Rent the Runway – High fashion, Affordable prices?

Rent the Runway offers high-end fashion to the masses for renting instead of purchasing. Can they leverage their data to turn a profit?

That is so fetch.[1]

Often overheard at galas, weddings, and other upscale events, fashion is at the forefront of many women’s minds as they seek to be fetch. Rent the Runway (“RtR”), a “fashion company with a technology soul”[2], was founded by two HBS students seeking to provide women with access to luxury clothing and apparel by renting clothes and accessories, as opposed to purchasing.

Business model – The average American woman buys 64 new pieces of clothing a year – 50% of which she’ll wear once[3]. Rent the Runway seeks to capture this highly fashion-conscious market by providing an opportunity for one-time usage at a deeply discounted price. They partner with premier designers to source inventory, then rent them to customers for 4- or 8- day terms, long enough for that special occasion. In contrast with the typical idea of “buy a dress, wear it once, then stash it in your closet until you give it to a cousin”, this company acts as the closet where one can choose from a seemingly endless supply. Their goal is to “build the Amazon of retail”, where they act as a “marketplace for retailers and brands to rent unsold inventory instead of shipping it off to discount outlets”[4].

Operating model – Rent the Runway utilizes sophisticated proprietary software algorithms to juggle more than 65,000 dresses and 25,000 accessories across the United States[5]. The company has turned the fashion industry on its head by offering this service nearly entirely online! Their website and App was the only method by which customers could interact with the company from 2009-2014, when RtR opened their first standalone store[6]. The company has excelled at leveraging big data and online customer reviews to tabulate which dresses women are renting for which types of events, then forecast demand to plan shipping, dry cleaning and storing of inventory. And, the convenience of shopping from the comfort of your own home via the internet, as opposed to having to travel to your local mall, has been a significant differentiator over competitors.

How has Rent the Runway done differentiating themselves with their operating model? In my opinion, it’s a mixed (shopping) bag. The company’s push into brick-and-mortar locations (they now operate seven) signifies a shift from the strategy of leveraging only online platforms to reduce expenses and offer items at a lower price. These stores have been successful in increasing the amount of personalization and touch the company offers customers, but they don’t contribute nearly as much data and analytics to their online platform, valuable when it comes to important factors such as identifying proper sizing and type of event the article was used for[7]. In my opinion, RtR shouldn’t invest in physical retail locations because of their high set-up costs and limited extension to customers. Additionally, their operating model is predicated on providing many options at decent prices. However, this has resulted in SKU proliferation as the company has to stock all the sizes of so many different dresses. They’ve had to undergo numerous expansions of their distribution operations simply to store the unrented inventory. I’d offer the company that shuttering their brick-and-mortar locations, and more actively ‘culling the herd’ of underperforming dresses (via actually selling), they would have a more targeted approach to their customers. Finally, Rent the Runway is extremely expensive. High-end dresses can cost $150 for a four-day rental. At that price point, why not buy something that you would be willing to wear several times? They are essentially only catering to the elite due to their high prices and limiting mass appeal. Will the company be able to better manage inventory and demand via their investments in technology in order to reduce the price to more affordable levels?

As discussed above, there are some challenges with Rent the Runway’s operating model. Though the company is not yet profitable, they are still growing top line sales and adding new customers[8]. However, Rent the Runway offers a unique value proposition to cost-conscious clients seeking fashion on demand and has consistently executed.

And that is so fetch indeed.

 

Word Count: 763

[1] Mean Girls, directed by Mark Waters, Paramount Pictures 2004, Film.

[2] Rent the Runway, “About”, https://www.renttherunway.com/pages/about, accessed November 2016.

[3] Forbes, “How Mixing Data And Fashion Can Make Rent The Runway Tech’s Next Billion Dollar Star”, https://www.caaspeakers.com/wp-content/uploads/sites/3/2013/12/HymanJ_Mixing-Fashion-and-Data_Forbes.pdf, accessed November 2016.

[4] Ibid.

[5] Ibid.

[6] Fashionista, “RENT THE RUNWAY TO OPEN FIRST STANDALONE STORE”, http://fashionista.com/2014/08/rent-the-runway-store-flatiron, Accessed November 2016.

[7] Meghan Pacholski, Boston, MA, November 2016.

[8] Washington Post, “Rent the Runway means you can always wear something new. Should you have to?”, https://www.washingtonpost.com/lifestyle/style/rent-the-runway-means-you-can-always-wear-something-new-but-should-you-have-to/2014/12/28/e41cebaa-7cb0-11e4-9a27-6fdbc612bff8_story.html, accessed November 2016.

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Student comments on Rent the Runway – High fashion, Affordable prices?

  1. Interesting perspective on this company. I’d have to disagree with your advice to close the brick and mortar locations. This proves an excellent opportunity build trust with the consumer. This is also an opportunity to offer consumers the chance to be professionally fitted so there is no question as to the right size to choose when renting an outfit.

    As for their price point, that same $150 rental dress would cost over $1k to buy. I think you are underestimating consumers’ willingness to pay for special occasions. There is research that shows the American middle class is willing to pay premium prices for luxury fashion.[1] Besides those exclusive dresses, in going through their website I found numerous outfits that cost $50 or less.[2]

    [1] Ian Yeoman, Una McMahon-Beattle. “Luxury markets and premium pricing.” Journal of Revenue and Pricing Management. Vol 4, No 4. http://www.tomorrowstourist.com/pdf/luxury.pdf Accessed November 18, 2016.
    [2] Rent The Runway. Wedding Guest Dresses. https://www.renttherunway.com/shop/wedding_guest_dresses/products?act_type=events_hp_feature&sort=newest Accessed November 18, 2016.

  2. I enjoyed reading your perspective on the company. I think one solution to your brick and mortar capital expenditure concerns could be to partner with department stores to create a RTR store within a store. Just this week, the company announced a partnership with Neiman Marcus. http://www.pymnts.com/news/retail/2016/rent-the-runway-opens-up-shop-with-neiman-marcus/

    Not only will this be less expensive for RTR than company owned stores, they can leverage Neiman Marcus’ preexisting retail footprint, customer base brand halo. Neimans can benefit by giving customers a more unique experience through the rental model and hopefully get customers to “rent” from designers they’ve been hesitant to try given the price point.

    One of the greatest costs to RTRs business is that often dresses don’t fit the customer so they ship you two sizes instead of one. Also, if a customer is unsatisfied with the dress she receives, the company allows a full refund. By allowing a % of customers to try dresses in store before renting, RTR can essentially double the number of dresses that can be rented (since only one will be out at a time) and reduce costs from returns. Also, RTR currently does not allow customers to keep a dress if they fall in love with it. I suspect this is due to that dress already being committed to another customer’s rental. This is a revenue opportunity that RTR is failing to capture. I believe a partnership with Neimans could be an opportunity to try out adjacent business models more centered around “try before you buy” model that caters to an affluence customer who may be able to purchase the dress instead of returning it after the rental period.

    1. Terrific comment top to bottom. Thank you for the additional information.

  3. K. Caven, you offer an expert opinion on the benefits and drawbacks of Rent-the-Runway. Like a few of the commenters, I agree that RtR’s pricing strategy (albeit exclusive to the massives) is still reasonable enough to attract millions of users. This high willingness to pay makes me think there is room for competition in this space…

    I wonder why we have yet to see a sharing model threaten Rent-the-Runway’s position. You called out how women have many dresses sitting in their own closet that are only worn once; maybe they should get in on this model of renting gowns in order to take a piece of the markup RtR is now monopolizing. This idea (let’s call it: “Share-the-Runway”) can provide a competitive online platform and hire individuals to perform the dry-cleaning and packaging functions (upon further research, logistics are the key barrier to entry right now). The benefit to this also eliminates the inventory risk that RtR faces if a dress is unpopular or suffers wear and tear.

    https://www.businessoffashion.com/articles/fashion-tech/will-the-sharing-economy-work-for-fashion-rent-the-runway-rental

  4. K. Caven, I disagree with your assertion that $150 is a lot to pay for renting a dress for a special event. I don’t know many people who need to wear something like a ball gown on a monthly, quarterly, or even yearly basis. Having one ready to go in one’s wardrobe with the knowledge of even how many times you could potentially wear it seems like a gross misappropriation of resources. Add in the complexity that it’s considered a fashion faux-pas to wear the same dress to multiple occasions, and the purchase seems even more frivolous.

  5. There is a reason why Rent the Runway exclusively caters to women clothing and not men. Women tend to wear a dress 1-2 times even if they buy them. This is mainly because it is badly seen to wear the same dress to several events so even if you like the dress it has a very short life.

    Rent the runway bring a solution by allowing women to rent high-end dresses for accessible prices, you can now wear a large diversity of dresses that might cost $1K+ and just sit on your closet if you purchase them.

    Although I agree with you that the move to brick and mortar sound a bit counter-intuitive for their business model and incurs in a much greater cost than they used to have with the pure online play. I think they need to better understand who their core customer is and how exactly a brick and mortar store is giving them additional value.

  6. K. Caven, a very interesting read! I agree that RTR has a unique value proposition and is in a good position to leverage big data. If RTR want to grow bigger, they will definitely have to find a way to manage their inventory better. Perhaps they could even use data to find the right “fit” for a person based on photos that customers could send through prior to ordering their clothes? Then as TomCat mentioned, RTR could increase the variety of dresses that they hold, while minimizing their return costs.

  7. K. Caven, that is a fetch article! In addition to the points you outlined above, what I find most fetching about RtR’s business model is the fact that it has the potential to be a truly environmentally and economically sustainable model (I am channeling the take-aways from our previous class on Climate Change). The sad part about most of today’s companies is that they make more money by selling more products, which require more resources to make. This vicious relation is fundamentally opposed to the idea of sustainability, no matter how many trees the company plants in the process or how many water-saving programs it initiates.

    RtR, in contrast, makes more money the more times clients reuse each dress: the average dress is worn by 30 different customers. This usage rate per clothing item (let’s call it utilization rate in TOM parlance) is especially impressive given the nature of the industry. Apparel and accessories in the high-end fashion market generally have short life cycles and are used only a few times by each single customer.

    Therefore, I would also dissuade RtR from investing in physical stores and locations – it would be an unwarranted use of resources that pollutes their potential to be a truly groundbreaking, sustainable company.

  8. Thanks for the post K. Caven – it was really interesting to hear your thoughts on RtR. I share @TomCat’s perspectives on RtR’s initiative to expand into brick and mortar locations and its challenges with fit. I’m personally very interested in the rental fashion space (particularly with a big data approach… I recommend you check out KatFranklin’s post on StitchFix here: https://digital.hbs.edu/platform-rctom/submission/stitch-fix-uses-big-data-to-personalize-shopping/) and have had many conversations with millennial women regarding their willingness to “rent” clothing vs. own it. All of the conversations come back to a strong concern and worry over fit. I wonder if RtR has the opportunity to better incorporate sizing technologies (check out what Alton Lane is doing in Anthony Bucci’s post here: https://digital.hbs.edu/platform-rctom/submission/how-technology-and-scotch-is-transforming-the-way-men-buy-suits/) to help protect against these costs.

    Further, you might find it interesting to learn about some other revenue streams that RtR has established in order to make use of its clothing inventory. In addition to dresses for formal events, the company has made an active effort to expand its inventory to include work wear, street wear, and even athleisure. Their inventory expansion demonstrates their efforts to “build the Amazon of retail” as you highlight. Further, RtR offers an “unlimited” subscription and a “StylePass” option to customers. The former allows customers to hold any three items at one time for a fixed monthly subscription fee (similar to how Netflix used to work for DVDs). The latter is a lower priced option to rent a piece for a fixed amount each month. Read more about both options here: https://help.renttherunway.com/hc/en-us/categories/201735678-Unlimited

  9. Like fetch, I’m not quit sure this is going to happen… It seems counter-intuitive to the very disruption RtR brought to the fashion industry for them to go back and now invest in brick-and-mortar locations and partnerships with large retailers inside their physical spaces (store-within-a-store at Neiman’s just announced this past week). Given their inability to turn a profit, my hunch may be that they are struggling to gain traction and awareness so have turned to more traditional channels to do so. However, RtR is a far cry from traditional. They are offering designer dressers available for rent, alongside brand new dresses that costs just a few times the rental price. On top of this, the company, though aspiring to diversity and manage 100Ks of SKUs, is already struggling with women finding themselves wearing the same RtR dresses to parties, and have had many complaints around the quality of the used dresses. How many re-uses can they get out of these dresses? How do they manage their inventory and at what cost? When it comes to used clothes, folks want to see what they are getting, and admitting to “high-end” and “used” in the same sentence I don’t think will ever feel “fetch” to the fashionista. I like the ingenuity in this disruptive model, but ultimately I’m not sure the product itself is good enough or the target market large enough for this to stick. I think of other HBS grads that have really been revolutionary in their online retail business model (birchbox), especially Gilt Groupe that offers high-end fashion at similar prices to the rental prices of RtR. With massive online discounter fashion sites out there now-a-days, why not just buy the real deal. Even if you wear it once, you can donate your dress, or sell it on eBay, a consignment shop, etc. I think what RtR could really make a killing in is a model for resale of used high-end dresses. Like online consignment shop for luxury fashion.

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