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Mall Brands Are Entering the Rental Market. Can the Model Work?

Retailers including Ann Taylor and Express are testing monthly subscription services as a complement to their sales model. Is the mass consumer ready for the rental model?
Express styles included in its rental service | Source: Courtesy
By
  • Cathaleen Chen
BoF PROFESSIONAL

NEW YORK CITY, United States — Mall brands struggling to entice customers into their stores are trying a new tactic: online rental services that bring the in-store experience to their homes.

This week, Express Inc., the mall retailer known for its affordable going-out apparel for women in their 20s, unveiled a monthly subscription rental service dubbed “Style Trial.” For $69.95, shoppers can rent three pieces at a time, delivered to their doors, for up to 12 total garments. Express joins Ann Taylor — under parent company Ascena Retail Group — and New York & Company, which also launched rental platforms this year with monthly fees of $95 and $49.95, respectively.

They're taking a page from Rent the Runway, the nine-year-old startup which loans out an assortment of contemporary brands. One key difference between the new crop of rental services and Rent the Runway: while plenty of women are willing to pay a monthly fee to borrow $900 Proenza Schouler tops and $2,000 Marni dresses, it's less clear if they'll do the same for a $30 halter top.

If it works, the rental model could help solve a litany of problems faced by affordable clothing chains, from declining mall traffic to an endless cycle of discounts required to move unsold clothes at the end of each season. Rental services are a way to hook customers even if they never set foot in a store, and can serve as a low-cost way to generate revenue off of excess inventory.

Because they're not doing anything new, the operating profit on this model is very high. Essentially, we're using the current assets they have to work harder.

According to Allied Market Research, the online clothing rental market is slated to reach over $1.8 billion by 2023. Compared to the trillion-dollar total fashion retail market, rental will likely remain just a sliver of the industry in the immediate future. But that hasn't stopped the likes of Rent the Runway and resale services from challenging the paradigm of ownership in fashion. Handbag resale shop Rebag, for instance, will introduce next week "Rebag Infinity," a program that allows shoppers to purchase a bag, carry it for up to six months and exchange it for store credit worth at least 70 percent of its original price. This allows users to put the credit toward a new bag, and the cycle begins again.

“Everybody has extra inventory… and it takes very little inventory in order to make [rental] work,” said Christine Hunsicker, chief executive of CaaStle, the third-party rental platform that handles logistics and operations for Ann Taylor, Express and New York & Company. “Because they’re not doing anything new, the operating profit on this model is very high. Essentially, we’re using the current assets they have to work harder.”

CaaStle’s first subscription service was its own creation: Gwynnie Bee, a women’s rental line that offers extended sizing, which launched in 2012. The company began courting retailers in 2017 and is now working with three active clients, with two more launching by the end of the year.

Through the CaaStle-powered rental websites, customers can sign up for the service and pick out their first selection of three items. Once they receive the items, they can keep them for as long as they’d like, or return them to be able to make another selection online.

CaaStle handles everything in the back end, from managing inventory to shipping and cleaning.

The company says that about half the customers signing up for the new rental services hadn't shopped with the brands before, easing fears of cannibalisation. The model so far delivers an operating margin of between 25 percent to 45 percent, whereas the average operating margin for a retail business is in the single digits. (The current operating margin for Nordstrom — owner of subscription service Trunk Club — is 6 percent.) Rental customers are also buying more: according to Ann Taylor president Julie Rosen, 50 percent of rental users end up buying products.

Ann Taylor's Infinite Style packaging | Source: Courtesy

“At the beginning, we weren’t sure what the reception would be,” Rosen said. “But nearly half of our users are brand new, and it’s also been a tool for clients to rediscover the brand, so it’s a win-win over all.” Ann Taylor plans to extend the service in terms of variety and breadth of inventory, she added.

But some are sceptical that rental is suitable for every retail business. While the model itself follows the zeitgeist, where consumers stream music on Spotify rather than buying tracks on iTunes, or subscribe to Netflix instead of purchasing DVDs, the long-term success of a rental program depends on retaining customers once the novelty wears off. Otherwise, the cost of acquiring new members can spiral out of control. Meal kit subscription services have struggled to convince customers to renew after the first few boxes. Earlier this week, Stitch Fix shares plunged nearly 40 percent after the company said it added fewer customers than analysts had anticipated.

“When it comes to fashion, there’s a question of economics,” said Joseph Sartre, a partner at Bleu Capital, a retail-focused venture capital fund. “Can you build a community strong enough so you can keep a customer for more than just one cycle?”

Ann Taylor, New York & Company and Express became known in the 1990s and 2000s as affordable choices for young working women but have since struggled to compete with fast fashion and newer, digital brands. Like many retailers, they began offering steep discounts. Promotions are still frequent today. Express, in fact, has a 40 percent off everything sale as of Thursday — one day after its Style Trial Launch.

A rental service is a low-risk way to mitigate some of these problems. Express won’t have to change its supply chain, and beyond profits, the company will benefit from a new source of customer data, according to Jim Hilt, Express’ chief customer experience officer and executive vice president.

“The subscription model right now is about how do we engage with more people in fashion and what we’re going to learn from that,” he said. “[Rental] is a growing piece of the market but we don’t necessarily see it as a replacement of the core retail product. It’s definitely a complement to it.”

There's also the question of whether women will rent clothes they already view as affordable — or whether apparel made from cheaper fabric can withstand the wear-and-tear of repeat shipping and frequent washing.

“I understand Ann Taylor, but I don’t get [rental] as much with Express,” said Gabriella Santaniello, founder of retail consultancy A Line Partners. “I have a hard time seeing that their customer would rent when most of the time there’s a promotion for buy one, get one $19.95.”

Rental makes more sense for “higher-end, more quality merchandising,” she added. “With Express, the quality isn’t there, the fabric isn’t there.”

Hilt said this is a good time to launch a rental service because a new fashion silhouette featuring wider legs and oversized jackets is emerging, prompting consumers to experiment with their wardrobes. "The Style Trial program enables women who see the change in trends and not immediately buy into it," he added.

Editor's Note: This article was revised on 5 October, 2018. A previous version of this article misstated that Rebag Infinity was introduced earlier this week. This is incorrect. Rebag Infinity will launch next week. 

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