Technology – What to know about “clothing as a service”

By guest author Maghan McDowell from Vogue Business

Key takeaways:

  • Clothing as a service is a distribution model in which clothing and accessories are provided to customers on a temporary basis, often through rental or subscription.
  • The best products are those that a woman can wear to work and are priced to create a perception of value and utility.
  • Rental models are a way to avoid seasonal markdowns, as high-quality inventory stays in rotation and builds with time.
All captions courtesy by Vogue Business

Like streaming movies and music, clothes are now being treated like a utility to which one can subscribe.

Referred to as “clothing as a service” (a play on “software as a service”), CaaS refers to a distribution model in which clothing and accessories are provided to customers on a temporary basis, often through rental or subscription. Rent the Runway is the clear legacy player, having established a market in the US with short-term formalwear rentals in 2009. It has since been joined by Trunk Club, Le Tote and Nuuly in the US, YCloset in China, and dozens of other upstarts across the world. Traditional brands have also recently tacked on rental offerings, including Bloomingdale’s, Ann Taylor, Express, Banana Republic and Levi’s.

CaaS puts brands in the role of a service provider, in which technology and logistics are often the key differentiating factor. In addition to separate inventory and marketing, CaaS requires reverse logistics infrastructure, technology that can anticipate inventory patterns, and a system for cleaning and repairing garments.

“More than anything, we are an operations business,” says David Hayne, the chief digital officer of Urban Outfitters parent company URBN and president of Nuuly, its four-month-old women’s clothing rental business. “We are in the business of making sure that the exact six items that the customer wants are what she receives and that she receives them in excellent condition and she’s happy with the experience. If we fail in any of those points, it’s an operations failure.”

But it can be worth it. In a September research note, Cowen senior analyst Oliver Chen estimated that rental and subscriptions are now a USD 5 billion market globally and growing at a compound annual rate of up to 15 %. Although rental is still relatively nascent, Cowen says it is seeing a consumer shift from ownership to access and found that brands that adopted a rental model saw higher engagement, new customer acquisition and expanded wallet share among rental customers.

In 2012, Christine Hunsicker anticipated this shift in consumer behaviour — and the need for brands to have a plug-and-play technology to implement it. She created rental business Gwynnie Bee as a device to test the model. This technology was adapted for CaaStle in 2018, which lets brands white-label its logistics to implement a rental offering (Express, Banana Republic and Ann Taylor are clients). Her data has shown what she anecdotally expected: Clients experience a 125 to 175 per cent spend increase year-over-year among active customers, and an approximate 25 per cent operating margin within their rental businesses. She says that rather than cannibalise an existing business, it can strengthen it.

Here is what to know about offering clothing as a service.

Offer the right product

Hunsicker has found that the average rental customer is a working woman aged 25 to 55 who rents 70 % of items for work. (There are not many clothing rental options for men.)

“It’s not just that she likes the photo or the aesthetic, but out of what she gets in her box, how many of those pieces will she actually walk out of the house in?” Hunsicker says. “If she is wearing the majority of the clothing she’s getting, it reinforces the value and becomes an actual utility that she can count on.”

Although it requires a shift in strategy, Hunsicker thinks that legacy brands have an advantage over start-ups due to existing market awareness and inventory production. Luxury is “a different beast”, she adds, because it “trades in scarcity. If you make the product widely available, it loses some of its cache”.

Determine the distribution model(s)

Brands can offer clothing rentals through a multi-brand offering like Rent the Runway, a service like CaaStle or by building a model independently. It can also do a combination.

Vince CEO Brendan Hoffman says that the brand added Vince Unfold last year after seeing the success of the brand’s products on Rent the Runway. The service costs USD 160 monthly for four pieces at a time. Adding its own service allowed more breadth and depth in the assortment — something he compares to being in Nordstrom and having a standalone store. Vince worked with CaaStle, which charges a fee based on the number of subscribers because Vince did not want to take on the operations and logistics.

Nuuly, Hayne says, developed proprietary operations, which involved hiring a team of 20 engineers. It was the option with the most long-term flexibility and gave more control over details like customer service, he explains. The service became available to customers in July and is USD 88 for one six-item box monthly. Although Hayne did not disclose the cost to launch Nuuly, Hunsicker estimates that building a “feature-rich” model like this from scratch would require USD 100 million.

Adding in a rental capability on top of an existing system, even if it is flexible, requires significant technical investment, says Donny Salazar, a former retail COO who founded fulfilment technology company MasonHub, Inc. “Your system would have to track unit level inventory and condition of the product, which most systems are not set up to do. Brands are starting to understand that logistics can be a key strategic advantage, but fulfilment partners are struggling to keep up with the necessary innovations to support existing channels as well as the new ones.” He recommends that brands think long-term when establishing a partnership. “Brands think of what they want now, not, ‘Where do I want to be in five years?’”

Price for value

The most important element of a successful CaaS model is setting the monthly fee at a price that feels like great value, Hunsicker says. American Eagle and New York & Company, which offer three items at a time for USD 50 per month, are on the lower end. Bloomingdale’s costs USD 149 for four, and Rent the Runway (which offers brands like Adam Lippes and Paco Rabanne), is USD 159 for four.

She adds that rental models are a way to alleviate inventory risk without having to discount. “One pushback we have gotten is that brands think rental will damage brand perception, but what damages brand perception is selling clothes on markdown,” she says.

Hoffman, of Vince, says there is no need to mark down products after 12 weeks — as in the traditional fashion format — with Vince Unfold. “The customer is less discerning if a piece she likes is from last year because she’s going to wear it once or twice. The inventory builds from season to season,” he says. Instead, a product is priced based on how many times it’s been rented and how long it has been available.

Be conscious of customer messaging

Hunsicker says that the biggest challenge for CaaStle’s clients is knowing which customers to message, and how often — specifically, which segment is best suited to a rental offering, without overwhelming existing clients. Hoffman says that there is little overlap between existing Vince customers and rental customers, but the hope is that rental will bring in a younger audience. Vince will soon start testing cross-promotion of Vince Unfold in outlet stores.

“The natural insecurities we have when we try something is that it’s going to cannibalise the mothership,” he says. “Certainly we were fearful of that. But, I was early days running NeimanMarcus.com in the 2000s, and that was the fear then, too. We realised that the more channels we can get a customer to shop in, the exponentially more share of wallet we were going to get. I think there is a lot of the same characteristics here too.”

Brands should consider CaaS “a loyalty play”, Hunsicker adds. For CaaStle’s mid-market brand clients, 30 to 50 % of new or lapsed customers join their rental programs, while contemporary brands see 90 % new or lapsed customers join. “This creates incredible engagement. She will wear over 100 pieces of your clothing every year and may put 250 pieces in her virtual closet in a year. You can’t get that kind of data and engagement in a transactional world.”

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