As rental services rise in popularity, retailers contend with logistical challenges

“Often, it is our preference at Urban Outfitters, Inc. to self-operate any piece of the business we deem critical to the customer experience,” Hayne wrote in an email to Digiday. “While there has been upfront time and investment associated with building these capabilities, we believe we’re now positioned very well to react and evolve to our subscriber’s needs in the future.”

Other retailers that have announced rental services within the past two years, including New York & Company, American Eagle, Express and Ann Taylor, are working with Caastle, a turnkey clothing retail service. Meanwhile, West Elm announced in March that it would start renting goods through Rent the Runway, which allows the home goods retailer to take advantage of Rent the Runway’s name recognition and existing customer base.

According to GlobalData Retail, the clothing rental market was valued at about $1 billion in 2018 and is growing by more than 20% annually, expected to hit $2.5 billion by 2023. Alexis DeSalva, a retail and e-commerce analyst with Mintel, said that her firm’s research has shown that Generation Z shoppers and millennials, in particular, are most interested in rental services. Retailers — particularly mall-bound traditional players — are hoping to cash in. But, tapping into the hot new rental market comes at a cost — retailers have to pay for shipping, delivery and cleaning of the garments once they’re returned, and build out a more complex inventory management system.

“[Rental] is going to require a different strategy and possibly even a different team,” DeSalva said.

To create its rental program, Urban Outfitters is building a new warehouse and fulfillment center in Philadelphia that also comes with laundry and dry cleaning services. The company has also developed custom cloud-based inventory and warehouse management services, and hired data scientists to develop a proprietary recommendation engine. Nuuly, which will be run as a separate entity, also has its own marketing, merchandising and creative teams, which currently consist of several dozen employees.

Caastle meanwhile initially started out as Gwynnie Bee, a plus-sized clothing rental service that launched in 2011. Founder and CEO Christine Hunsicker said it was always her vision to use Gwynnie Bee as a vehicle to create a “B-to-B platform that would power the new economy for apparel” — which she believes is rental.

“We just felt like it was really important that we ran and operated the service ourselves so that we could deeply understand the consumer and so that we could build out the right technology and infrastructure to support other players,” Hunsicker said.

In 2017, Hunsicker took on Ann Taylor and New York & Company as her first two pilot clients, and then officially launched Caastle in 2018. Caastle manages the front-end website and mobile app experience for the retailers, as all of the brands that work with Caastle operate their rental services under different domain names than their main websites (American Eagle’s rental service is called American Eagle Style Drop, while Ann Taylor’s is called Infinite Style by Ann Taylor). Caastle also picks, packs and ships items from its own distribution centers, and cleans the items once they are returned, handles customers service, and gives brands access to algorithm and analytics tools Caastle has developed.

Hunsicker said that across the nine companies that Caastle currently manages rental services for, roughly 50% of the customers who use their rental services are new customers for that particular brand. And, among the current brand customers who use the rental services, companies are seeing an average increased spend of 150%. She said that Caastle develops a custom pricing model for each company that it works with, but that aims to give the retailer a 25% operating margin.

Chad Kessler, global brand president for American Eagle, said that interest in AE Style Drop has been “well above our expectations,” but declined to provide specifics. American Eagle is currently in the middle of a 12-month pilot with Caastle.

Both Hayne and Hunsicker also said that sharing data with brand partners is an important part of their respective services’ value propositions. Hayne said that Nuuly will share “aggregate non-personal information on details such as sizing preferences, product ratings, product durability and purchase information, and that “our goal with Nuuly is to be a partner to help the brands we work with grow their businesses.” Meanwhile, Hunsicker said that, given that Caastle is a white-label service, the companies they work with get access to all customer data. Still, at the end of the day, Caastle’s customers are relying on a third-party partner, not building an in-house operation like Nuuly that will own all of the customer data for its brand and others.

“I think that’s a fundamentally different approach than what people see when they work with Amazon or potentially any of the other aggregated rental services like a Rent the Runway or a LeTote,” Hunsicker said. “This is really about strengthening the brand’s relationship with the consumer.”

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