Can RTR maintain the Cinderella magic?

by John Smith-Ricco

Despite the obvious duplicability of its business model, Rent the Runway has aggressively protected its position as first-mover through investment in technology and operations management. Providing women with the “Cinderella” moments that accompany wearing otherwise inaccessible designer dresses may be Jen and Jenny’s mission, but their company’s expertise lies in the less sexy areas of inventory management, quality control and maintaining high utilization rates of each garment.

Rent the Runway was the case I anticipated the most as a student in Launching Tech Ventures. The RTR story is wonderfully hopeful, a feel-good MBA cautionary tale on the type of success risk-averse capitalists might miss out on by taking the safe route [insert finance/consulting/CPG career path here]. Rent the Runway has the potential to democratize the world of luxury ready-to-wear. However, in order to maintain the “magic” and keep would-be competitors at bay, RTR must avoid becoming TJ Maxx for the Netflix generation.

Technology is not enough
Hyman appropriately acknowledges that technology is at the core of the company. This poses a problem if a competitor were to enter the space with better technology in the form of faster turnarounds, better size matching, etc. So far this threat is unrealized, but one can imagine there are retailers and other players in the fashion ecosystem whose current expertise might overlap with and surpass that of RTR.

Fashionistas are fickle
The technological advantage that Rent the Runway currently enjoys may undermine its appeal among its most discerning customers. The business model is such that higher utilization of dresses yields more profits. In class, I opined that dresses are seasonal and therefore not utilizable year round, but learned that a significant fraction of inventory did not follow seasonal pattern. Furthermore, RTR purposefully leaves out dresses’ release dates (e.g. Fall 2010) so that dresses can be used year after year as trends start in New York and drift from the coasts to the heartland, thus spreading fixed costs even further.

While a Marchesa gown from a three-year old collection may be fine for the consumers in middle America, the 25 year old Manhattan PR girl may not be so impressed. Since RTR’s original focus groups included “it” girls and “almost it” girls from Harvard an Yale, I suspect this discerning consumer still comprises a sizeable portion of sale and it would be a disservice to alienate her. Doing so will commoditize the service and invite competition on the basis of technological execution rather than the elusive Cinderella wow.

Relationships matter
Ultimately, I’m still quite optimistic in my outlook on RTR. They have a head start on technology and by maintaining strong relationships with key design houses the team can keep the “it girl” consumer engaged. The key will be to avoid profitable shortcuts that will damage the brand in the long term.

There’s nothing wrong with being the TJ Maxx for the Netflix generation; TJX (the holding co. for Marshalls and TJ Maxx) has an impressive $30Billion market cap and its stock has outperformed the market over the last two years. However, if Rent the Runway is to be a premium service it must continue to deliver cutting edge fashion while using technology to make the overall operation more profitable.