Introduction

With the rise of the sharing economy, rental, subscription and resale business models are gaining traction in the US as the desire to own products and the social stigma of buying pre-owned products diminish, especially among millennials and Gen Zers. Online rental platforms such as Rent the Runway and Gwynnie Bee and resale platforms such as ThredUP and The RealReal were the first to capitalize on this trend and have seen some success, inspiring many traditional retailers to test the waters.

Defining Market Segments

Rental This model offers one-off rental for a specified short-term period, with no option to purchase. Major players following this model include Rent the Runway and The Black Tux. Subscription services Subscription rental: In this model, the consumer pays a monthly fee to rent a specified number of garments (which the retailer chooses) that the consumer can exchange at any time, with an option to purchase at a discounted price. Shipping both ways is included in the fee. Prominent players offering this service include online platforms Rent the Runway, Gwynnie Bee and Le Tote, and traditional retailers American Eagle, Urban Outfitters, Express and Ascena Retail Group. Online furniture rental platforms such as Fernish and Feather, and retailers such as IKEA also offer this rental model. Subscription box: In this model, the company sends a box on a regular basis to paying subscribers. Shipments can be weekly, monthly, quarterly or as scheduled by the customer. Beauty and grooming companies such as Birchbox, Dollar Shave Club and Sephora use this model, along with meal kit delivery companies Blue Apron and HelloFresh. Many apparel firms use a modified format of the subscription box model: The retailer sends a curated box of clothing, shoes or accessories on a regular basis (or the customer chooses a schedule). The customer has a certain amount of time to return items and pay for only those which he or she keeps. Merchants offer a discount if the customer keeps the entire box. Major players following this model include Amazon Prime Wardrobe, Stitch Fix and Kidbox. Closed-loop subscription: This model uses a closed-loop manufacturing and recycling process enabled by an annual subscription program that lets customers return worn clothing for recycling in exchange for fresh ones. Customers can use items until they are worn out, return them and the company upcycles them into new products. This format differs from the subscription rental model in that the clothes can be returned stained or damaged as they are recycled. Major players following this model include For Days and MUDJeans. Resale services Retail resale: In this model, retailers buy used items and re-sell them. Most have a brand-specific authentication processes. Companies following this model include mainstream retailers such as Patagonia, Recreational Equipment Inc. (REI) and North Face. Consignment resale: In this model, the owner places items on consignment and is paid only if the item sells, minus the retailer’s commission. Major players in this segment include ThredUP, The RealReal and Buffalo Exchange. Peer-to-peer resale: In this model, an online marketplace connects buyers and sellers, owns no inventory and takes a fee from every sale. Some companies operating in this space also provide authentication service for buyers. Major players using this model include Poshmark, Depop, Etsy and eBay.

Traditional Retailers Move into Subscription Rental and Resale Services

With digital natives growing quickly in this space, we’re now seeing mainstream retailers move into subscription rental and retail resale. Many target millennials and Gen Zers, who tend to be more likely than older age groups to value access over ownership and relish having fresh wardrobes. A subscription rental model gives retailers exposure to potential new customers and creates recurring revenues. Rental data and rental customer feedback can also deliver insights into customer preferences, providing insights they can use for product development and marketing. Retailers that have launched subscription rental services recently include Banana Republic, Urban Outfitters, LOFT (owned by Ascena Retail Group), American Eagle Outfitters, Express Inc and IKEA. Nuuly by Urban Outfitters: In July 2019, Urban Outfitters, the parent company of Free People, Anthopologie and Urban Outfitters, announced the launch of Nuuly, an online monthly apparel subscription service offering for women. Nuuly’s subscription offers customers six items per month for $88. On average, a subscriber gets access to $800 worth of merchandise per box. The assortment of products includes a variety of categories such as seasonal outwear, athletic wear, premium denim and dresses from the company’s portfolio, as well as from hundreds of third-party retailers and labels such as Reebok, Fila, Levi’s Wrangler, DL 1961, LoveShackFancy, Alice McCall, Paige Denim and AGOLDE. Customers have a month to return the items in a prepaid, reusable bag. Customers can also purchase items at a discount. Nuuly operates the subscription rental offering via a new, in-house built digital platform and ships from a dedicated center in Philadelphia. [caption id="attachment_101779" align="aligncenter" width="480"] Source: Urban Outfitters[/caption]   AE Style Drop by American Eagle Outfitters: In February 2019, American Eagle Outfitters rolled out a rental subscription service offering called AE Style Drop. Subscribers rent three items for $49.95 a month and can exchange them an unlimited number of times. Shipping and laundry service are included. AE Style Drop also gives customers the option to purchase items at full price. [caption id="attachment_101780" align="aligncenter" width="480"] Source: American Eagle[/caption]   Style Passport by Banana Republic: In September 2019, Banana Republic launched Style Passport, an online subscription service for women’s apparel. Style Passport lets customers rent up to three garments at a time for $85 a month, with the option to purchase. The fee includes unlimited exchanges, returns and shipping. Banana Republic partnered with rental technology specialist firm CaaStle to develop the Style Passport platform and manage fulfillment. Banana Republic plans to add a men’s subscription service in the future. Infinitely LOFT by Loft: In May 2019, Loft launched a size-inclusive clothing rental subscription service called Infinitely LOFT. For a monthly fee of $64.95, customers can rent a box of three garments with unlimited swaps per month. The service offers petite, tall, plus and maternity collections, sized 00 to 26. The subscription fee includes unlimited shipping, returns and complimentary dry-cleaning. Customers can buy items at discount of 50-80% off the retail price. Express Style Trail by Express: In October 2018, Express launched Express Style Trial, a new online clothing rental subscription service that allows customers to rent three items at a time for $69.95 a month with unlimited exchanges. The service requires customers to send all three items back before it sends the next shipment. Customers can also buy items at a discount. Express also collaborated with rental technology and logistics platform company CaaStle to build the Express Style Trial platform. [caption id="attachment_101781" align="aligncenter" width="480"] Source: Express[/caption]   IKEA’s furniture rental subscription service: In April 2019, IKEA announced plans to roll out a subscription-based furniture leasing pilot program in all 30 of its markets by 2020. IKEA is already testing the leasing service in Sweden, the Netherlands, Switzerland and Poland, with the US expected to follow. For a flat monthly fee, IKEA lets customers lease furniture, and return or buy the item at the end of the lease period. Patagonia’s Worn Wear Resale Program: In November 2019, outdoor clothing retailer Patagonia opened its first brick-and-mortar Worn Wear store in Colorado, which features second-hand Patagonia products. The company had already launched an online Worn Wear resale store in September 2017, offering pre-owned Patagonia items and accessories at a discount. Patagonia buys items from customers for cash or credit that can be used in Patagonia retail stores, on Patagonia.com or on WornWear.com. Outdoor gear and sporting goods companies REI and North Face launched similar e-commerce platforms dedicated to second-hand items in 2017 and 2018, respectively. Foot Locker invests in online sneaker reseller platform GOAT: In February 2019, Foot Locker announced it would invest $100 million in GOAT Group, a major player in the secondary sneaker market. Under the partnership, Foot Locker provides GOAT with a number of physical access points in over 3,000 locations in 27 countries, while GOAT strengthens Foot Locker’s digital capabilities.

Potential Challenges Traditional Retailers May Face in Adopting the Subscription or Resale Model

Some of the risks traditional retailers may face in incorporating subscription and resale commerce into their portfolios include: Handling complex logistics and inventory management systems Subscription rental: Operating a subscription rental service is complex. Companies must track inventory availability, inventory location (which products are with which customers) and, where rentals are time-limited, whether returns are late. The model also has a more complex reverse-logistics element. Companies must inspect and launder items, and damaged items need to be replaced. And, retailers need to ensure items offered by subscription are as on-trend as those offered for retail sale. One example of the logistical complexity was when Rent the Runway faced a supply chain crisis in September 2019, with hundreds of customers taking to social media to express their dissatisfaction with delayed orders and poor service. Rent the Runway CEO Jennifer Hyman later explained supply chain problems occurred after the company installed a new inventory system at its New Jersey warehouse. The integration did not go smoothly, creating problems in fulfillment and impacting the number of orders the warehouse could ship each day. Retail resale: The operational aspects of processing, sorting and listing items for resale can be complex, and these are likely to be unfamiliar processes to companies which normally focus on new products. Additionally, the less predictable nature of merchandising and inventory acquisition in the resale model can prove challenging, which means retailers have to sufficiently incentivize customers to return items to build inventory. High churn and customer acquisition costs Subscription-based companies typically see high customer churn rates and, partly as a result, incur high customer acquisition costs. Customers may trial subscription services, but many gravitate back to conventional retail, attracted by its greater flexibility, which lets shoppers buy what they want when they want it. Apparel subscription firms may experience high cancellation rates because subscribers may suffer from buying fatigue, pressured to purchase new clothes due to recurring shipments. This churn can be expensive as companies incur constant customer acquisition costs and growth stagnates once they get past their core customers. Moreover, online-only business models typically incur higher customer acquisition costs: Lacking physical stores that attract passing traffic, digital-focused companies have to spend more on advertising and marketing to get themselves in front of customers than do brick-and-mortar retailers. In the subscription meal kit category, for example, cancellation rates are high because customers often find the subscription expensive once the initial promotional period runs out. A subscription format may also be too inflexible for time-pressed customers whose grocery demands may change at short notice. This, in turn, translates into high marketing and advertising costs as companies offer heavy discounts and free meals to either attract new customers or lure back ex-subscribers. For example, Blue Apron’s marketing/advertising expenses were equal to 17.6% of net revenue in 2018. HelloFresh’s were 25.8%. By comparison, advertising costs accounted for 5.9% of revenues at Amazon and 0.7% at Walmart in the companies’ latest fiscal years. Order fulfillment costs Retailers will increase order fulfillment costs with a rental or subscription service, as they may require new or enlarged distribution centers to support rental and subscription services. Retailers that have traditionally sold through physical stores, where costs are largely fixed, will see an increase in variable costs due to fulfillment and reverse-logistics (returns) costs associated with rentals or subscriptions. Viability and quality issues Rental services are well established in luxury, where clothes are expensive and of superior quality. However, the economics of rental in the mid- and premium markets appear to be less proven. With most players offering unlimited exchanges for a flat fee, along with limits to the number of times a garment can be rented out, the financial viability of the subscription model in these segments can be challenging given the high variable costs associated with garment exchange, outbound and return shipping, laundry service and quality control. And, subscription rental garments must be durable to begin with and retain their integrity even with frequent wear. Cannibalization of existing revenue streams Subscription rental: Adding a subscription rental service could also cannibalize traditional sales if existing customers switch to renting rather than buying from the same retailer.

Online Rental and Resale Platforms Grow Their Physical Footprints

A brick-and-mortar presence is becoming increasingly critical for online rental platforms as traditional retailers enter the rental and resale space. Online platforms are expanding physical networks, opening their own stores and collaborating with—or acquiring—department stores to leverage their huge store footprints. Le Tote acquires Lord & Taylor from HBC: One example is online clothing rental company Le Tote acquiring luxury department store chain Lord & Taylor from Hudson’s Bay Company (HBC) for $100 million in November 2019. The acquisition gives Le Tote control of Lord & Taylor’s 38 stores, delivering a brick-and-mortar presence for the first time. Le Tote said it plans to change the store layout to emphasize its subscription rental format and plans to open “rental studios” in Lord & Taylor stores, where customers can browse Le Tote’s rental inventory, drop off or pick up rentals. Le Tote also plans to merge both companies’ inventory under a single backend system to provide a unified online, in-store, renting and buying experience. Rent the Runway extends its partnership with Nordstrom: In November 2019, Rent the Runway and department store chain Nordstrom announced plans to expand their partnership, under which Nordstrom offers rental drop-off box facilities to Run the Runway members in 24 more stores from the existing five. Rent the Runway members also get various Nordstrom exclusive services, such as styling and gift wrapping. Nordstrom will also contribute inventory to the Rent the Runway ecosystem. Apparel resale marketplace ThredUP partners with Macy’s and JCPenney: In August 2019, Macy’s and JCPenney announced pilot programs with online fashion resale platform ThredUP, featuring second-hand products from the resale site in selected stores across the country. Under the deal, Macy’s will offer a selection of ThredUP merchandise in 30 of its stores and JCPenney will offer it in 40 locations. Macy’s said ThredUP merchandise will likely occupy up to 500 square feet in each store, while JCPenney will provide a larger footprint of 500-1,000 square feet. Online furniture subscription rental company Fernish opens six showrooms: In April 2019 Fernish stepped into brick-and-mortar space by partnering with real estate company Alliance Residential to unveil six showrooms, four in Los Angeles and two in Seattle. Fernish offers brands for subscription such as CB2, Floyd, Campaign, Alder & Tweed and Crate & Barrel. Online beauty subscription service provider Birchbox partners with Walgreens: In November 2019, Birchbox announced it will expand its brick-and-mortar partnership with Walgreens for the holiday season with pop-ups in 500 Walgreens stores in 44 states from November 8 to the end of December. The Birchbox holiday fixtures were positioned at the front of the store in a “grab-and-go” holiday gifts format and includeded items such as Birchbox subscription gift cards, limited edition travel-themed Birchbox Beauty and Birchbox Grooming boxes, travel-size beauty products and an Advent calendar collaboration between Birchbox and Walgreens.

Rental and Resale Online Platforms Get Venture-Capital Support

Venture-capital firms are showing a lot of interest in the rental and resale market, and this year quite a few platforms have raised impressive amounts of funding. Apparel resale online marketplace ThredUP raises $175 million: In August 2019, ThredUP raised some $175 million in a funding round led by Park West Asset Management and Irving Investors, bringing its total venture funding to $306.1 million to date. The company said it will use the capital to build a new resale-as-a-service platform to facilitate second-hand clothing partnerships with traditional retailers. The company will also use the funds for infrastructure expansion and to increase the number of automated distribution centers. Rent the Runway raises $125 million: In March 2019, Rent the Runway raised $125 million in a new funding round led by Franklin Templeton Investments and Bain Capital Ventures, bringing the total the company has raised to $337 million. The company said it will use the capital to rapidly scale up its subscription rental business, broaden its assortment and category offerings and open additional fulfillment centers. Apparel resale platform Depop raises $62 million: In June 2019, peer-to-peer social shopping platform Depop announced it raised $62 million in a new round of funding led by venture capital firm General Atlantic. Additional investors included Balderton Capital, Octopus Ventures, Creandum, Tempocap and Holtzbrinck Ventures. The company said it will use the funds to accelerate customer acquisition in the US and to grow its London-based engineering and data science teams to enhance product recommendation technology and image-based algorithms.

Retailers and Online Rental Companies Expand into Children’s Clothing Subscription Services

As part of a wider strategy to broaden the customer base, retailers and online rental companies are moving into children’s apparel and footwear rental. A children’s clothing rental service could prove more lucrative than adult clothing since children outgrow their clothing regularly and parents may be reluctant to spend a lot for an item for a single special occasion. Nike launches a footwear subscription box service offering for kids: In August 2019, Nike announced its entry into the subscription market with the launch of Nike Adventure Club, targeted at children aged two to 10 years. Offers are available in three tiers: $20 a month for four pairs of sneakers, $30 a month for six pairs and $50 a month for 12 pairs. If the shoes are the wrong size, Nike will provide free exchange within a week of delivery. Once the shoes are ready to be replaced, parents return them to Nike, which either recycles or donates them to families in need. Rent the Runway adds children’s apparel to its portfolio: In April 2019, Rent the Runway announced it would start offering children’s clothing. The new service, known as Rent the Runway Kids, is offered as an extension to its subscription offering, so members can rent four items of either women’s or children’s apparel. The initial launch included sizes for girls aged three to 12 years from designers such as Little Marc Jacobs, Stella McCartney, Fendi, Milly Minis, Marni, Philosophy and LoveShackFancy Kids. The children’s service includes dry cleaning, shipping and insurance, same as the adult offering. Walmart enters the apparel subscription market by teaming up with Kidbox: In April 2019, Walmart announced a partnership with a children’s apparel subscription box company Kidbox. With the Walmart Kidbox service, customers get access to more than 120 children’s brands such as Butter Super Soft, C&C California, Disney, BCBG and Puma. The curated style box includes four to five items, including sweaters, denims and graphic t-shirts for $48, which, according to Walmart, is approximately 50% off the retail price of the bundled items. Parents can order an individual box or schedule up to six automatic shipments per year, to be delivered by season, for back-to-school or a specific holiday. Foot Locker takes a minority stake in Rockets of Awesome: In April 2019, Foot Locker announced it invested $12.5 million in children’s online apparel subscription company Rockets of Awesome. As part of the deal, Rockets of Awesome will begin selling on Foot Locker’s children’s website kidsfootlocker.com and open pop-ups in Foot Locker stores. The investment enables Foot Locker to enhance its children’s category, while expanding its product offering and diversifying its customer base.

Key Insights

• Traditional retailers such as Urban Outfitters, American Eagle, Patagonia and IKEA are moving into the subscription rental and resale market with their own offerings. Retailers such as Foot Locker, Nike and Nordstrom are opting instead to partner with online platforms rather than compete with them, either collaborating with or investing in their businesses.
• However, in incorporating subscription rental and resale offerings into their portfolio, traditional retailers may face challenges, such as cannibalization of existing sales and high customer-acquisition and order-fulfillment costs.
• Online pure-plays are responding by ramping up their brick-and-mortar presence, backed with huge amounts of VC money.
• Both traditional retailers and online platforms are diversifying their customer bases by moving into children’s subscription services.