Introduction
This warehouse is on the outskirts of Philadelphia. How are you? A never-ending supply of clothes More than a million pieces fill the 310,000-square-foot space. It might be obvious from looking at this view, but we’re pretty much at max capacity right now.
It’s all part of Nuuly, an apparel rental service launched by Urbn, or Urban Outfitters, Inc., in May of 2019. For $98 per month, Nuuly users can pick and rent six pieces valued at an average of $800 per box.
The burden of shipping, cleaning, and repairs is placed on Nuuly. Between all its brands, the company brought in $4.8 billion in net sales in 2022. Analysts predict that Nuuly will add at least $1 billion in value to its parent company over the next 3 to 5 years.
In 2019, they launched with $0 in revenue. This is going to be one of the fastest kinds of concepts to break even profitability that we’ve ever seen.
Walking around the floor with the leadership team, there’s been a lot of eyes open about wow, this has grown quite quickly, and a little bit of amazement about how we’ve been able to keep it going.
The rental industry is expected to represent 3% of the total retail market by 2030. Recommerce or secondhand sales will likely represent 12%.
Some analysts forecast that the size of the global apparel and footwear market will reach 3.3 trillion USD by 2030. Gen Z and millennials are driving support for circular business models.
15% say they’re willing to try renting, and 48% are willing to buy secondhand. From August 2022 to August 2023, Nuuly’s revenue almost doubled. We didn’t approach this like a test.
We built this giant building, and I think this wasn’t like a pet strategy project. It was going all in on a new business.
The sharing economy
While clothing rental is not a new idea, it is an emerging market that’s seen an uptick in recent years. Companies like Express, Vince Camuto, and Banana Republic all launched rental platforms in 2018 and 2019.
Rent the Runway, the biggest independent rental platform, went public in October 2021 at a $1.7 billion valuation. It was named to the CNBC disruptor list five times, the last time in 2019.
Whenever there’s a hot new topic or an idea, everybody wants to test it. You name the vertical brand, and they very likely have some variation on a rental service.
With an increasingly climate-conscious population that still cares about fashion, renting could be the sharing economy’s new frontier. While the data varies greatly depending on several factors, most agree that the potential is great.
One report predicts the global clothing rental market could hit $7.5 billion, nearly double where it stands in 2023. Another study by McKinsey & Company expects the circular business model to reach $2.
1 billion by 2025. Millennial Gen Z and Gen Alpha: what do they want? They want everything of their choosing at their doorstep. Those who are kind of, you know, offering this rental avenue are looking forward to a decade.
This very well could be the beginning of the next big genre of servicing the customer. So in 2019, Dave and Kim tossed their hats in the ring. In the mid-20th century, there was a lot of interest in sustainability, and there was a lot of interest in circularity.
We knew that we had an opportunity to get into that space. It was just a matter of how to do it well and to do it right. Dave is the son of Urbn founder Richard Hayne, and he worked with the company for 18 years before founding Nuuly.
The company wouldn’t disclose its initial investment but said the total amount is well over $100 million. Leaders like Dave and Kim decided the service shouldn’t follow the existing blueprint for one, building a business that includes, but is not limited to, Urbn brands Urban Outfitters, Free People, and Anthropologie.
It was very obvious to us quickly that that didn’t exactly make a lot of sense, because the one thing people want to do when they’re renting is have a broad variety of choices.
Secondly, Nuuly featured day-to-day options in contrast to competitor Rent the Runway, who initially focused on occasionwear.
From our beginning days, our mission was to be there for customers every day of the week, from fancy to casual work events—anything that they had going on in their lives.
The service has already seen massive growth, with Nuuly now counting eight times more subscribers in October 2023 than in its first year.
Some industry experts have called Nuuly a case study of what happens when a company goes all in on rental. We made a concerted investment in this business at the outset.
We didn’t kind of dabble in the program. We didn’t experiment with it. We built the platform ourselves. We specifically invested in a unique team that was focused entirely on the success of the business.
Rent the Runway, established ten years before Nuuly, had about 137,000 active subscribers in the second quarter of 2023, almost 50,000 less than Nuuly.
Nuuly saw an 85% increase in subscribers from July 2022 to July 2023. Rent on the runways only grew by 11% in the same time period. Nuuly predicts it will be profitable in 2023, in the third or fourth quarter.
I think the possibilities are really endless, but we just have so much market left to address in the space that we’re currently in. Nuuly is opening a $60 million distribution center in Kansas City, Missouri, in Q1 2024.
We believe the growth is there, and we’re excited to fill a second building. By the end of this year,
It’s arguable that there’ll be north of $200 million in revenue, rivaling their own in-house wholesale business, which accounts for about 5% of total sales. And that wholesale business has been around for well over a decade.
Nuuly’s potential
McKinsey & Company found that 63% of consumers factor in the way a brand promotes sustainability when considering a purchase. It’s important to us.
Anywhere there’s an opportunity to do something smartly, we try to do it smartly. In 2019, research showed that consumers, on average, bought 60% more clothing than they did 15 years ago but only kept those items for half as long.
Fast fashion’s increasing contribution to the global total of greenhouse emissions is somewhere between 2 and 8% and has been described as an environmental and social emergency.
Analysts say rental recommerce repair and refurbishment could help the fashion industry cut about 143 million metric tons of greenhouse gas emissions by 2030.
But Newley’s commitment is not only good for the planet; it’s also good for business. The longer an item can stay in circulation for us, the better it is for our economics and the financials of the business.
Recommerce can extend the average product life by 1.7 times, rental by 1.8 times, and repairs a little less by 1.35 times. In Nuuly’s, warehouse workers recycle laundry chemicals, repair items, and ship orders with reusable boxes.
They also get rid of a lot of cardboard waste. So we don’t have to; we’re not just dumping cardboard into landfills. Nuuly also launched Nuuly Thrift, a resale marketplace, in October of 2021.
It takes a 20% commission on all sales. That latest offering sets Urbn apart as a sort of trifecta of retail rental and resale. The 2020 COVID-19 pandemic permanently changed how and what consumers bought.
The casualization of the workforce is tremendously different than it was circa 2019 before this all happened. It was almost like I’ll still have a certain portion of my entire wardrobe that’s going to be generally casual.
10% of my life is just going to be that way, sort of permanently. Nuuly took off less than a year before the world shut down and didn’t walk away unscathed.
The pandemic was a weird time. We had been growing nicely up to that point. I think we had around 25 or 30,000 subscribers, right? As the pandemic kind of hit in the next 3 or 4 weeks, we lost a good half of our subscriber base.
Women just didn’t need to rent. Despite these losses, Nuuly didn’t fail, helped in part by the backing of its multi-billion-dollar parent company, which continued to invest rather than pull the plug. We believed in the concept.
Leadership across Urbn believed in the concept; our board believed in the concept, and we were able to ride it out. Dave’s father, Dick Hayne, has been known to be more risk-averse, so the company’s decision to take a risk with Newley is notable.
They don’t spend foolishly. They don’t make investments, sort of, that haven’t been studied in terms of the return on that invested capital. They never took down debt during the period of the pandemic when people needed debt to just get through, but
Overall, the rental sector struggled. Le Tote filed for bankruptcy in 2020, citing complications from the pandemic, though it was later acquired by Sadia Group for $12 million.
Loft’s, Bloomingdales, and Diane von Furstenberg’s rental platforms all shut down. Rent the Runway reported a net loss of $171 million, and its active subscriber count fell almost 60% to about 55,000in 2020, while the company bounced back and went public in October 2021.
It backfired when Wall Street quickly turned on it. We’ve been focused on building a long-term business, and we continue to execute against that strategy.
One of the major components of our path to profitability is capital light acquisition models for our rental product, our inventory. Rent the Runway’s share price has fallen by about 97% to $0.
45 on November 2nd, 2023. In its second quarter of 2023, the company’s reported revenue was $75.7 million, down 1% from the same quarter the year prior.
This is as Newley’s net sales rose to $55.8 million in its second quarter. At the moment, the focus is on supporting current clients, keeping up with the enormous product volume, and constantly innovating new features.
We are surviving this fall because we have this carousel system in place. We launched this summer something called Closet List that we’ve been hearing from customers for so long.
They go on, they heart their favorites, and it goes into a closet. Sky Pollard was poached from J.Crew in 2018.
This brand is amazing. Since Nuuly’s launch, she’s added more than 100 new brands to the service that Urbn had not previously worked with on the retail side. There is a lot of it.
I started by just making connections with brands that were sister brands that I had already worked with, developed relationships with, and knew how it was to work with Urbn. I think so.
We bring new customers into the urban family, which we have seen we are doing through Nuuly. They’re getting exposure to our family of brands, and they are actually more inclined to go buy from our sister brands, which is a good thing.
Risks
Unlike competitor Rent the Runway, which built everything from scratch, Nuuly is uniquely positioned, and that’s mainly due to Urban’s existing partnerships with hundreds of brands and a global network of over 700 stores. It’s built its customer base and brand loyalty over decades.
Competition will undoubtedly continue to trickle in, but experts say there’s plenty of room for more. I think that’s harder for people who don’t have the background of, say, you know, Urban Outfitters or being in that sort of youth culture.
That’s a lot of risk. Most retailers will not take a risk on 80% of what they buy. They like to play it safe. There’s a lot of advantages that we have competitively if other people enter.
I welcome competition. I actually do think it could make us better. Nuuly has other challenges, like being under a parent company with a volatile stock, a consequence of being in fast fashion.
Urban has to accurately invest in the latest trends while constantly fending off competition. The company is also facing a trade secret lawsuit by rental company Le Tote. Le Tote alleges that urban stole proprietary information during potential acquisition talks, and used that knowledge to build Newley as a direct competitor.
Urban told CNBC it was unable to comment on ongoing litigation. And companies are doing well and are on a certain glide path of success. We often do see, you know, infringement lawsuits or things that sort of try to slow down kind of the success of what that company is perhaps doing.
Nuuly, like the rest of the world, has been impacted by inflation, which reached a 40 year high in 2021 and 2022, though dropped to an annual rate of 4.9% in April 2023.
Nuuly recently increased its subscription price to $98 from $88. Like everything else, clothing itself has significantly inflated.
I mean, even from April of 2021, clothing in general has inflated about 9%. It was not the only platform to do so when Rent the Runway phased out its unlimited rental option in 2021.
The offer was replaced with new membership tiers with worse values higher prices for less inventory. While this may have affected Rent the Runway, Newley says it’s price change hasn’t disrupted business.
By and large, we have not seen a disruption in our subscriber growth and we’ve actually seen new subscribers coming in quite the same rate, analysts say.
Ultra fast fashion poses the biggest threat to the rental industry. The mentality of buy it today, throw it away tomorrow.
And this is the Shein, the Temu sort of that whole ilk, $300 divided by the average price of 20, right? That’s a bunch of stuff that I could get. I think that that is very attractive to truly the younger generation.
But as consumers age, they tend to look for higher quality clothing. And since the younger generation is more eco conscious than the previous one, the rental markets appeal over fast fashion is spreading as other players continue to innovate and refine their rental services, Nuuly will too.
Certainly, there are other categories that we could consider. You know, what about kids clothes? What about menswear? I think because we built everything from scratch, we’re really able to kind of flex into whatever that next opportunity is.
We want growth. We want to try new things. Some things might work, some things might not. But I think that’s the only way you stay ahead. And I think that’s that’s what allows us to be successful. Website Builder Sponsored hostinger.com Start now
