Almost all aspects of fashion are under pressure right now. Manufacturers are dealing with high raw material costs, which put pressure on brands’ profit margins, which in turn means customers have to spend more for the same goods.
But rental fashion has been surprisingly resilient over this period. During the first days of the pandemic, the rental was destroyed due to the cancellations of most cases that suit the rental clothing. Now, rental companies are seeing higher subscriber growth and steady business at a time when many brands, including DTC brands like Warby Parker and Allbirds, are struggling.
Three-year-old Nuuly, the rental service owned by Urban Outfitters’ parent company URBN, has added hundreds of new subscribers a day in the past three months, reaching more than 90,000 active subscribers at the end of July. According to Dave Hayne, president of Nuuly and CTO of Urban Outfitters, since the cost of Nuuly’s monthly subscription is $88, Nuuly is well on its way to profitability. By comparison, 13-year-old Rent the Runway has 135,000 active subscribers.
“The top line subscriber growth this year has been fun to watch, but we’re also extremely excited about our progress towards bottom line profitability as a business,” said Hayne. “We decided early on that we wanted to build a sustainable business at Nuuly, and to do that we needed to eventually return a profit to support continued investment in future growth [like adding 150 new brands to the Nuuly catalog].”
Last quarter, operating losses fell below 10% of revenue for the first time, meaning Nuuly may be able to hit profitability by next year, Hayne said.
“As prices rise almost everywhere for consumers, Nuuly offers a strong value proposition,” said Hayne. “Our program is seen as a way for subscribers to add variety and fun to their wardrobe without overspending or feeling like they’re spending their money.”
Rent the Runway has also seen resilience in its business despite inflationary pressures. Rent the Runway ended its most recent quarter with a record high number of subscribers and revenue that grew 100% year-over-year. The company was hit hard by the pandemic and saw thousands of customers cancel or suspend subscriptions.
Rent the Runway CFO Scarlett O’Sullivan said the company is well positioned to deal with fluctuating market situations such as inflation or a potential recession due to its cost structure. About 60% of RTR’s operating costs are variable. They include customer service, performance marketing and revenue sharing payments for brands, all of which can be adjusted to reflect demand and revenue.
But there is also an inherent virtue to leasing in an inflationary environment because of how each product is monetized.
“Our business is different from other businesses because we are able to monetize our products for many years, as opposed to other retailers or e-comm companies who may be stuck with their inventory,” said O’Sullivan.
In short, rental companies also face rising costs, but because each outfit earns money from multiple transactions, rather than a single purchase, every dollar spent on costs goes further. However, the rental must include additional shipping costs for getting the product to and from customers. For its part, Rent the Runway has diversified its shipping partners this year and kept shipping costs stable. Additionally, the company has a goal to offer home pickup to up to 50% of its customers by the end of the year, which is cheaper than shipping through a national carrier like UPS.
Rent the Runway has been raising its prices recently, raising the costs of each membership level by about $10 in April. But this won’t be a regular occurrence, according to O’Sullivan.
“We don’t have a specific plan for annual price increases,” she said. “From time to time, we may do some mid-digit price action when it makes sense.”
