Building the business case for circular business models Part 2: Rental

The potential of circular business models continues to grow in the apparel market—more and more rental and resale experiments and pilots are being launched and market growth is outpacing traditional retail. Nevertheless, for brands looking to design and launch a circular business model, there are many real and perceived barriers associated with their adoption. One such barrier is the lack of clear evidence of the financial viability: the business case. Currently, the best proof that the industry has on the long-term financial viability of rental and resale business models lies in the market’s anecdotal success stories and a number of key industry reports on the topic.

The latest 2-part article in the Switching Gear series takes a closer look at the business case and financial feasibility of circular business models in the apparel industry. Using illustrative case studies from our partners PwC, Lindex, Lizee, Fashion for Good and Accenture, we clarify the associated risks and benefits associated with both rental and resale business models and outline key learnings and considerations. for part 1 of this series click here

Both one-off rentals and rental subscriptions can be profitable circular business models in fashion, based on the 2019 analysis by Accenture and Fashion for Good, ‘The Future of Circular Fashion’. The economic analyses presented in the report are encouraging but we must note that the assessment was done at garment level, and does not fully take into account investments needed to operate and build these models to scale. Nonetheless, the report is very valuable as it outlines how brands can increase the profitability of their rental or resale model by strategically considering a number of key levers, further explored below:

Logistics and Packaging: Going Dutch with the customer

For one-off rental models, logistics and packaging are often recognised as a key challenge to address and a key cost driver. Reducing logistics and packaging costs by passing them on to the consumer can drastically increase the profitability of the model, especially for premium and mid-market brands. For example, in 2018, Rent the Runway partnered with WeWork to set up clothing drop-off boxes at 15 of the shared workspace company’s locations across the US. Similarly, Amsterdam’s LENA the Fashion Library set up four ‘swap points’ at key locations across the city. Both examples decrease the hassle factor for the user and centralise distribution and collection for the brands, enabling operational efficiency and cost reductions.

Rate of Exchange: Sometimes, less is more

Meanwhile, rental subscription models have a different set of challenges and levers. The core proposition of a rental subscription model is that they offer the thrill of continual newness and variety, without ever having to own a thing. Therefore, a key benefit for the customer is how often you can ‘refresh’ your rented wardrobe, with unlimited exchanges as the most prized offering. Unfortunately, while this is extremely attractive to the consumer, a high rate of exchange can have a detrimental effect on the financial viability of your model. It is therefore key to maintain a balance: build a model that is attractive and convenient enough to acquire and keep followers, without eroding your margins.

Processing: No need to reinvent the wheel

Levers that apply to both one-off rental and rental subscription models include reducing the processing time per garment (sorting, cleaning and stock management, for example), which will in turn reduce variable costs. There are important technical frictions for brands who are looking to test rental, primarily relating to information technology (IT) and supply chain management, since brands generally have traditional ecommerce platforms, designed to facilitate the purchase of goods. Rental comes with an entirely different ‘sales’ process, so partnering with existing solution providers—B2C or B2B platforms—will enable efficient handling and reduce the overall risk, while allowing you to share the profits and test the rental waters with relative ease. For instance, Lizee’s rental service helps brands enter the circular economy by renting their products and allowing multiple uses of each good they produce. Every aspect of the rental model is handled by Lizee, so that brands can focus on their core business. Lizee’s co-founder and CEO, Tanguy Frécon, explains that ‘in essence, we help brands and retailers launch, validate and industrialise at scale their best offerings. Brands find it hard to start and need to be educated. Today, they are all selling products and those products need to become services. And that’s a huge shift of mindset that is not always easy. We always say that the service is much more important than the product itself—what people are looking for when they rent is a function.’

Quality and stock management: Garments that last are designed to last

The number of times that you can rent out an item has a direct influence on the profitability of your model. Naturally, this is largely dependent on the versatility and quality of the item in question, so designing highly durable garments will drive the financial potential of your rental model. It’s all about designing and selecting your inventory for rental with intent. CaaStle’s Director of Product, Amy Kang, echoes this sentiment: ‘It’s not just about the durability, but also about the cleanliness. One of the things we have learned over time is that certain types of materials or fabrication can have longer wear than others and can hold odours differently than others.’ In that sense, the ‘market’ segment may not be the decisive factor, but rather a combination of the quality and suitability of the product, as demonstrated by Lizee’s collaboration with Decathlon. Frécon explains that ‘with Decathlon, in two seasons—or five months—they made more than twice the revenue out of these products’ and that over time, the data they collected via the rental system can even inform design improvements.

As Fashion For Good, Accenture and Lizee note, another way to improve the business case of your model is to consider including out-of-season and/or excess stock in your rental collection, which you might ordinarily have to mutilate or destroy at a cost, and to offer customers a ‘try before you buy’ option on items they can’t bear to part with. Both are simple strategic decisions that will bump up the balance sheet.

Frécon also points out that ‘we should not oppose rental and resale’. Rental inventory, once retired, can fulfill a complementary second hand channel. In October 2020, ThredUp and Rent The Runway made headlines with their unlikely collaboration, which saw designer clothing previously rented on Rent the Runway made exclusively shoppable on ThredUp, at up to 80% off retail prices. ThredUp gained access to expanded assortment while Rent the Runway cleared its excess inventory.

THE FUTURE BUSINESS CASE

The future of rental and resale business models is undoubtedly bright, but their long term competitiveness in the market will depend on our ability to balance the ‘why’ of resale and rental initiatives with ‘how’ they can generate revenue and in time, compete with and cannibalise primary, linear business models. Of course, the true impact of covid-19 on the market is yet to be seen. However, key reports indicate a ‘shift to thrift’, as consumers prioritise value for money and take a critical look at non-essential expenditures in light of the current economic downturn. Brands should heed the signs and use this transitional moment to stay ahead of the curve and design, test and iterate alternative models in the market.

‘We are just at the beginning of the revolution. Brands need to understand that we can’t have clear knowledge of what will happen because it’s a new business model. But of course we truly believe again that now the momentum has never been as good as it is now at the end of 2020 and we have very high hopes for 2021.’ Tanguy Frécon, Co-founder and CEO, Lizee.

This 2-part article was written by Hélène Smits and Gwen Cunningham for FashionUnited, with the support of Jennifer Nelen of PwC. PwC supported the Switching Gear project at Circle Economy as part of their Corporate Sustainability Programme. It is part of a series of articles published on the topic of resale and rental business models. Hélène and Gwen lead the Switching Gear project at Circle Economy

About Switching Gear

“Switching Gear: Towards Circular Business Models” , is a Laudes Foundation supported project, led by Circle Economy, that guides four apparel brands on a circular innovation process towards the design and launch of rental and resale business model pilots by 2021.

To support the practical implementation of these pilots and enable the wider uptake of circular business models in the apparel Industry, Circle Economy have joined forces with strategic partner Fashion For Good. Through this partnership, Circle Economy and Fashion for Good are working together to drive the formation of a powerful global Enabling Network of over 50 circular solution providers and innovators, frontrunning brands and relevant experts, until the end of 2021. Should you be interested to join the Enabling Network, please get in touch through the Circle Economy website

Images: Courtesy of Lena the Fashion Library through Circle Economy, Huib van Wersch.