Rent the Runway: A Successful Fashion Forward Business
A stylish business with an effective model
Rent the Runway (RTR) is expected to rent over $1B worth of designer dresses this year1, taking $100 million of that as revenue2. Initially launched as a “passion project” by two HBS graduates, RTR has grown to employ over 850 people and serve more than five million members1.
With a current valuation between $400 and $600 million, I think it is important to take a look at the incredibly effective and targeted business model of RTR1.
Creating Value by Making Members Runway Ready
The average American woman buys 64 new pieces of clothing each year, and of these purchases, only wears 50% of them more than once3. RTR is capitalizing on millennials decreasing emphasis on ownership and increasing focus on individual experiences and access to a wide array of items4.
But, how exactly do they pull this off? RTR allows members to rent designer clothes and accessories for 4 or 8 days at a fraction (usually about 10%) of the retail cost4. However, in addition to the accessibility and affordability of RTR, the company continues to add value by making the process undeniably convenient. For example, RTR offers customers the option to choose a back-up size for free just in case the original piece does not fit, and will next-day you a new garment if neither of those options worked4. Finally, after the customer has worn the clothing all she (RTR is currently targeted for women) has to do is place the garment is a prepaid shipping envelope and drop it in mail-box…no dry cleaning required. The lack of responsibility for upkeep of the garment is a significant convenience factor that drives the logistical operations explained below.
Creating and Maintaining an $800M+, 40,000 Square Foot Closet
To give you an idea of what an $800M+ closet looks like, just look at the image below. And to lay it out in even more detail, RTR owns more than 65,000 dresses and 25,000 accessories6.
Keeping a 160,000 square foot closet that serves five million members is no easy task, but this is exactly what happens at the RTR warehouse in Secaucus, NJ7. Critical to keeping satisfied members is RTR’s ability to provide garments that are ready-to-wear upon arrival and don’t make the member feel as if she is wearing something that has been passed around. In order to avoid sacrificing the quality of the experience, RTR places every garment through a 20-step dry cleaning process2. “Spotters”, or the brilliant cleaning masterminds who can get nail polish out of a gown, typically complete 30 dresses per hour2. The VP of Operations, Charles Ickes, states that maintaining dry-cleaning operations in house was an important move to control the quality of the RTR inventory2. The RTR warehouse is currently the largest dry-cleaner in the U.S.7 Also, by having this in-house, RTR can continue to meet the high demand for items: 60% of dresses depart the same day they arrive back to the warehouse6. Due to the high quality in-house operations, RTR is able to average 30 uses per garment – with every save by the highly skilled spotters allowing more revenue per piece2.
Staying on the Best Dressed List for the Foreseeable Future
RTR continues to effectively utilize their assets, including a 2,500 square foot shop in the warehouse where coveted items are sold at up to 90% off after their days being shipped across the U.S. are over7. RTR is also planning to roll their unlisted membership out more broadly in 2016, which will increase the amount of units in rotation as well as the frequency which members use RTR services. The RTR co-founders believe women’s closets will consist of a majority of rented pieces consistently in rotation, and if this prediction comes true, RTR is suited for success5.
Student comments on Rent the Runway: A Successful Fashion Forward Business
The operational challenges here are much larger than I had originally anticipated. I wonder if some level of predictive analysis can make this process easier?
I had no idea that RTR is the largest dry-cleaner in the United States, in fact, I had never thought of it as a dry-cleaning company at all. However, like you alluded to, it is as much a cleaning service as it is a clothing rental business. Looking at the company through this lens, it becomes apparent that its ability to scale is a function of its internal processes’ ability to fluidly adapt to increasing inventory. RTR’s customers demand that they receive their dresses quickly and in pristine condition. If RTR tries to grow too fast and sacrifices quality, its reputation will suffer. This also makes it even more important to have a strong and proactive customer service department to pacify customers if / when their dresses arrive in less-than-ideal condition. While I imagine the the dry-cleaning defect rate is low, I also imagine that this is a metric which they track closely, as their brand image depends on delivering a high quality product on sometimes short notice.
With the time spent in-transit for the dresses effectively being “downtime”, the logistical challenge here is immense. It is in RTR’s best interest to minimize the time being spent in-transit. I wonder why they have restricted themselves to just one warehouse. Given the scale of its operations and the next-day option in case a garment doesn’t fit the customer, having multiple fulfillment centers, similar to Amazon, may help reduce the risk of dresses not reaching on time.
Saaket makes an excellent point. Perhaps the centralization is a reflection of the need to keep inventory consolidated to meet common consumer demand. Do we have a sense of how broadly the average RTR customer reaches into their inventory? Are there “hit” dresses with waitlists similar to the lists one used to experience on Netflix? Has RTR innovated with respect to storage and retrieval the way Amazon has broken new ground on this front? And does RTR benefit from having an eye toward selecting popular dresses or do they simply add value through breadth of offerings?
Loved reading about the behind-the-scenes operations of a company I’ve used. I’ve noticed RTR has at least one physical storefront location where customers can try on dresses before renting them online. Seems like that strategy would increase costs (rent, staff, inventory management) but might help increase revenue by helping to build the RTR brand and bring on skeptical new customers. Would be interested to know what trade-off calculations management made when deciding to pursue this approach, and whether this is something they’re looking to expand further.
An interesting business model that still leaves me puzzled. Especially in the case of evening dresses, I see many challenges keeping the consumer satisfied and delivering on the customer promise. Clearly, if RTR succeeds in renting out ~10x it should at least be break-even on the retail purchase price of the dress. Considering that the company by now should have significant buying power I assume the company can buy at significantly lower prices than retail and need not rent a dress out that many times to be able to make a profit. But how do you ensure you have both the breadth in options that fashion-concious women are looking for, as well as make sure a dress is profitable? Especially for smaller or larger sizes, this seems challenging. Although some people might actually be so lazy that dry-cleaning is a hurdle to them purchasing a dress (although I do not really understand that given that in many countries around the world this can now also be arranged hassle-free online), fit to me seems to me the most important consideration when contemplating to buy a dress. In fact, it is the reason why I would not use RTR. Most designer dresses are sold in convection sizes and the actual brand stores offer tailoring in-store to guarantee perfect fit. Although RTR might offer dresses at 10% of retail price, that is still way too much money for an ill-fitting dress. With RTR there is no option for alteration. Is there any way RTR can address customization whilst still being able to rent the dresses multiple times. For instance by altering the length of dresses for certain ranges of length so that women who fall within those ranges can at least rent a dress that they do not trip over?
Very interesting post! What most strikes me in their business model in the unpredictability that comes with it on all fronts:
– Unpredictability of customer response: It is hard to predict customer reaction to some of the pieces. And with some low demand pieces being very expensive maybe some of the more high demand items are subsidizing the lower demand ones.
– Unpredictability of item lifetime: While some dresses may be good for over 20 rentals, others may deteriorate easily, even before getting any ROI out of it. Even more, some items may be particular to a specific trend and will therefore quickly become obsolete – I wonder how reactive they are to trends.
– Unpredictability of item availability: With the new “unlimited” subscription that they are offering, in which you may keep the item as long as you need, will some items just never be in stock??
As I said, this is a very interesting company and a very nice post – I would be interested to see how long they will be able to maintain their business model and hedge the risks of the unpredictability it dictates.
An incredibly interesting business model that I just recently came across. The operational challenges that RTR faces are fascinating. First among all, the choice of internalizing the dry cleaning processes given its strategic criticality to allow for better control over the quality of the outcome but also on the throughput time, which has to be minimized to reduce the very costly downtime of a garment. Secondly, I would be interested in knowing more about the SKUs selection process and what type of data feeds that decision as well as what type of data is available and with what granularity for performance analysis. The key questions I have around this model, however, is related to its scalability and / or replicability outside of the USA: would it make sense to extend this service to men’s fashion? Would it be feasible to replicate this operating model in Europe or Asia?
I wonder if in your research you came across information on how certain operation decisions came to be such as the decision to bring dry cleaning in house. I imagine that these operational decisions came over time as the company looks to scale, improve efficiencies and control costs. Likely dry cleaning and other elements of this model were not in their current form originally. Since there has been a lot of management turnover and speculation on cultural issues within the firm, I would love to see an exploration of how culture has driven decisions and vice versa.
Nice article, CBR! In response to Saaket’s question on downtime, I think the company is able to capitalize on the fact that a significant percentage of dresses are rented out on weekends, allowing enough time during the week to receive a dress back, dry clean it, and ship it out again. The company does struggle with seasonality in a broader sense though, with enormous utilization happening around New Years and wedding season. As others have pointed out, inventory is clearly this company’s biggest challenge.
On that note, I would be curious to know what you think of RTR’s recent move into everyday clothing. From what I understand, the revenue opportunity is enormous but inventory management will be incredibly difficult to maneuver.
Awesome post and a very popular read! Similar to many, I had no idea that RTR had this in-house dry cleaning business. I’m curious about the use of these “spotters” and at what point the company decides to retire a dress. Do the 29th and 30th users pay differently than the 1st and 2nd, whether this is because the dress is out of season or, more likely, a little worse for the wear (no pun intended)? It seems that if these dresses are depreciating in value over, the later users should be entitled to a lower price point.
Building off Julie’s point on culture and Rachel’s on its brick-and-mortar store, I think one of the most interesting facets of RTR is their inclusion of user reviews and pictures on the rental page. In my experience, these reviews and images are hugely important in picking out a dress. When I’m in a crunch to get a gown, I trust an average user with my body type infinitely more than a picture of a model a typical department store or designer posts online. To me, this culture of honesty and openness creates value to the customer buying, to the customer reviewing (you receive credit as a poster), and to the company by capturing the loyalty of these two ends.
Since I wrote about RTR as well, I felt like I should comment! Great post! I’m curious what you think about the challenges RTR has had finding skilled spotters. It seems that spotters are crucial to turn around dresses efficiently, but that the skill set is rare. I wonder if there is anything they could do to either automate this process more or fill their pipeline with more talent.
Interesting post! It’s interesting but I never considered how large a role just owning and maintaining space must have when designing such an operation. However, I wonder what complexities this drives when expanding. The sheer investment alone must be massive. It also must include staffing and maintenance considerations going forward. I wonder how the founders will approach this challenge going forward.
Thanks for sharing! This seemed relevant to me because I just had my first Rent the Runway experience. I’m glad you touched on the convenience level for customers. While ordering from RTR, it seemed like the company had answered every concern I had – Will I get it on time? Will it be dirty? Will it fit? Will it be a pain to return it? RTR had all of these bases covered. It was a no-hassle experience that made dressing up fun.
However, I would be curious to see how they do with renting clothing outside of formalwear. I noticed this option on their website, and I don’t know if I would be inclined to rent a jacket from them. Formal dresses definitely fall in the “only wear it once” category but a jacket doesn’t. By offering different kinds of clothing, does RTR slightly change their business model? I also wonder how easy it would be for another company to start a similar business. Food for thought as RTR continues to grow.
Interesting! I had no appreciation for the magnitude of RTR’s inventory and operations management process.
Wow, popular post!
I completely agree that RTR is developing a robust operational model that aligns with its customer promise and business model. My biggest concern is around their warehousing and logistics infrastructure, which I believe Saaket astutely pointed out in an earlier comment. If the value for women is the ability to rent a designer gown at a fractional cost for a special evening, the entirety of the value is lost if the garment does not arrive in time. It appears that they may need to consider beefing up their distribution capabilities as they continue to scale.
That said, I think it’s a great model. Why spend hundreds on a gown you’ll wear once when you can rent one instead?