Rent the Runway

Rent the Runway expands your closet, one rental at a time

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.

Business Model

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).

Operating Model

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.

  1. 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.
  2. Workers inspect garments and sort them into bins for dry cleaning, stain removal, and repairs.
    1. Stains can cause significant variability and bottlenecks in RTR’s process. Nearly 50% of garments return with stains that require hand treatment.
  3. If necessary, spotters – specialized workers trained to remove stains – will rid garments of stains and blotches. This work is done by hand.
    1. Jewelry is sterilized before being dispatched again.
  4. Gowns then move to dry cleaning and steaming.
  5. Seamstresses repair gowns that have rips, loose beading, missing sequins, etc.
  6. 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).

Conclusion

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.

Sources

  1. Rent the Runway – How it Works. https://www.renttherunway.com/how_it_works
  2. Rent the Runway – Unlimited. https://www.renttherunway.com/unlimited
  3. Forbes, 2014. http://www.forbes.com/sites/stevenbertoni/2014/08/26/the-secret-mojo-behind-rent-the-runways-rental-machine/
  4. Fast Company, 2014. http://www.fastcompany.com/3036876/most-creative-people/inside-rent-the-runways-secret-dry-cleaning-empire
  5. INC, 2015. http://www.inc.com/zoe-henry/rent-the-runway-2015-company-of-the-year-nominee.html
  6. Jezebel, 2014. http://jezebel.com/after-five-years-rent-the-runway-still-not-profitable-1652343127
  7. Bizjournals, 2015. http://www.bizjournals.com/bizwomen/news/profiles-strategies/2015/04/why-goingbrick-and-mortar-could-be-a-very-smart.html?page=all

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7 thoughts on “Rent the Runway

  1. Great choice of company. RTR has been hugely successful but I would argue that the operating and business models are actually quite challenged. I think the tension arises between the business model, which allows women to rent dresses they otherwise could’ve bought as-new, and their operating model, which requires renting out dresses that are not new and that get more and more “not new.” They’ve done things to mitigate this but as you point out, it’s a hugely capital-intensive process and it’s hard to control how users treat the garments once they have them. Are there innovative methods RTR employs to incentivize garment care when it’s out of their hands?

    1. Not that I know of, but that’s a good point. They could try to incentivize people to take better care of the garment, like giving them points toward a future discount on a rental. I struggled a bit with whether to call them a winner or loser, but I ultimately came down on the winner side by looking at it from a pure operational perspective, i.e. what we study in TOM. Their operations/logistics platform is quite incredible when you look at it – it does allow them to get those dresses out very efficiently to millions of women. But I think their business model is challenged in the long term because it’s expensive to gain new customers and most women only have so many formal events to attend. They clearly see this too, and that’s why they launched their new Unlimited program which focuses on everyday clothing. It has a long waiting list but a very high price – $139 per month for a Netflix like clothing subscription.

  2. Great company choice. This is an example of a company whose business model couldn’t exist without a strong operating model. I would rent clothes from a company only up to the first time they don’t have them available when I need them for an important event. Rent the Runway’s operating model reduces those negative customer experiences.

  3. In light of Holidazzle aka everyone-shops-at-RTR event, your post is quite timely! I didn’t know about their spotter problem so that’s quite interesting. To me, this is a business that feeds on scale. The more unique styles you have, the more value to renters and the more renters you can attract, the more inventory you can afford to keep. However, I wonder if the business is subject to self-cannibalization. When RTR is so successful, it becomes the default for special event dressing and at some point, customers will start leaving because they don’t want to be wearing the same dress as 5 other girls at the event. I wonder if RTR would reach that point before it turns profitable. Perhaps consider a different monetization model such as a subscription service or tiered pricing?

  4. This is a great post that has me thinking about how RTR could implement operational efficiencies without significantly raising its costs. You mentioned that stains introduced variability and bottlenecks into their process. The most obvious way to solve this issue is to hire more trained spotters who can quickly identify the type of stain and treat it. However, not only are individuals with this skill set hard to find but presumably hiring them would increase the company’s labor costs. Perhaps the company could incorporate an incentive for customers to return dresses in perfect condition (ex. those who return dresses in perfect condition get a portion of their rental costs reimbursed).

  5. Interesting post! Although I haven’t used RTR yet but I have observed its price tag and turnover for each garment for a while. In general I found out it’s very profitable considering the cost per rental is about 10%-15% (or even higher) of the dress value and the fact they are able to rent c.30x. That means even with two times earnings from the dress they are still not able to cover the high maintainance cost per item. Therefore my question is in the longer term how can the business start generating positive cashflow? seems it’s both high fixed cost and variable cost business.
    Also what do you think of the possibilities of adding new business element such as partnering with fashion magazine, model, trend-setting, advertising for certain brands’ dresses?

  6. I think of RTR as part of the sharing-economy. I think it addresses certain needs but I am a little worried about that the scope of the market may not be big enough for RTR to turn profits. I think spotters could be trained but the fact that many people are not comfortable sharing a dress with a stranger could be a much bigger issue. Any idea on how to address this issue?

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