Rent the Runway CEO on Underestimating the Fashion Rental Market | CEO Talk, BoF Professional

This article appeared first in The State of Fashion 2019, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here.

BoF: How would you characterise the state of the fashion rental market today?

Jennifer Hyman: The fashion rental market globally today is a lot bigger than it’s given credit for [because] if you look at the GMV [gross merchandise value] of the amount of product that is exchanged through platforms like Rent the Runway, and platforms like The RealReal and thredUP, the [latter two are] longer-term lease models versus a shorter-term rental model that is Rent the Runway. I put businesses like The RealReal or thredUP into the larger market of rental businesses because if you buy a handbag right now with the intention of selling it on The RealReal and get a portion of your spend back, what you’ve effectively done is rented that handbag for six months. Rental is about the customer intention behind the usage of the item. When we think about the merchandise value that passes through — we’re talking tens of billions of dollars’ worth of goods, that’s number one.

Number two is that there’s a larger movement from consumers all over the world buying clothing for multiple use, to clothing for single-use items. Thirty years ago, 70 plus percent of all fashion purchases in the United States were done at department stores. Now only 28 percent of all fashion purchases are done at department stores. The primary locations of consumption, not only in the US but all over the world, are via channels like Amazon, Walmart, H&M, Target, Zara where you go in and you’re buying cheap clothes where the intention is to only wear those clothes once or twice.

BoF: Who is your customer today and how has that changed over the years?

JH: Our customer base today represents 76 percent of all zip codes in the United States. Given the segregation that exists in the United States, it means we’re catering to almost everyone. We have subscribers who have household incomes of $60,000 a year, we also have subscribers with household incomes of over $5 million a year using the same product, with the same inventory. Now, the value that she might be deriving from it is different. One woman is subscribing because she never in a million years would have been able to afford what is being offered via the subscription; [another] woman might be using it because it just saves her time or it’s more efficient for her, or she needs a new outfit for every day at work.

BoF: How has your relationship with designers changed?

JH: The way we work with the industry has changed dramatically over the past ten years. We used to have to beg people to work with us, and now they are coming to us and are really excited about diversifying all the ways that they work with us. Designers were under the impression that they were competing against other designers. If I was Diane von Furstenberg, I might think that I’m competing against Tory Burch or Alice + Olivia. Now designers understand that they’re competing against Amazon and they’re competing against Zara.

With our top 100 brands, we’re their number one or number two customer. Not only do we work with them on wholesale; we’re working with them on innovation. We’re working on custom collections, on extended sizing, on using data to help inform what they produce in the first place. We help them use rental as a monetisation channel for different components of their inventory, so [in reality], there’s five or six ways that we work with designers to build their businesses. What designers have really seen is that the customer base that Rent the Runway is bringing to them is new and different than their other partners; that we are bringing a new customer who’s trying the brand for the very first time. We’re part of that process of helping that customer fall in love with the brand.

BoF: How did you know that physical retail had to be part of the experience? How have you developed it?

JH: The Neiman Marcus partnership was fundamentally, for us, about free real estate. We would rather have our own physical space that has more square footage where we can control the hours and the experience. When we started our retail strategy many years ago, we didn’t have a subscription business so we had concepted the store in a different way; it would be a place to build awareness of Rent the Runway, give people the ability to try things on before they rented it so that they weren’t fearful about fit.

Designers were under the impression that they were competing against other designers… Now [they] understand that they’re competing against Amazon and they’re competing against Zara.

Now that we’ve seen the incredible growth of the subscription business, we’ve seen how a physical footprint can provide even more convenience and magic to the customer base that was in that market. We’re going to be accelerating our retail footprint throughout the US. We’re launching a series of Rent the Runway drop boxes in WeWorks in six different cities across the United States so that our subscribers can walk into the lobby of a WeWork, drop off inventory clothing that they’ve already worn and immediately new slots will be opened up for them of new items that they can pick from their subscription. It’ll make the process of receiving something new from us even quicker.

BoF: How much do you think your consumers care about value and to what extent does it play into their mindset?

JH: We need to switch the word from being value to being smart. The average consumer cares about making smart choices, [about] not being ripped off. She is thinking about how often she’s going to use something for. I don’t think that fast-fashion is a larger piece of the fashion market. It’s just that they’ve understood earlier that no one is going to spend a few hundred dollars or a few thousand dollars on an item that they’re only going to wear once or twice.

There is a lot more intelligence; we know what things cost, we can be in a store, we can look up price comparisons right away. We’re shopping on Instagram.

Within this there’s an appreciation of quality. I think that the consumer does appreciate that designer clothing and luxury is of much higher quality than what they are buying from Amazon or what they’re buying from H&M. Therefore they figure out: ‘where and when do I want to invest in quality and when am I comfortable with the low-quality substitutions?’

BoF: There are so many second-hand businesses coming up. Do you think the number of these different services will continue to increase going forward?

JH: Anyone could put up a website and say, ‘We’re renting Prada.’ There’s no way to short-circuit this because in order to rent Prada, you have to become an expert in reverse logistics, build all of those direct relationships with the designers to actually procure and buy that product. Some folks have tried to do this via second-hand channels; they just procure the inventory from second-hand or third-hand markets. I think that there are going to be a few very large, very dominant players in this market. It could be a winner-takes-all market or it could be just two or three businesses [that] emerge as the global winners [but] it’s not an easy business to copy given how difficult it is to do well and all of the technology and logistical barriers to setting this up and the amount of capital that you need.

BoF: What do you want to accomplish in the next five years?

JH: We believe that this business can be a $100 billion company. We believe that that is applicable all over the world, it’s applicable in all different kinds of categories. As we grow, our designer brands grow along with us. The closer I’ve got to designers, the more I really want to put bad fashion out of business. I think that it’s egregious how they’ve been copying the intellectual property of all of these designers for many decades and undercutting them. From a sustainability standpoint, there is absolutely no reason to fill up our landfills every single year with all of this junk. One-fifth of LVMH Group is not thrown into a landfill every year; it’s one-fifth of H&M.

This interview has been edited and condensed.

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