Vivrelle, which offers rental of leather goods, jewellery and other accessories that are easier to process and don’t require dry-cleaning, customer service is a major cost. The customer service team represents 60 percent of Vivrelle’s total headcount, said Wayne Geffen, who co-founded of Vivrelle, a luxury accessories rental subscription programme. Geffen created the company with his wife, Blake Geffen.

Compared to a typical apparel brand, there are more touchpoints in rental that require attention from the brand to its customers. For example, customers often reach out to Vivrelle when they’re swapping for an item and require a larger size. They often have questions about waitlists when a certain item is borrowed consistently.

“When you’re selling clothes online, all you have to do is ship the product and you’re done,” Geffen said. “Rental just has a lot more moving parts than traditional retail.”

The Inventory Dilemma

For some rental start-ups, the biggest hurdle to profitability is monetising inventory in a timely manner. These companies spend capital to buy products, but revenue comes at a slower pace as the garment is rented out. Each item typically requires multiple rentals to justify the cost.

A company could reduce expenses by buying fewer clothes, but this can lead customers to complain about poor selection. Buying too much can burn through reserves.

Eventually, Season addressed this problem by offering an option for shoppers to buy its rental inventory, but Perlera said the startup should have introduced such an option sooner.

“There’s a lot of inventory risk, and we were battling each season to come up with money to front for merchandise, before we offloaded,” Perlera said. “It was a race.”

Nuuly launched a resale site, Nuuly thrift, in August. The venture is currently a marketplace for third-party sellers, but Hayne said Nuuly will soon start offloading its rental products to the thrift marketplace.

“We’ll have an opportunity to clear some of our rental product that is not renting at the rate it is needed to,” he said. “It’s a brand strategy platform, as well as a financial potential benefit.”

The Peer-to-Peer Model

Not having to carry the costs of inventory is one advantage of peer-to-peer rental companies like By Rotation, said founder Eshita Kabra-Davies. The startup just reached 200,000 registered users in the UK and will soon expand to France. Kabra-Davies said the business is scalable because its only costs are running a social media-like platform for rentals, and the company takes a 15 percent commission from each side.

“It’s very democratic; whatever [fashion] performs well will get more views, and more likes and saves,” she said.

Perlera, however, didn’t consider peer-to-peer rental, because he said it would be harder to build a selection that excited customers.

“We were able to grow quickly in a short amount of time because we had exciting brands, but peer-to-peer is a hodgepodge and you never know what you are going to get,” he said. “I’m of the opinion that peer to peer can be a feature but it doesn’t work long term.”

Hurr mainly operates peer-to-peer rental, and the rest of its revenue comes from consignment partnerships with the brands it carries. This means that rather than buying dresses and jumpsuits outright, Hurr pays the labels it stocks a share of every rental transaction.

“We’re inventory light and therefore very scalable,” Prew said.

For Vivrelle, it comes down to purchasing the right inventory so that the vast majority of its products are rented at any given time. The company uses consumer insight data to understand what the hottest trends are in luxury handbags, and from there, it buys Chanel bags and Cartier jewellery with discretion.

“[We’re] not walking into a department store and throwing bags in a shopping cart,” said Geffen.

These strengths represent bright spots in the rental model. Both Vivrelle and Hurr saw record sales in January, and project continued growth. According to Geffen, Vivrelle became profitable six months after its inception in 2018. Later this year, it plans to open a 15,000-square-foot showroom open to its members.