Rent the Runway (RTR), founded by HBS alumnae Jennifer Hyman and Jennifer Fleiss in 2009, allows customers to rent designer dresses and accessories for special occasions.
RTR’s business model is fairly straightforward. Rather than spending hundreds (or sometimes thousands) of dollars on dresses and accessories that will seldom be worn again, users can rent these items for a fraction of their total retail cost. Each dress rental includes a back-up size at no additional cost and users can add a second dress style with their order for $32.50. At the end of the rental period of 4 or 8 days, customers can return the items in a pre-paid package. Rental prices include the dry cleaning and care of the garments and accessories (1).
RTR’s operating model is tightly aligned to its business model and they are currently very effective at what they do. Every day, RTR processes upwards of 65,000 dresses and 25,000 accessories that are dispatched across the country to its 5 million members. The average dress is rented 30 times – squeezing out the maximum number of rentals is key to revenue generation. The more times RTR can successfully turn a dress, the more revenue the company makes. But to keep customers happy, dresses have to arrive on time and in flawless condition.
RTR has developed a process that is a mix of high tech algorithms and low tech skilled manual labor.
- When a user returns a dress, its bag is scanned into The Allocator, a computer that determines what needs to ship and what can wait in inventory.
- Workers inspect garments and sort them into bins for dry cleaning, stain removal, and repairs.
- Stains can cause significant variability and bottlenecks in RTR’s process. Nearly 50% of garments return with stains that require hand treatment.
- If necessary, spotters – specialized workers trained to remove stains – will rid garments of stains and blotches. This work is done by hand.
- Jewelry is sterilized before being dispatched again.
- Gowns then move to dry cleaning and steaming.
- Seamstresses repair gowns that have rips, loose beading, missing sequins, etc.
- Orders are assembled and bagged for the next customer. An algorithm forecasts demand and chooses the most cost effective shipping method before the order is dispatched again (3 and 4).
Points of weakness
While RTR’s logistical operations are impressive, it is an expensive undertaking. Its model requires a tremendous amount of capital, as demonstrated by its recent round of funding in June that brought is total capital raised to $126 million (5). This poses a significant challenge to profitability; despite growing revenues, RTR is still not profitable (6 and 7). This has led to RTR turning to brick and mortar stores to fuel customer acquisition growth, a capital intensive strategy (7).
Even more worrisome, RTR has a major operational weakness in the short supply of trained spotters with the skills to quickly diagnose and remove stains. CEO Jennifer Hyman has acknowledged that “the hardest position to recruit has not been engineers, it has been spotters.” The role requires a deep knowledge of fibers, materials, and stain-removing chemicals. While the company has a 20 step process for dealing with stains, skilled spotters can recognize what to do with a stain in two minutes or less, significantly reducing the cycle time to process a dress and thus earn RTR more revenue. But these highly paid workers have become harder to find, leading RTR to have to poach spotters from high end dry cleaners and invest significant resources into a spotter training program (4).
The speed at which RTR can get dresses out to customers and its sheer scale in terms of inventory are significant competitive advantages that competitors have so far been unable to replicate. But given the capital intensiveness of its business and the need to step up customer acquisition, RTR faces significant challenges ahead. Further, its competitive advantage is highly dependent on the acquisition and training of a skilled spotter workforce. Currently, these workers are in short supply which should place upward pressure on their wages. Finding and training a new, deep bench of spotters will require an investment of time and money, posing a risk to RTR’s operations and logistics.
- Rent the Runway – How it Works. https://www.renttherunway.com/how_it_works
- Rent the Runway – Unlimited. https://www.renttherunway.com/unlimited
- Forbes, 2014. http://www.forbes.com/sites/stevenbertoni/2014/08/26/the-secret-mojo-behind-rent-the-runways-rental-machine/
- Fast Company, 2014. http://www.fastcompany.com/3036876/most-creative-people/inside-rent-the-runways-secret-dry-cleaning-empire
- INC, 2015. http://www.inc.com/zoe-henry/rent-the-runway-2015-company-of-the-year-nominee.html
- Jezebel, 2014. http://jezebel.com/after-five-years-rent-the-runway-still-not-profitable-1652343127
- Bizjournals, 2015. http://www.bizjournals.com/bizwomen/news/profiles-strategies/2015/04/why-goingbrick-and-mortar-could-be-a-very-smart.html?page=all