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Increased shift to eCommerce shopping.
With the spread of covid-19 and social distancing measures, many traditional retail- and department stores were closed for several weeks. Apparel retailers have fast-tracked the shift to eCommerce through technology and software development in order to enhance digital capabilities and speed to market. Brands like Nike and Lululemon are channeling sales directly to the end consumers taking control of inventory and reducing costs.
Ecommerce is a USD3 trillion market globally, excluding China and bill payments, and has reached a fundamental inflection point likely to grow in the mid-to-high-teens range post covid-19. The pre-covid-19 levels are in the low-to-mid-single digit range. In recent weeks US eCommerce spend on apparel was up +102% and was growing more than 50% YoY since mid-April, even after stores had begun to reopen. In the UK during lockdown online shopping increased from 27% to 88%. In 2019, US e-commerce represented ~26% of apparel, up from 6% in the last decade and is estimated to increase by 20% in 2020. European online penetration increased from 6% to 18% over the same period and is expected to reach 23% penetration in 2020. [3] The broader offline retail sector is projected to shrink 15% from 2019 to 2021. [4]
Wardrobe rentals gained momentum prior to covid-19.
There are a variety of subscription-based clothing services on the market dubbed on the Airbnb fashion of a sharing economy. These services offer to rent you items for a monthly fee or at a cost typically equal to 10-20% of the item’s retail value. If you love the item, some platforms allow you to buy it at a discount or extend your rental. You get a prepaid label with every order and can switch items within the rental period. Other services allow you to rent just for a special occasion such as a wedding or tuxedo event, and some even offer to send a free backup size to ensure customer satisfaction. The subscription service providers will handle your specific requests through technology driven software, notify you when other items you listed are ready, package the goods, ship the clothes to your door within i.e. 2 days, dry clean the items and provide styling services tailored your needs and preferences. The shipping service, dry cleaning and insurance of damage goods are all included in the price.
Rental services are more widespread in the US than in Europe where 82% of millennials and Gen Z in the US have heard of clothing rentals but only 21% have tried it. Between 7-10% use it often whereas half of them are frequent users. It is expected that these numbers will grow as more companies explore the rental market. [3]
The rental business is growing through three different eCommerce platforms.
The first alternative, B2C (“Business to Consumer”) offer rentals directly from a brand’s own website or from a wide distributor platform where perhaps the best known is the US based Rent the Runway (“RTR”, private). RTR launched in 2009, has more than 9m members and was valued at USD1bn in 2019. RTR takes on the role as a new wholesale partner by purchasing the inventory and is providing rentals in all shapes and sizes, thereby removing the inventory risk from the brands. They are also becoming the customer interface effectively owning the customer relationship. RTR looks as themselves as a data and logistic company and has invested heavily to ensure quick inventory turnaround and the handling of complex inventories. It is currently US’s biggest dry cleaner operating 160,000 square foot fulfilment center that dry cleans 2,000 dresses every hour. [9]
The second alternative rather than a direct to consumer model, is B2B (“Business to Business”). In example, US based CaaStle plays the “Clothing as a Service” angle, an alternative provided to brands where retailers continue to own the customer, inventory, website and customer data. CaaStle provides the technology and manage services to help retailers participate in the new economy. This platform is compatible to a single brand rental platform with far less inventory than B2C. In comparison RTR offers more than 7k dresses for one-time rental, while a single brand may offer 200. The price point for the latter option may not have enough reach to command the price point of services such as RTR.
The final subscription service C2C (“Customer to Customer”) is the opportunity to rent directly through a peer-to-peer platform such as the Norwegian based company Fjong. This option permits you to lend out your own items for others to rent for a specified period. The service platform is responsible for the handling, logistics and cleaning, and will typically take a share of the profits.
You may argue that the rental platforms run high carbon footprint with frequent last mile delivery, extensive packaging, frequent dry cleaning and for some of them, continuous purchase of new inventory. The services have an advantage in dense cities where logistics are cheap and available, and in a market of maintaining a unique position offering the latest fashion items is justifiable.
Wardrobe rentals may be a solution to the excessive buying of new apparels.
The use of a rental subscription model within fashion and apparel may contribute positively in terms of sustainability by enhancing the life and use for the clothing and reducing waste. The service will facilitate access to designers clothes many people normally wouldn’t have. Consumers can buy on a budget in addition to saving money on dry cleaning. Styles and fashion trends are rapidly changing and with social media and the increased focus on appearance (and increased numbers of fashion influencers), many feel like they hardly can wear the same outfit twice. The services may also help brand protection and build brand awareness in addition to serve as a distribution channel for brands who are facing shrinking buys from department stores. Some of the most high-end subscription services may cost up to USD160/month for unlimited flexibility, however if you take the retail price of a more high end statement piece currently in your wardrobe and divide it over number of times in use, and include the cost of dry cleaning, you may argue that rental subscription can be an economically valid alternative.
Secondhand resale is growing fast.
The resale market grew 25x faster than the overall retail market last year (+49% versus +2%) with 62 million women buying secondhand products in 2019 up from 56m in 2018. The resale market is expected to grow 5x over the next five years due to value and sustainable conscious consumers and is a multi-billion a year industry that continues to be one of the fastest growing segments of retail. First Research estimates the resale industry in the U.S. to have annual revenues of approximately USD17.5 billion. ThredUp, an online resale marketplace, estimate the total resale market in 2020 at USD32 billion, predicting it will reach USD64 billion by 2024 while fast fashion will only reach USD44bn. [4], [8] Secondhand goods are expected to make up 17% of a person’s share of closet space by 2029, up from just 3% in 2009. That would put it behind only merchandise bought from off-price outlets such as TJ Maxx, at 19%. [4]
The biggest market within resale exists in used luxury goods. The secondhand luxury goods market keeps the consumer in the cycle, validate the price paid for luxury goods and support sustainability sectors growth, which largely benefit the industry. The US Online start up The RealReal (Real) sells used luxury apparel and accessories and is considered the largest marketplace for authenticated luxury. [10] The company reported revenues of USD318 million in 2019 and consensus revenue estimates for 2021 and 2022 is USD432 and USD545 million respectively. Real’s current share price is almost back to pre covid-19, however still above historical average. The recent share price improvement reflects the faster ramp up in supply and demand following covid-19 lockdowns. During Q1 2020 the company experienced supply-constraints rather than demand constraints, and the company has communicated that it doesn’t see any signs of different dynamics with this year’s customer base vs the past. Real is positioned for circular tailwinds with the online shift in the luxury market and is continuously investing in technology and marketing.
Rentals and secondhand buying combat with well-known environmental complications that the fashion industry is facing with heavy resource demands, labor issues and excessive waste.
The fashion business model is built on the premise of “fast fashion” providing clothes cheaply and quickly to consumers through fashion cycles. Clothes are produced by using synthetic fibers, 60% of the global textile production, which is cheap and harm the environment. Second to oil, the clothing and textile industry is the largest polluter in the world [8] and contributes to 10% of global greenhouse gas emissions due to its long supply chains and energy intensive production. Giving a dress a second life would reduce its CO2 impact by 79%. News continue to emerge around clothing-factory workers being underpaid and exposed to unsafe workplace conditions. In terms of waste, 2625 kg of clothes are burned or landfilled every second. These issues will grow proportionally as more clothes are being produced without any improvements in the production process. [2] The UN is committed to change the path of fashion, reduce its negative social, economic and environmental impact and turning it into a driver for the implementation of the Sustainable Development Goals (SDGs). 10 different UN organizations agreed to establish a UN Alliance on Sustainable Fashion. [6] Europe is ahead of the US in terms of awareness around ESG, but not at the point where consumers are actively making decisions purely based on it.
Can a sharing economy platform work for fashion?
The sharing economy has been slower to take off in retail compared to sectors like transportation and accommodation. Logistics seems to be the key barrier and the style and fit variations a fashion marketplace needs to offer. Convincing people to share clothes with other people requires a much bigger behavioral shift than convincing them to share vehicles or accommodation. [7]
The rental subscription services are not yet mainstream, but customers may in the near-term continue to buy everyday staples but turn to rentals for occasions and statements pieces due to the current pricing and the need to plan. Secondhand should continue to grow as they are better options than simply buying new items in terms of sustainability. According to Second Measure, subscribers of rental services spend less on both an absolute and relative basis with other retailers.
Will the consumer be smarter about what they only want to wear once?
The subscription services have faced headwinds due to Covid-19, but longer term we might move towards an environment where people are more aware of rentals and secondhand. A post-Covid-19 world may accelerate these trends where the young shoppers do not see the need to make large investments upfront for something they use now and then. Young consumers often tend to prefer access, convenience and experiences more than actual ownership where there is limited use. They are also considered more economically minded and these new trends attracts consumers from all economic levels. Big and small players seem to be jumping on the sustainability trend, and with smoother and easier applications and logistic services, these solutions should continue to improve.
Rentals and secondhand have changed the way we think about clothing ownership and is something we will hear more about in the future.
We do not have any exposure in the Global portfolio towards the names mentioned in this article. In addition, most of the new start-ups are privately owned companies. We do however keep an eye on the space and the impact it may have on other big brands such as Nike (NKE) which is increasing its digital offers and where we have a position.
[1] Movinga study
[2] McKinsey, Style that’s sustainable- A new fast-fashion formula
Edge: Fashion Intelligence
https://edgexpo.com/fashion-industry-waste-statistics/
[3] Bernstein Research
Bureau of Economic Analysis, Census Bureau, Eurostat, Euromonitor, Statista and Bernstein estimates and analysis
[4] ThredUp – 2020 Reports
https://www.thredup.com/resale/
https://www.thredup.com/resale/#resale-growth
https://www.thredup.com/resale/#consumer-trends
https://www.thredup.com/resale/#future-of-fashion
[5] CNBC
[6] UNECE, UN Alliance aims to put fashion on path to sustainability
[7] Business of fashion, will a sharing economy work for fashion https://www.businessoffashion.com/articles/fashion-tech/will-the-sharing-economy-work-for-fashion-rent-the-runway-rental
[8] Nart. The Association of Resale Professionals
https://www.narts.org/i4a/pages/index.cfm?pageid=3285
[9] RTR
https://www.renttherunway.com/
[10] Real
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