In early February 2020, Jennifer Hyman, co-founder and CEO of Rent The Runway, was in construction mode.
Its fashionable subscription business, which for $ 160 per month allowed customers to borrow hundreds of thousands of designer items such as Hugo Boss blazers, Marc Jacobs mini bags and Saint sunglasses. Laurent, was increasing at more than 100% per year. To fuel the growth, Hyman was busy making deals with designers to bring more user-friendly looks and clothing categories to her style-hungry clientele.
Meanwhile, on the more gritty, more complex side of the business, it envisioned building an expensive third distribution facility to take the strain off its two huge hubs in Dallas, Texas, and Secaucus, NJ which were receiving, cleaning, and repairing a parade of used clothes (Rent The Runway operates the world’s largest dry cleaner) before they are quickly packed and reshipped.
At the same time, she was also putting the finishing touches on a new loft-chic headquarters in the trendy DUMBO neighborhood of Brooklyn, which was due to open in the spring. “We were just focusing on growth,” says 40-year-old Hyman. “To grow our subscribers, broaden our apparel selection and accelerate the way we work with brands who see us as their most important acquisition and data partner.”
Covid was also on its radar, but as a possible inventory puzzle rather than a pandemic disrupting the world. As March approached, he was worried about a slowdown in the number of new customers. Then, on March 8, the United States began to shut down. Overnight, Americans found themselves fully clothed with nowhere to go.
Hyman’s clients fled. Its special events division, which rented dresses from Marchesa, Ralph Lauren and Veronica Beard for weddings and galas, has shut down. Subscribers, many of whom used the service to dress for work and now accounted for around 75% of Rent The Runway’s business, have canceled or suspended their accounts en masse. In May, only 30% were still active.
His ragged company, Hyman cut costs (layoffs, time off, pay cuts), raised capital, negotiated revenue-sharing deals with brands, overhauled pricing models, and further automated its facilities. “It was important to anchor the team in the reality of the situation, but also to inspire them with a larger vision,” explains Hyman. “We weren’t going to ruin 2020. The pandemic has been terrible, but also a time of creation and creativity.”
Thanks to some difficult pandemic pivots, Rent The Runway is now ready to take off in the world of reopening. Hyman says subscribers are up nearly 100% from lows in May 2020. While the company does not share the number of subscribers or sales, the jump would place the subscription service at around 60% of pre-Covid levels, as most office workers stay home and major markets like New York and California have just opened. “The recovery is happening much sooner and is much steeper than we ever imagined,” Hyman said. “Nobody wants to wear what they wore in 2020.”
We weren’t going to let 2020 go to waste. The pandemic was terrible, but also a time of creation and creativity.
New subscribers are now joining at the same rate as before the pandemic. And they’re coming from new areas like Iowa, Ohio, and the southern states including Tennessee, Arkansas, and the Carolinas. “We have a much more diverse set of people signing up,” Hyman said, adding that Rent The Runway has suspended all paid ads since 2020. “And they have a diverse set of use cases and a diverse set. of reasons they are coming. ”
The company regularly asks users to fill out surveys and finds that customers, who previously used the service for business events and milestone celebrations, are renting for birthdays, picnics and brunches at a rate of two. times higher than 2019. Vacation rentals have increased three times the covid level. “90% of our growth has been organic – it’s based on word of mouth,” says Hyman. “This is growth that we are not paying for.”
With business stabilized, Hyman is back in the growth frame of mind. In May, she added leading actor and Goop founder Gwyneth Paltrow to her board of directors. “Watching Jenn transform this idea into a game-changing company, even through the challenges of Covid, further strengthened my admiration for her vision and execution,” Paltrow said via email. “I am delighted to join the Board of Directors at such a dynamic time for the company and to help Jenn bring RTR into its next phase.” The company is currently recruiting to fill approximately 70 new positions. There is also speculation that Rent The Runway could go public towards the end of 2021.
With many uncertainties and challenges ahead, the Roller Coaster Year of Rent The Runway offers crucial lessons about the power of quick and painful decisions, the importance of agile strategic change, and the fickle and unpredictable nature of the business. client psychology. “Customers want to live their lives more freely and on the go,” explains Hyman. “They dress in the optimistic, joyful and festive clothes of everyday life. ”
The recovery is happening much earlier and is much steeper than we ever imagined … No one wants to wear what they wore in 2020.
Data drives Rent The Runway as much as fashion trends. In early March, figures showed Covid was significantly undermining customer demand. To avoid paying cash up front for inventory that could go unused in warehouses, Hyman quickly adopted a consignment model with many of its 700+ brands. Designers received money every time their items were rented. “We expected other big buyers to cancel orders. We thought we were real partners, going through this together and sharing the success,” Hyman said. “We said ‘we don’t know what’s going to happen in the next few months, but if we partner on it, we can monetize the inventory until 2021 or 2022.'”
Other movements were more painful. With the collapse in demand, Hyman laid off 15% of the company. Another 30% were granted three months’ leave (many were recalled earlier). The company also instituted a three-month pay cut across the board and suspended advertising for the remainder of the year.
Find a lifeline
Hyman had to make sure Rent The Runway survived the pandemic shutdown, however long. Since its launch in 2009, the company had raised some $ 340 million in venture capital from Bain Capital, Franklin Templeton, Fidelity and Temasek. After months of pitching, Hyman raised $ 100 million in equity and debt led by Ares Management to a value of $ 750 million. This was a twenty-five percent discount from the company’s $ 1 billion valuation. Still, Hyman found the conditions favorable and, more importantly, they provided the cash cushion needed to weather the downturn.
Embrace the Covid Disruption
As the old saying goes, necessity is the mother of invention. Covid threatened Rent The Runway’s life, but also created a unique pause in operations that allowed the company to make technology upgrades and strategic changes that would have been impossible under the demands of the status quo. Hyman says, “Looking at it from a positive perspective, we would never have had the opportunity to make the kind of process changes to our operations in a period of continued rocket growth. “
In March, Hyman changed their subscription model. Gone is the unlimited plan that allowed customers to exchange as many items as they wanted for $ 159 per month. In its place, there were plans starting at $ 99 that give you the ability to rent between eight and sixteen products per month. The lower rates have unlocked a new customer segment. “The programs have more price diversity, and we are attracting more diverse household income into Rent the Runway,” Hyman said. “We’re seeing a greater diversity of customers and more loyalty from our subscribers than we were if you compare to 2019.”
The change also reduced customer churn and increased margins. “It was an example of a change that is going to be strategically better for us because it could attract a larger customer base,” Hyman said. “And also financially better for us because these are higher gross margin programs.”
In another sideline move, Hyman took advantage of the shutdown in demand to update and further automate its existing distribution centers in New Jersey and Texas. While most ecommerce businesses dread returns, Rent The Runway, the retail boomerang, is counting on them. Like any rental business, Rent The Runway’s success hinges on maximizing the number of times it can loan out a dress, jacket, and pair of jeans.
Over the past decade, the company has used big data and trial and error to create over 50 separate cleaning programs to clean specific types of fabrics and stains. During the 2020 downturn, Hyman invested in AI, radio ID tags, and robots to sort, clean, and ship clothes more efficiently. With upgrades, Rent The Runway can avoid opening the third hub while still allowing for future growth. “Based on the process changes, our current two facilities can handle quadruple our maximum number of subscribers in 2019,” Hyman said. “This allows the business to grow significantly, and we have increased our execution margin by 20 percentage points.”
Ready for recovery
Upgrading facilities also allows Rent The Runway to enter the growing used goods market. Used clothing sites have surged in the past year as Covid has made many customers more spend and sustainability conscious. In February 2021, Poshmark, a digital consignment store, went public and currently has a valuation of close to $ 4 billion. Rival Thread Up went public in May and has a market cap of over $ 2 billion.
Rent The Runway has always allowed subscribers to buy second-hand clothes, but it opened the program to everyone in June. This is a strategy to both increase revenue and attract high value future subscribers. “Coming out of Covid, the second-hand economy is dominant – people want to rent, buy or subscribe to second-hand clothes,” says Hyman. “Selling designer items attracts a more laid back customer to Rent the Runway. Then it’s our job to educate them on how a trendy subscription can be transformative.