Traditional retailers are exploring the apparel rental market

Sandy Smith

First, they came for CDs and movies. Then for automobiles and hotels. Now, it appears that millennials and Generation Z might be on the verge of changing everything when it comes to apparel.

Clothing rental has been around for a decade. But as millennials and Gen Z become a more dominant force, a number of apparel retailers are jumping in more fully. URBN recently entered the mix, following American Eagle, Ann Taylor and others into space carved out initially by Rent the Runway and Gwynnie Bee.

“Younger consumers say they are more willing to engage in ‘fractional ownership,’” says Sucharita Kodali, a vice president and principal analyst of Forrester’s eBusiness and Channel Strategy Professionals. “Renting everyday clothing is newer, but the economics never made sense.”

Just how significant could this shift be? “The State of Fashion” report from The Business of Fashion and McKinsey & Company noted other “rental models” that had shaken their industries to the core: “Think of Spotify supplanting CD sales and downloads, Netflix replacing video stores and ZipCar standing in for car ownership among many young urbanites. This is a fundamental evolution in consumer behavior, and we expect it will have an impact in the fashion business in the years ahead.”

While it might be easy to assume the trend is driven by young people’s desire for sustainability, “The State of Fashion” identifies more than that. It notes that people buy 60 percent more clothing than they did 15 years ago — but keep the clothing only half as long: “One in seven consider it a fashion faux-pas to be photographed in an outfit twice. Simply put, young people today crave newness, and these cohorts are much more likely to embrace churn in their wardrobes. At the same time, younger generations are more interested in sustainable clothing than older consumers. Rental, resale and refurbishment models lengthen the product lifecycle while offering the newness consumers desire.”

In a day when virtually everything is Instagrammed, it is safe to assume that we’re just starting to see this trend emerge.

Rising rentals

Ultimately, consumers are the driving force behind this experiment, says Nicole Leinbach Reyhle, founder and publisher of Retail Minded. “Consumers identify the trends they respond to and trends say a lot about the underlying values. This meets the desires of younger generations that care about sustainability and environmentally friendly products, which influences their purchase decisions. As an example, fast fashion was a popular trend for a while, but as the impact of some fast fashion became more known, consumers said, ‘It’s not for me.’ Clothing rental supports sustainability and that helps to drive the trend forward, particularly with this consumer.”

Kodali sees it as more of an experiment at a time when fashion retail “has been difficult. The retail industry tends to copy what others do. These startups are getting a lot of media attention. They are pricing these models in a way that they should make more money than waiting for shoppers to come to them, but the challenge is that these are also subscription models with monthly fees, which have high churn.”

Whether it is to tap a new revenue stream or meet consumer demand, rentals are drawing plenty of new entrants into the pool. Retailers like Rent the Runway and Gwynnie Bee practically wrote the business model. Gwynnie Bee is now taking that knowledge elsewhere, as a founding partner in CaaStle, a managed service that has allowed retailers like Ann Taylor, American Eagle and Rebecca Taylor to join the rental market. (Here’s a new acronym to learn, from CaaStle: Clothing as a Service.)

Earlier this year, URBN announced it was joining the fray with Nuuly, a monthly subscription service based on URBN’s brands, third-party labels and vintage pieces. Unlike other subscription models, customers can receive only one box per month; Rent the Runway and others limit the number of clothes a subscriber can have rented out at any given time, but do not limit how many times they make the exchange per month.

URBN, parent of brands like Urban Outfitters, Anthropologie and Free People, said it will include 1,000 items at launch and add 100 new items per week until it triples the style count. Customers will be able to select from URBN’s brands, as well as Reebok, Fila, Champion, Levi’s Wrangler, AGOLDE and Anna Sui.

“Urban Outfitters made a huge splash when they first reported they were introducing rentals on the same day they announced high earnings for first quarter sales,” Reyhle says. “The introduction of their new program is not only to boost customer loyalty and engagement, but also to continue to boost sales performance. It’s not just about meeting customer expectations, but about building longevity for their brands.”

Meet the players

Each of the entrants has a slightly different model. Rent the Runway charges $89-$159 per month and users can borrow four styles at a time. Ann Taylor’s Infinite Style also clocks in at around $100, with three pieces per month. Both services offer discounts should the customer want to keep the item rented. American Eagle Style Drop allows users to build a “virtual closet” — each shipment includes three items from the closet.

The newer entrants have an advantage over Rent the Runway, Reyhle says. “Rent the Runway is wildly different in that they don’t have a traditional, freestanding store,” she says.

The company has a handful of stores in major cities where customers can pick up, select or return items as well as try on items for future rental. In June, Rent the Runway announced it would put rental return drop boxes in select Nordstrom locations in Los Angeles, with plans to expand to additional locations if it proves successful.

“Clothing rental supports sustainability and that helps to drive the trend forward, particularly with this consumer.”

Nicole Leinbach Reyhle, Retail Minded

Rent the Runway has been in this position before, partnering with Neiman Marcus for a boutique inside its San Francisco store.

“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,” says co-founder and CEO Jennifer Hyman in “The State of Fashion.”

“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. 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 U.S.”

It is doing so through expanding partnerships, including with West Elm to bring the Rent the Runway approach to home furnishings. Both come after a wildly successful experiment with WeWork, which brought the drop boxes to the coworking space. According to CNBC, Rent the Runway saw a 180 percent increase in the number of returns it receives, which it attributed to more frequent churn through clothing.

Fad or fashion?

While URBN has not yet released a lot of details around its plan, a tie-in with the physical store is logical, Reyhle says. “We’re seeing more and more retailers leveraging online and in-store. It would make sense for returns, drop-offs and even pickups to happen in physical stores. What that’s doing is driving foot traffic into the store.”

Kodali is a bit more circumspect about the potential. “It’s a small business in the larger scope of fashion retail. I wouldn’t overstate its success. It has received a lot of media attention. Retailers think that media attention equals success, and they think they are missing out if they don’t have a similar offering.”

The business model brings a lot of friction, Kodali says. “You need to have broad assortment for a good rental business, and you need to price in reverse shipping, cleaning, etc. These businesses also have very high churn, and customer acquisition and retention is difficult.”

She is also skeptical at the complete business model. “I don’t know that the economics yet make sense but maybe if you can get vendors to comp clothing or you are data heavy, you can be better positioned to succeed,” Kodali says.

“I think younger consumers think it’s more sustainable to have rental clothing versus just buying disposable clothing, but I don’t know if that actually holds true. There’s quite a carbon footprint to ship things in packages, have them returned, and so on. A better solution would be for a shopper to have a membership, go to the store to pick out what they want whenever they want, and then return things as they see fit in the manner they choose. But that is difficult because stores don’t manage laundering returns now.”

Not just for fashion

Both Kodali and Reyhle believe fashion is just the beginning of where rental could — and perhaps should — go.

They’re both watching Rent the Runway’s still-to-be-launched project with West Elm. “It’s showing that innovation is a must in order to meet the various demands of consumer expectation,” Reyhle says.

It also provides keen insight into what is resonating with customers. “It helps retailers test the waters for new products, for new revenue streams and how they can build long-term loyalty,” Reyhle says.

Kodali notes that rentals have been around almost as long as retail, especially in areas like wedding apparel and timeshares. Companies like the as-needed auto line Zipcar may be newer, but still are well established.

Still, Reyhle sees plenty of potential in new areas like baby clothing and products. “We need to look beyond traditional clothing,” she says. “Let’s say you are welcoming a family into your home for the week. You want to offer a crib. How great would it be to be able to rent that?”

Technology like gaming systems is another area of possibility, she says. “There are so many ways that we could expand on this.”

It’s clear that younger consumers are looking to do just that.

Sandy Smith grew up working in her family’s grocery store, where the only handheld was a pricemarker with labels.

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