Rent the Runway: Fashion Meets the Sharing Economy
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Over the years, whenever I purchased a “party dress” — meaning an expensive dress for a specific occasion, mostly black tie — I always thought, why can’t I just rent the dress, wear it, and be done with it, instead of spending so much money on something that, while gorgeous, might be out of style or not look so great when the time comes to wear it again? Two Harvard Business School classmates, Jennifer Hyman and Jennifer Fleiss, had the same thought, but went so far as to turn it into an actual business. The first Jennifer, Hymen, was struck with the idea after her younger sister showed off a $1,600 Marchesa dress she couldn’t afford but bought anyway to wear to a wedding. What’s a girl to do when every event is photographed and appears on Facebook? Wear the same outfit twice? Not anymore is the answer the two Jennifers provided when they launched Rent the Runway in 2009 with $1.5 million of venture funding from Bain Capital Ventures.

Rent the Runway has capitalized on several converging trends: the coming of age of the Millennial generation, the sharing economy, social media and our celebrity-driven culture. Millennials, the prime customers for Rent the Runway (75.3 million of them this year, now aged 18 to 34), have limited means and their own set of unique values and aspirations. They are renting versus buying their houses, apartments and cars. And they are sharing every detail of their lives on social media. Our celebrity-obsessed culture, where fashion meets the red carpet on a near-daily basis, has provoked the expectation that women can and should look like stars when they go out to their own “red carpet” events. The bottom line: Why buy a dress when you can rent one?

How It Works: Rent the Runway Basics

Rent the Runway offers 65,000 not-quite-designer dresses and 25,000 accessories, which can be rented for four or eight days at a fraction of their full retail cost. Perfect for proms, special dates, black tie events, weddings, sorority parties and the like for women who don’t want to spend a lot of money or be seen in the same outfit twice.

Dresses and accessories on Rent the Runway’s well-designed website are photographed beautifully, cleanly and clearly on great-looking models and include necessary fit, style and measurement details. A useful feature, and testament to customer engagement, includes postings from consumers who have rented the item previously with their own photos, date and type of event, size worn and specific details about fit.

The retail and rental price of each item is clearly shown. To my view, the rental pricing lacks a direct relationship to the purchase price. A $1,995 item can be rented for $90, while a $375 item may cost $100 to rent. Apparently the spread has to do with the age of the dress as well as the popularity and the availability of the item. While it doesn’t seem economical to me to pay $100 for a $398 BCBG cocktail dress, a  29 year-old Manhattan nutritionist I interviewed told me that she “did not even look at the retail price because I’m not buying it.”

Logistics and Dry Cleaning

To keep inventory moving requires some sophisticated logistics and engineering — and also dry cleaning. Each of these challenges seems to have been met creatively by Rent the Runway. Charles Ickes, Rent the Runway’s vice president of operations, was formerly general manager of Manhattan’s luxury dry cleaner Madame Paulette. His 105-person team (from a total of 287 employees) includes 13 spotters — technical experts who can remove spots and stains from dresses quickly and without ruining them. Ickes manages Rent the Runway’s new 150,000-square-foot warehouse in Secaucus, N.J., and supervises its dry cleaning operation there, now reported to be the largest in the country in terms of pounds per hour.

Vijay Subramanian, Rent the Runway’s chief analytics officer, has a Ph.D. in operations research. Formerly with Oracle, Subramanian manages Rent the Runway’s data analytics as well as its proprietary reverse logistics system. The system prioritizes the order of events for an item, including dry cleaning and repairs, with the goal of achieving a one-day turnaround to maximize the use of inventory. Subramanian also works with cross-functional teams to make sure that big data insights are incorporated into the company’s strategic initiatives.

Financing the Netflix of Fashion

Rent the Runway releases no sales figures, but has managed to continue to impress its investors. In December 2104, it completed a $60 million round of Series D funding led by Technology Crossover Ventures — backer of Netflix and Spotify — with participation from initial investor Bain Capital and others, including Advance Publications, the parent company of Conde Nast. In total, the company has raised $116 million during its first five years in business. The current round values the company at $500 million to $600 million. Chump change to tech investors perhaps, but a sizeable amount for a fashion company that uses metrics like “we doubled our customer base in 2014” and rentals “will reach the equivalent of $600 million this year.” According to Forbes, one company source said the company would “top $50 million” in 2014 and is projecting to “double that number by the end of this year.” Although it continues to lose money, Rent the Runway recently started a subscription service, Unlimited, which allows customers to rent up to three items (mainly accessories) at a time for as long as they like for $49 per month. This may be appealing to investors because it might generate a new revenue stream and solidify a loyal customer base with fewer inventory turns and somewhat less complexity in the back end.

Proceeds of this latest round of financing will be used to hire more engineers, open a West Coast distribution center and open a network of retail stores in 15 markets. My guess is that Rent the Runway’s store strategy is a work in progress. Previous rounds of funding were invested in people, technology and infrastructure. The company has built a solid management team that is 80 percent female, including Beth Kaplan, president and chief operations officer. Kaplan has had an extensive career beginning at Procter & Gamble, and, most recently was president and chief merchandising and marketing officer of GNC. An IPO is a possible future scenario for Rent the Runway when the numbers look right for the current investors and the founding Jennifers. Hyman, 34, is chairman and chief executive, while Fleiss, 32, is head of business development. Together, they are reported to hold 30 percent of the company.

The Store Experience

Rent the Runway has four stores, two in New York, one in Washington, D.C., and one in Las Vegas. Appointments are encouraged, but walk-ins allowed. I walked in to the Manhattan Flatiron District store with a colleague who was looking for a gown to wear to a black-and-white masked ball. A front room features styles sorted by color, length and formality. A “stylist,” the title accorded Rent the Runway salespeople, steered us to the inner salon where individual dressing rooms open into a bright interior lounge area with good lighting and trays of jewelry available to accessorize a dress instantly. Our stylist was an engaging and helpful young man with lots of retail experience, company experience and personality; frankly, I would have liked to take him home with me to style my own wardrobe. If an appointment is made in advance, customers can pre-select items on the website to try on in store, definitely a risk-reducing option for those who live near a store.

Clearly, Rent the Runway has found its territory and planted a large stake there. There is competition from some other web venues, including consignment and rental sites like The RealReal and Bag Borrow or Steal, which rents Chanel, Louis Vuitton and Prada bags for up to $500 per month. But there are none in what I would dub the “dress up space,” and none that are as well-developed or well-positioned to be a long term, fully integrated and successful business.

A Bloomingdale’s executive I spoke with thought that Rent the Runway has “a great niche” which “taps into the sharing economy.” I think so, too. But there are still questions. As with all businesses targeting Millenials, it is hard to determine what their tastes and aspirations will be like when they have settled down into mid-life and have more real-life responsibilities and fewer parties and weddings to attend. And it is hard to know what the window of opportunity is when Rent the Runway has to begin to make money and to answer to investors who no longer care to lose what appears to be about 50 percent of revenue a year. The key will be how long it will take to scale up, to open enough stores to engage customers fully with a multi-platform business, and to be profitable while doing so. At this point, managing the world’s largest dry cleaning empire seems easy compared to what comes next. We will look forward to seeing how it turns out.

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