What are the returns on rental?

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The rise of rental has been one of the defining features of fashion retail over the past couple of years, driven by growing awareness of the impact overproduction of fashion is having on the planet. But as more high street brands and retailers experiment with the model, and rental platforms seek to scale up, the question remains as to whether it makes commercial – as well as environmental – sense.

The luxury market has embraced rental: high-end department stores Harvey Nichols, Selfridges and Harrods have partnered with start-ups such as Hurr and MyWardrobe HQ to launch rental services in store and online, as retailers seek new sales channels that appeal to Generation Z and to climate-conscious customers.

In December 2021, Burberry became the latest luxury brand to experiment with rental, making some of its popular styles, including its signature trench coat, available to rent for up to 14 days via MyWardrobe HQ. Later that month, Hurr – a rental platform for designer womenswear brands – announced it had raised $5.4m (£4.1m) in seed funding to allow it to “significantly scale up”. At the end of January it added a resale feature, and international expansion is on the cards.

High street retailers are also exploring the opportunities. In November 2021, Marks & Spencer launched its first rental trial in partnership with Hirestreet – a platform that offers brands such as French Connection, Lavish Alice, Keepsake the Label and Lipsy. Hirestreet carries 40 pieces from the M&S Autograph and Ghost ranges, where dresses cost up to £299 to buy.

The overall profitability of these rental models is still unclear

Pippa Stephens, fashion analyst at GlobalData

In response to the growing demand, several rental platforms launched white-label services last year – offering the use of their technology to the wider market.

Questions of viability

But there remains some scepticism in the industry about rental’s commercial viability.

Fashion brand consultant Elizabeth Stiles says some of her high street clients have worked with rental platforms on a consignment model – they provide product for free, then receive a slice of the revenue – but adds: “Some [of the brands] were saying, ‘Yes, it rents well, but the money isn’t worth it. I would rather sell the stock myself.’”

And with product lifespan – and therefore quality – one of the biggest factors in determining profitability, critics have questioned whether rental has a place on the high street.

Pippa Stephens, fashion analyst at GlobalData, explains: “The overall profitability of these rental models is still unclear, but it is likely to be far more feasible for those operating within the luxury and premium segment, compared with their more affordable counterparts. These brands offer higher-quality products, which are longer lasting, allowing each product to be rented out more times before being discarded.

“Moreover, these [luxury/premium] players will get far more traction from consumers, as their higher prices mean that many shoppers are unable to purchase them outright, but would be willing to rent when prices are more reasonable.”

Burberry launched on MyWardrobe HQ in December 2021

Burberry launched on MyWardrobe HQ in December 2021

However, Hirestreet founder and CEO Isabella West argues that the emergence of more white-label services – such as her Zoa business, which launched last year – “dramatically” reduce the costs involved in offering rental by providing a ready-made, high-tech solution: “Many Zoa clients are profitable after just a few months.”

Others point out that the RRP (recommended retail price) of an item is not always an indicator of its durability, and there are ways to maximise the number of times an item is rented that make it more viable for high street brands. Furthermore, the inventory model chosen, and investment in data analysis and technology, are fundamental to long-term profitability, regardless of whether the brands are high street, premium or luxury.

Matt Chandler, consumer investor at Octopus Ventures, which led the investment round into Hurr announced in December, says: “Fashion rental is rapidly turning into a hugely profitable and scalable player in the market, aided in large part by the logistics infrastructure that has been developed in recent years, combined with the frequency at which consumers are looking to rent garments. It is increasing and we expect this to continue.”

Capital-light models

Nasdaq-listed US platform Rent the Runway, one of the global forerunners of rental, hit the headlines in December after reporting a net loss of $87.8m (£65.3m) in the three months to 31 October 2021, on revenue of $59m (£43.9m).

CEO Jennifer Hyman detailed its strategy to become profitable. Central to this will be increasing its use of two “capital-light” inventory models: a consignment model, where Rent the Runway pays little or nothing for product up front and shares the revenue with the brands; and exclusive designs manufactured in partnership with brand partners, which costs Rent the Runway 50% less than buying pieces wholesale.

I’m not sure anyone would invest in a different model right now

Jane Shepherdson, chair, MyWardrobe HQ

It is also investing in technology and data, to better understand which products to stock, who to show them to, how to price them, and how to “turn them” – or rent them – more times, to increase their profitability. Meanwhile, operational efficiencies from its increased scale and more automation are expected to boost its bottom line.

In the UK, many rental start-ups have gone down the capital-light inventory route. MyWardrobe HQ and Hirestreet use a consignment model, menswear platform Garmentry is peer to peer, while Hurr has a hybrid of “managed stock” and peer to peer.

“I’m not sure anyone would invest in a different model right now,” says Jane Shepherdson, chair of MyWardrobe HQ of its decision not to buy stock. “We see it as imperative to becoming profitable.”

Hirestreet carries dresses from Ghost at Marks & Spencer to hire from £13

She adds that for brands, rental “can make sense financially, certainly if compared with selling through wholesale. It should be considered alongside ecommerce, wholesale, and bricks and mortar, and will probably be most appropriate for more of the occasion pieces, and the top end of the collection.”

However, clothing rental subscription company The Devout, which launched in 2020 with brands including AllSaints, Hobbs and Jack & Jones – and added Whistles wedding and bridesmaid dresses to the mix in January – is one of the few that buys stock in a traditional wholesale arrangement.

Founder Steve Bryant says: “This was a preferential model to have more control on the availability of ranges/products, but also to ensure inclusivity in the sizing and brand mix. Peer-to-peer or ‘management’ lends itself to reduced availability and sizing, along with a lack of control over the curation of brand mix and styles available.”

The Devout

The Devout launched in 2020

Hurr is pursuing a blend of both models: building a peer-to-peer community and working directly with brands. While it does not release the exact split, the peer-to-peer side of the business is bigger, but this is closely followed by its “managed stock” and it has at least 90 brand partners, such as contemporary womenswear brand Rixo. Hurr’s white-label service, which powers rental for Selfridges among others, feeds into the managed stock business – the aim is to bring its white-label clients onto the Hurr platform.

“Peer-to-peer is great for community building, while having managed brands gives us depth of stock and scale,” says Hurr founder Victoria Prew, who was one of Drapers’ 30 Under 30 rising stars of fashion retail in 2020. “It is data driven, so we can feed back to brands what works and what doesn’t, while peer-to-peer gives us great insights into which new brands have traction, which then informs our managed brands strategy. I believe this hybrid model is the future.”

As we scale up, the unit economics will only improve

Victoria Prew, founder, Hurr

Like Rent the Runway, Hurr is investing in its proprietary technology and data science, such as pricing algorithms.

Prew says the focus is on growth in the short-term and profitability in the longer-term, but she is confident of achieving the latter: “Because of our hybrid model, the unit economics are already attractive, and we’ve only been going for three years. As we scale up, the unit economics will only improve.”

Hurr

Hurr is investing in its proprietary technology and data science

A similar approach is taken by menswear rental start-up Garmentry, which launched in January 2021 and uses the peer-to-peer model.

Its founder, Callum Bramley, says: “While profitability is a long-term key goal, we know that first we need to educate men on the possibilities of rental.

“Not all circular models can scale. We opted for a peer-to-peer model as we know that one day we can handle millions of transactions and item uploads, as Depop and Vestiaire [Collective] have done in second-hand sales, with fulfilment being undertaken by the lender rather than a central hub.”

Finding the sweet spot

For third-party platforms, individual lenders and brands alike, the lifecycle of products is a critical question in whether rental can turn a profit. Garments can only be rented while they remain in pristine condition. Any garments that are cheaply made, but also certain delicate materials such as chiffon, silk or satin, or heavily embellished pieces, are likely to have a shorter lifespan.

The cleaning process is also important: as part of its drive to become more profitable, Rent the Runway has invested in automation that can sort garments by the most suitable cleaning method – there are 26 options to choose from – which maximises the number of times they can be rented.

MyWardrobe HQ x Gucci

This Gucci suit has been rented more than 60 times via MyWardrobe HQ

MyWardrobe HQ uses ozone cleaning, which uses cold water and fewer chemicals. Its “very high-end eventwear dresses” can be rented 20 or 30 times, says the platform’s co-founder, Tina Lake: “We have one Gucci suit that has rented more than 60 times and has been worn by multiple celebrities and influencers – we often joke it should have its own Instagram page. The quality of the garment obviously has a bearing on how many times it can be rented out.”

The CEO of one luxury fashion retailer agrees: “Products have an end of life, some more so than others. For example, some lower-quality dresses might only last a maximum of five weeks in the rental market before they come to the end of their life, so it’s then about knowing when to sell it on [for example through a resale site].”

Hurr has a team dedicated to “garment science”, which advises brand partners on which materials or items will be the most durable, and therefore profitable. “We work with the brands to make sure their rental edit is built for success,” says Prew. She believes Hurr’s premium positioning makes this easier.

We have hundreds of thousands of data points to look at and price is absolutely not the key determinant of durability

Hirestreet founder and CEO Isabella West

However, Hirestreet’s West argues that the RRP does not equate to product durability: “Our data shows a slightly inverted U-shaped trend in durability – imagine price increasing along the bottom axis and number of wears up the side.

“Very cheap, mass-produced items are often less durable, but in our experience so are some of the more luxury items, particularly those with intricate detailing, satins etc – their designs are often focused on how they look as opposed to durability. What we find is there is a sweet spot in the middle, which is why we focus our stock selection in this range. Interestingly, customer feedback shows they are also less worried about renting these [mid-range] items because, if they damaged the item, they would be able to afford the replacement cost.

“We have hundreds of thousands of data points to look at and price is absolutely not the key determinant of durability. When selecting stock, you should predominantly be looking at material blend and style factors if you want to effectively forecast number of wears.”

The Devout’s Bryant agrees. It offers a mix of shorter- and longer-lifespan items, to ensure a wide selection for its customers: “For example, jeans may have an average lifespan of 10 cycles, but a silk dress perhaps two or three cycles,” says Bryant. “There’s the risk versus reward of offering items with a shorter lifespan, but which are more ‘sellable’, to improve acquisition – complemented by durable items such as jeans and knits.”

Loftier goals

While the founders of the UK’s leading rental platforms are confident in their ability to turn a profit as they scale up, they also point to other benefits of the model, some of which may be more important than securing an early return on investment – such as sustainability and customer acquisition.

Kirstin Scott-O’Carroll, communications manager for sustainability at M&S, tells Drapers rental will allow the retailer to reach a wider audience and new customer base by providing access to “higher-price point investment pieces that might otherwise be out of reach”.

M&S will take several elements into consideration when assessing the performance of its Hirestreet trial –  such as the minimum number of rentals required per item over a specific period to ensure that the model is commercially viable, as well as which items prove most popular – but Scott-O’Carroll adds: “Commercial performance won’t be the only measure of success. We’ll also be looking at sustainability credentials, exposure to new audiences and customer acquisition.”

Lipsy dress from Marks & Spencer is available on Hirestreet

The Devout’s Bryant argues that rental can increase customer lifetime spend with a brand by up to 40%: “[Brands] will achieve a certain amount through traditional retail sales, but by adding rental to their revenue channels, they are allowing the customer to consume more of their product. A combination of retail sales plus rental revenue increases the lifetime spend by giving [customers] multiple ways to consume. Through a good CRM [customer relationship management] system, they can monitor that customer across channels and support cross and up-sell opportunities.

“Alongside that, allowing customers to access the range via rental encourages additional purchases (of an item they don’t want to give back). Approximately 10% of our membership base has purchased at least one item from their rental boxes.”

Rental is becoming an important channel for some brands and retailers, driven by fashion-hungry but climate-conscious consumers’ demands for a comparatively low-impact model for the industry. For now, the immediate benefits for brands lie in customer acquisition, and being seen to embrace circularity. But as third-party platforms scale up and further develop their white-label services, the unit economics of rental could become too tempting to resist.

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