This article on rental fashion is part of our Vogue Business membership package. To enjoy unlimited access to our weekly Technology Edit, which contains Member-only reporting and analysis and our NFT Tracker, sign up for membership here.
Rental fashion has long been pitched as an alternative to the wasteful “buy, wear, purge” cycle of fashion. The concept is simple, but monetising it is more complex.
This year, two leading rental fashion marketplaces — 15-year-old Rent the Runway and five-year-old Nuuly — hope to demonstrate that rental fashion can be a profitable, sustainable business model. This would be both a first, and a big milestone in the future of fashion.
In 2021, Bain and sustainability-focused research firm Positive Luxury optimistically mapped out a way that rental fashion could profitably make up 10 per cent of a luxury brand’s business by 2030. Combined with resale, the project paved a path towards decreasing waste without sacrificing profit. While both “circular” models require a big upheaval in mindset and practice, consumers and luxury brands have seemed especially slow to embrace rental. The global online clothing rental market was worth about $1.12 billion in 2021, and is expected to grow to $2.33 billion by 2030, says Grand View Research. By comparison, the apparel resale market is expected to reach nearly $223 billion by 2030, says Maximize Market Research.
Rental is a tough nut to crack, both culturally and logistically. Rental fashion means that high-end clothing is available for wear at a discounted price, which breaks the exclusivity barrier that keeps luxury fashion humming. And if rental prices are too high — a 10 per cent rental fee on a $5,000 dress is still $500 — the customer might just decide to buy something at that price point instead. There’s also the knowledge that many other strangers have likely worn the same piece.
On the backend, rental businesses require advanced reverse logistics operations and a hefty inventory load that can ensure delivery of specific items at the right time to the right customer, even while accommodating the whims of current customers. A current renter might decide they want to buy and keep a piece forever, or they might accidentally damage it before sending it back. The clothes need to be washed and repaired, all without undoing the environmental benefits of decreasing the cost-per-wear.
The pandemic, which upended occasionwear and workwear, didn’t help. “The rental market is in a challenging place,” says Neil Saunders, managing director and retail analyst at analytics firm Globaldata Retail. “Several unfortunate headwinds have hit the sector at the same time, including a casualisation of what people wear, fewer people going to offices for work and the cost of living crisis deterring people from subscriptions.”
This year could be make or break for rental platforms: aspirational consumers — who might normally buy into mid-tier brands that are rental’s sweet spot — are back to work and play. They’ve tightened their purse strings and are rejecting both fast fashion and closet bloat. Brands have begun facing the music on circular models, and are hungry for the first-party data that rental marketplaces can provide. They’ve also realised that many rental customers now treat rental as a “try-before-you-buy” discovery channel — which saves them the headache of returns. And there is now more than one major rental marketplace, meaning that the model has been validated.
Incumbent Rent the Runway has weathered a rocky few years. In January, it laid off 10 per cent of its corporate workforce (37 employees) and saw the departure of chief operating officer Anushka Salinas, all in a bid to realign the company’s financial structure and reach profitability. Co-founder, president and CEO Jennifer Hyman says that the company isn’t far from that goal; the company is on track to reach profitability this year. Still, its shares are trading at 38 cents, down 97 per cent since it went public in 2021, risking a delisting from Nasdaq. Some analysts have put the company on a bankruptcy watchlist.
Meanwhile, Nuuly, which shares a parent company with retailer Urban Outfitters, briefly reached profitability for a quarter last year and just invested in a new warehouse.
Both CEOs are confident that this is the year that rental fashion tips over into profitability. But it could also be the year when the first-mover is unseated — or when fashion cancels its subscription to rental altogether.
The incumbent: Rent the Runway
Founded in the US in 2009, Rent the Runway (RTR) started as a first-of-its-kind service for women to rent one-off occasionwear, and later expanded to a monthly subscription that includes casualwear and accessories. It now offers more than 16,000 clothing and accessory pieces from more than 750 brands, including JW Anderson, Boss, Ulla Johnson and Veronica Beard, plus exclusive items co-created and produced with RTR.
Rental plans now start at $89 a month for once-monthly shipments of five customer-selected items, or one-time rentals for four or eight days, with the cost depending on the item. Renters have the option to buy the item outright once rented, and they can pay more to have more items at home or more shipments each month.
By 2020, Rent the Runway had raised more than $500 million, opened five physical locations and ventured into kids and furniture. The pandemic brought that to a halt, and the business closed its physical footprint, shifted the subscription options and conducted layoffs. In 2021, Rent the Runway filed to go public at a valuation of $1.3 billion.
Since then, it has been navigating life in the new normal. As of October 2023, its third-quarter earnings reported 134,646 average active subscribers, which was up 4 per cent from the same period in 2022. It reported revenues of $72.5 million, down 6.3 per cent from the year prior, a net loss of $31.5 million and adjusted earnings before interest, taxes, depreciation and amortisation at $3.5 million, compared to $6.6 million the year prior. Yearly revenue in 2022, the last full year reported, was $296.4 million.
Hyman says that this year, Rent the Runway is “laser focused” on turning a profit. The company has sought to cut costs by restructuring its debt, enabling the company to avoid payments for the next six months; moving tech roles to Ireland; and laying off more employees. It also tackled inventory issues, when a lack of sufficient products last year “lost it a lot of goodwill”, Saunders says. “To be fair, Hyman has addressed these issues head-on and is in the process of trying to turn the business around.”
Hyman says that even after more than a decade, the business still struggles with awareness. “My biggest challenge is lack of understanding of our business model,” she says, adding that while inventory is often the biggest cost for traditional retailers (about 50 per cent of revenue), inventory costs for RTR were 30 per cent of revenue (in the first three quarters of 2023), and the company continues to improve its margins as it pursues profitability. “The strengths of Rent the Runway’s business model are greatly misunderstood. The fact that we monetise fashion over time and many customers wear the same item is a competitive advantage,” she says.
She points to the positives: customer loyalty rates are up 15 per cent compared to last year, and the purchase rate — meaning how many customers elect to buy a rented item outright — is up 50 per cent. “As the category creator, I am proud that Rent the Runway normalised rental and made it aspirational.”
The next phase is to promote the value of the platform to more consumers. “There is a lot of room for disruption here, and I have conviction that rental will continue to steal share for many decades to come,” Hyman says. This month, it’s preparing for a revamped marketing strategy under new CMO Natalie McGrath (formerly at Afterpay and Boohoo).
It is also turning attention back to its events rental with “The Vault”, with higher end dresses from the likes of Oscar de la Renta, Brandon Maxwell and Roland Mouret, which come with a higher one-time rental fee (a similar business, Armarium, tried this before ultimately shuttering in 2020). It’s also expanding a program it tested last year to enable customers to chat with a human stylist. McGrath hopes to encourage existing customers to rent more frequently, to bring in more customers and to “bring IRL events back to life”. “RTR is at its core a fashion brand; we must excel at this at velocity and scale,” McGrath says.
Hyman pushes back on the notion that it’s hard to build a profitable rental business; she says that Rent the Runway hasn’t been profitable yet because it had an outsized team to build out critical customer experience foundations. But now that the foundation has been set, the company has been able to reduce its overhead. Hyman says the company is working toward breaking even and achieving free cash flow in 2024. “My response to being put on bankruptcy watchlists is two-fold: don’t believe everything you read and everyone loves a comeback.”
.png)
The newcomer: Nuuly
Nuuly launched in 2019 as part of Urbn, the company that owns retailers and brands including Urban Outfitters, Anthropologie and Free People. This gave the business an immediate leg up in terms of capital, inventory and other behind-the-scenes functions such as technology, logistics, talent, finance and legal teams, says David Hayne, CTO of Urbn and president of Nuuly.
But unlike some retailers and brands who have tested rental as part of existing marketplaces, Urbn made an early decision to establish rental as a separate business, meaning there are teams and processes that focus entirely on Nuuly, and its sales are not integrated into Urban Outfitters or Anthropologie. It also elected to build its own technology and systems (versus using an outside rental provider such as Caastle). To get it off the ground, Urbn invested an estimated $100 million. This backing from a profitable business — Urbn reported net income of $288 million in 2023 — is a key advantage. “I’d be lying if I didn’t say we had a big leg up because of our affiliation with a big parent company,” Hayne says.
Nuuly started with a focus on “everyday” clothes. Renters can choose from 19,000 items from 400 brands; about half are provided by its sister companies (which stock multiple brands) and outside brands, including Farm Rio, Pistola and Eloquii. Subscriptions start at once-monthly shipments of six selected items, starting at $98 a month (raised from an initial fee of $88), and renters can buy the item outright once rented. As of 31 January 2024, it counted 195,000 average subscribers. While it doesn’t report all figures separately, as its earnings figures are part of Urbn’s, it reported its first and only profitable quarter in the third quarter of 2023 with $300,000. In the quarter ending 31 January, it reported revenue of $65.5 million. Yearly revenue in 2022 was $130 million; in 2023, it was more than $235 million.
Its biggest cost by far, Hayne says, is logistics, including operations, warehousing and laundry. This spring, it began operations of a new 600,000-square-foot fulfilment centre in Missouri, which includes laundry, and hopefully will increase the speed and efficiency of processing orders, via increased automation. With an investment of $60 million, this will enable Nuuly to eventually triple its subscriber base. “Whatever we can do to make that more efficient, to drive that down [cost] per unit or per order is going to have a big impact on the business model,” Hayne says. The investment is also why the most recent quarterly earnings did not report a profit. The other biggest costs are merchandise and marketing.
It’s a challenge to plan inventory, Hayne says, because rental fashion businesses must essentially have three of each possible item at all times — one outgoing, one incoming and one in case the current renter decides to keep it. While there was an early concern that renting items available for sale via its sister brands risks cannibalising retail sales, Nuuly has found that the opposite is true, meaning that not only did it not decrease sales, but some subscribers discovered brands and became customers after trying Nuuly.
Against a tough environment, Saunders says that Nuuly has performed well. “It has a great range of styles and is relevant for all kinds of occasions, including everyday wear. Its digital presence is very social and fun to use. Operationally, Nuuly is on the ball and has good levels of inventory.”
Hayne admits that new consumption models, like rental, “sometimes take a while to catch on”. Nuuly has found that for people who are new to renting — just over 60 per cent of Nuuly subscribers have never rented clothing before — it takes about two to three boxes for the idea to take hold. After a year, about 50 per cent of people are still subscribing, and that churn rate decreases after two years.
“Something tends to click in their head and it’s like, ‘oh OK, I get this’,” he says. “I understand the value.” His hope, like Hyman, is that more people will learn the value, and that having multiple players can benefit the industry as a whole. “This gives us the impression that we’re growing a market right now. The rental market is not just something where it’s stealing share from other people. I think we really are growing the market and bringing people into the fold.”
Sign up to receive the Vogue Business newsletter for the latest luxury news and insights, plus exclusive membership discounts.
Comments, questions or feedback? Email us at feedback@voguebusiness.com.
