Clothing retailers turn to rentals to lure customers

Renting clothes could be the future of fashion — or it could just be a fad.

But traditional retailers can no longer afford to wait on the sidelines to find out. That's why a growing number are now offering customers the option to rent clothes for a monthly fee instead of buying them. Bloomingdale's, Banana Republic and Urban Outfitters are the latest to offer the services. Even footwear chain Designer Brands says it’s considering launching a rental service for shoes.

Now a booming $1 billion business, the clothing rental sector is expected to reach $2.5 billion by 2023, according to research firm GlobalData. When combined with resale, it will account for 13% of the total $360 billion U.S. clothing market within the decade, up from 7.3% today.

Clothing rentals are one more piece of the sharing economy, where customers — particularly those in their 20s and 30s — are less interested in owning or making big investments but still want access to different brands and services, says Steve Barr, consumer markets leader at PwC.

"You no longer have to buy into the myth of continuous consumption and that there’s pride in wearing something as opposed to pride in owning something,” said Jennifer Hyman, CEO and co-founder of Rent the Runway, which in 2009 pioneered the business model that many retailers are now trying to replicate.

Several clothing retailers have already gotten into the secondhand business — another popular trend in the sharing economy led by companies like The Real Real and ThredUp.

J.C. Penney and Macy's, for instance, have partnered with ThredUp to sell gently-worn clothes in a couple dozen locations. Nordstrom is testing resale at its women's flagship store in Manhattan and online.

Many in the industry consider these necessary steps as clothing retailers watch their fortunes erode. Last year, clothing retailers accounted for an outsized share of retail bankruptcies, according to a recent report by consulting firm AlixPartners.

Christine Hunsicker, CEO and founder of CaaStle, a startup that manages inventory and shipping for retailers, says rental services have anywhere from a 20% to 25% operating profit compared with only 5% for traditional retailers. Last year, Hunsicker's retail clients saw total spending for both renting and buying increase twofold on average for each customer.

But unlike Rent the Runway, a dedicated rental service for high-end designer clothing, the economics for traditional retailers — from marketing to dry cleaning and shipping, on top of running their normal day-to-day operations — pose significant challenges.

Some experts wonder whether it even makes sense for lower-priced clothing chains to get into the rental business since customers could just buy the clothes used, or get them at a deep discount. Also, the clothes may not hold up well after multiple wears, says Rod Sides of Deloitte LLP.

Elizabeth Kashin, 53, of Indianapolis, says she tried Urban Outfitter's Nuuly rental service last month. She never received her package of six items but was charged anyway. After contacting customer service via social media, she got another package but said the clothes didn't look clean.

“I can go to a secondhand store to get a better experience," she said.

Retailers also face the same challenges that still dog Rent the Runway. Consumers complain about spotty customer service and a slew of added fees.

There is also the issue of too few locations to return rented items. Retail expert Melissa Gonzalez says retailers should have kiosks in their stores in key cities but right now, most shoppers must drop off their garment bags at a UPS or the post office. Rent the Runway has five stores and nearly 50 drop-off locations.

Rent the Runway has had to adapt to an increasingly demanding customer. It started out with special occasion dresses but its customers now rent on average more than 120 days per year.
 

Vara Pikor, an insurance broker from Manhattan who's been using Rent the Runway for many of her clothing needs, says she is hooked. “This could be my forever habit," Pikor, 26, she said. “I have less stuff in my home.”

Rent the Runway's long-term prospects are still unknown. The company plans to go public but there is no clear timetable. In 2016, it announced that it was profitable but a spokeswoman declined to comment on whether that remains true today.

Nonetheless, retailers continue to follow its lead and hope to end up in a better place.