L.E.K. Consulting Report Addresses Whether Clothing Brands Can Improve Customer Acquisition and Monetize Inventory by Renting Out Clothes
Boston (May 3, 2021) – While the sharing economy may have no bounds, certain industries may seem less, rather than more, adaptable to it. This question applies to apparel brands: As normal life creeps back from the pandemic, people may be refocusing on their wardrobes, and with new sensibilities.
Rent the Runway, founded in 2009, proved there’s a market for rented designer clothes. But the question remains whether it’s a worthwhile business for apparel brands themselves, especially as direct to consumer (DTC) selling increases in focus, according to the new L.E.K. Consulting Report, “Should Rental Be a Part of Your Apparel Brand’s DTC Strategy?”
“Rental may not be an intuitive strategy for apparel brands, but a convergence of trends — including online shopping, peer-to-peer secondhand marketplaces and broader consumer and corporate demand for sustainability and re-use ethos —is prompting many to contemplate the channel,” said report coauthor Chris Randall, Managing Director at L.E.K.
L.E.K. Managing Director Jon Weber and coauthor said, “Our research shows that a rental model can make sense, and be profitable, for some brands, and that there are ways to mitigate the complexities, risks and logistical challenges of a launch.” “Many of the potential benefits center around improved inventory monetization and customer acquisition,” Randall said.
Consumer trends, as the report points out, are pointing in the direction of apparel rental. First, there is the rising popularity of “re-commerce,” or secondhand trading platforms, including fashion marketplaces like Poshmark, thredUp and The RealReal. A survey by Bank of America Global Research reports that younger consumers — 51% of Gen Z and 53% of Millennials — are open or likely to use a clothing rental platform, compared with only 32% of Gen X and 14% of Baby Boomers.
There can be significant margin and revenue benefits to brands’ having rental businesses. For instance, rental strategies can further inventory monetization, the report says. If a garment with a retail price of, say, $100 is available through a service where subscribers can borrow up to three garments per month, and if there is 50% utilization under a $95-per-month subscription plan, the piece of clothing would yield $192 in revenue over the course of a year.
Another example: If a brand has a “try before you buy” option that allows customers to purchase the same garment for 65% off the retail price after they’ve rented it, and if the garment sells after just a few months of renting, the company will realize the full retail price or more.
The report also explains that a rental strategy can drive customer acquisition, rather than cannibalize sales. About half of all current rental service members are new or re-activated lapsed customers, and — due to the rental model’s novelty — online consumers are more likely to click on a rental ad than a traditional ad leading to higher sales in both channels.
And there is greater engagement in rental relationships with consumers; they habitually come back to check the next release of styles. For instance, a mall brand with a 40% year-over-year retention rate among retail customers saw retention climb to 73% among rental members.
Setting up a rental program, however, involves complexity. It entails developing a new customer interface and working out the logistics of shipping, returns and cleaning, according to the report. And then there is the question of managing inventory, including the retirement of pieces.
An answer to the challenges could be engaging a white-label, behind-the-scenes managed service provider. They can do everything from helping to design the program and website to running distribution centers, handling shipping, receiving and cleaning at scale. This kind of turnkey solution can help keep risk and investment to a minimum, according to the report.
“A rental offering can provide an opportunity to meet consumer needs in a new way — albeit one with its own set of considerations — so many brands pursuing direct-to-consumer strategies may want to try a rental model on for size,” said Randall.
About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public-sector organizations, private equity firms, and emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,600 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.