The nouveau approach to retail: Fashion brands foray into clothing rental services

by Noyanika Dixit

20-December-2019  |  12 mins read

Rent the Runway

Is it a struggle for you to fish for clothes in your closet every time you have to step out? Repeating clothes for various occasions, although a more sustainable choice, isn’t what most people are particularly fond of, hence, they end up flocking to stores in search of that new outfit for a boost of fresh confidence.

The fashion world has come up with an ingenious solution to solve this vicious cycle of returning to stores and shopping for more than you can afford. Ever since the inception of the pioneer in this field, ‘Rent the Runway’, the rental economy has been growing at unprecedented rates. The online clothing rental market size is estimated to reach US $ 1,856 million by 2023, growing at a CAGR of 10.6 per cent from 2017 to 2023, as per market research portal, Allied Market Research.

A cause for concern that pushes the argument for rentals forward is a strange practice of millennials in their quest for fresh looks. Due to this social pressure, one in five UK clothing consumers admit that they order garments, wear them and return them to retailers as unwanted goods, according to research firm Mintel. This makes ‘wardrobing’, as the practice is known, a considerable and expensive problem. It undoubtedly contributes to online retailers’ return rates, which can go up to as high as 50 percent of total sales. This industry is meant for the new gene of people who live on social media, and having a new ensemble for every post is imperative.

Another major reason behind the growth of this market is the widespread social acceptance of buying and renting pre-owned clothing. With rentals, consumers can now afford even designer wear and premium clothing like never before.

The specificities behind brands encashing the niche industry

Fashion brands

The industry magnates of the fashion jump on to the chance to make rentals a lucrative and integral part of retail. The concept of clothing-as-a-service (CaaS) is one that’s being looked at with mounting interest as a way to disrupt the retail business model and tap into the budgets of fickle consumers.

Although a well-established practice for high-end retailers, getting the economics of rentals to work for affordable brands is tricky. Though it seems like an alluring market, rentals can be a hard market to crack as it presents its own set of struggles that seem to go completely against the grain of traditional retail. The tanking apparel industry in the world does not provide an impetus needed for retailers to diversify in this category.

However, this has not deterred the like of Hennes & Mauritz from launching their first clothing rental service at the refurbished Sergels Torg store in Stockholm, Sweden. The service is only available to members of H&M’s loyalty programme who are able to rent selected party dresses and skirts from its 2012-2019 Conscious Exclusives collection. The rental space also offers a selection of unique pieces designed with inspiration from this autumn’s Conscious Exclusive collection, all made from more sustainable materials.

URBN, which is a portfolio of global consumer brands like the popular Urban Outfitters, Anthropologie, Free People and Terrain among others, officially launched its very own monthly clothing subscription service Nuuly. Started in July this year, along with more than 100 third-party brands, vintage items and products within the brand’s existing portfolio, their rental service offers customers the chance to borrow six pieces of clothing per month for US $ 88.

“When we looked at how the retail landscape was changing, we felt that a subscription rental business really tapped into some key customer desires: a desire for newness that exists alongside a desire to be more sustainable and to be smart about how she spends her money,” Kim Gallagher, Nuuly’s Director of Marketing and Customer Success told Forbes.

Fashion brands.

However, URBN is prepared for some cannibalisation of retail sales. They are anticipating some sales to be impacted but are certain that Nuuly will be able to recoup and grow, the company said in a statement. They have expressed desire to evolve with the changing consumer demands because one of the reasons for the slowdown in retail is the inability to innovate and adapt to what the consumer wants.

Although brands and retailers may encounter many hurdles while starting the rental business, a chain stuck with a bloated inventory (perhaps because it went with bolder buying choices) could divert surplus items to a rental operation. Hence, consumers might be more inclined to take a risk with fashion-forward pieces when offered the same clothes at lower prices. This could offer a better economic outcome than getting rid of the excess through heavy discounts. Markdowns to shift unwanted stock can be a real drag on margins.

In USA, CaaStle operates rental services for its own brand Gwynnie Bee as well as for third-party retailers including Express Inc. and Ann Taylor. It charges a flat fee per active subscriber to provide all aspects of the offer, from logistics to laundry.

Chief Executive Officer of CaaStle, Christine Hunsicker, has voiced the success of the platform for brands as the retailers using its platform can generate operating margins of 25 per cent. That compares pretty well with the profitability of a mid-market fashion chain.

The newer brands which have followed suit to cash in on the market include American Eagle which offers its Style Drop programme where customers can pick three items at a time for US $ 49.95 per month. Haverdash allows renters to borrow three pieces at a time for a slightly higher fee of US $ 59 per month, but includes boutique labels like BB Dakota and Cupcakes and Cashmere. Banana Republic allows members free priority shipping, unlimited exchanges and returns and complimentary laundering services for a flat monthly fee of US $ 85.

Although brands already deal with their fair share of returns, cleaning and repairing of garments, it’s much harder to persuade consumers to hire affordable apparel than catwalk creations.

A more novel take on this market is by Amazon. Its service called Prime Wardrobe lets buyers choose up to eight items to try out for seven days. The customers can send back the items they don’t want and keep the ones they’d like to purchase.

Amazon also announced an addition to the Prime Wardrobe with ‘Personal Shopper’ which is essentially a styling service for prime members that can make tailor-made product recommendations, further personalising the experience.

The sustainability of the rental programmes

Womenswear

As consumers look for more sustainable options, the rental economy seems to be hitting the right mark. The global apparel industry is considered among the biggest industrial polluters. The explosive popularity of fast-fashion has sped up not only the array of store merchandise, but also consumer discards. With the advent of subscription boxes and rentals, if closets become more communal, fewer garments will be made and they can be worn longer.

Some experts from the fashion industry feel that subscription clothing rental isn’t just a passing fad but is here to stay. There is a new trend touted as ‘singularity of closet’, meaning what individuals wear on weekends now blends with their work wardrobes. This is a result of consumers becoming more thoughtful about what they invest in when it comes to fashion purchases.

From a business perspective, the rental model helps brands get a higher ROI on slow-moving SKUs. However, the business usually needs to invest more in operational infrastructure, primarily in dry cleaning and faster shipping. This is a flip side that opposes the debate of it being a sustainable alternative to fast fashion.

With this model, consumers who might not have shopped online on a monthly basis due to budgetary constraints are basically getting the same experience but at a lower cost, adding more packaging and emissions from shipping into the mix, thus increasing carbon footprint.

However, some brands are consciously making an effort to decrease this form of pollution. Nuuly uses reusable shipping bags spun out of ocean-waste plastic and garments, which are laundered in low-water machines designed to use special detergents.

Road ahead

The strongest clothing rental programs are ones with a styling component and a lease-to-own option, which add a level of personalisation and additional value. Most brands have only just started out and can innovate in this direction so that this company offshoot takes off.

Caitlin Strandberg, Principal at Lerer Hippeau, a venture capital firm, believes, “We’ll see more brands looking at clothing-as-a-service as well as technology that enables retailers scale rental operations. A big motivation behind this is that it is a rich source of consumer data as well as regular, recurring revenue. Rentals and subscriptions offer a new channel to not only acquire customers but to also establish a regular cadence of authentic marketing communication,” she said, speaking to Forbes.

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