Urban Outfitters (NASDAQ:URBN) became the latest retailer to jump into the clothing rental business, launching Nuuly in hopes of cashing in on yet another manifestation of the sharing economy. By allowing consumers to cycle through trends without being locked into any particular article that may soon fall out of favor, it makes fashion even more disposable than it already is.

Fast-fashion houses like H&M and Zara sped up clothing's half-life by ripping designs from runways and putting them on store shelves in a matter of weeks instead of months. Clothing rental goes one step further, confronting fickle consumer tastes by changing the way consumers view thevalue of clothing and design process.

The one-and-done mentality of clothing raises the question of whether this is really the business model that saves retail.

Woman opening box with clothing inside

Image source: Getty Images.

Rewards and risks

Certainly, clothing rental has all the hallmarks of a winning strategy. By recycling articles of clothing, retailers can:

  • Generate multiple revenue streams from a single item.
  • Potentially foster stronger relationships with consumers who come back for more.
  • Expand their reach to new customers willing to try something they otherwise might not if they had to buy it.
  • Gather extensive data from customers they can use to sell additional merchandise or inform future design decisions.

For retailers still reeling from a weak market, these are all positive attributes, yet there are also risks associated with changing customer attitudes about how clothes are consumed.

Renting clothes is not a cost-free activity. Beyond shipping costs, a retailer needs to keep track of the stock it offers, where it is, when it's due back, and whether returns are late. While customers may find they're socked with exorbitant fees if an item is late or lost, a retailer is unable to rent it out again until it returns or is replaced. That's a potentially lost opportunity that degrades the customer experience.

When an item is returned, it still needs to be checked for wear and damage, have stains removed, and be cleaned (and possibly mended); worn-out items need to be replaced. And fashion is still continuously changing, with style coming in and out of favor, meaning the clothes used for rental still need to be as on-trend as those for sale. And if the inventory and logistics don't operate at peak efficiency, it could break down the customer experience.

Renting out clothes also has the potential to cannibalize actual sales. But retailers appear to be learning that rented clothes are not the same as those bought; consumers seem more willing to take risks on rented clothes with design-forward styles, patterns, and colors than the more functional clothes they may actually buy. This could change as the concept matures, particularly as retailers themselves push the concept further down into casual everyday wear, and away from articles for a single event.

The new, new fashion trend

The clothing rental business is not new. Renting dresses, gowns, and tuxedos is something most people might have done at one time in their life. But the online, on-demand aspect of temporary fashion is decidedly more current, and probably best exemplified by Rent the Runway, which expanded the concept into high-end fashion. But now the industry is changing once again.

On one side are those like Urban Outfitters, RTW Retailwinds' New York & Co, and Ascena Retail's Ann Taylor that offer for a monthly fee a subscription service that lets you rent a selection of clothes you choose, while on the other are outfits such as Stitch Fix and Nordstrom's Trunk Club that send you clothes to consider buying based on a personalized profile you create or a personal shopper you work with. 

And then there's Amazon.com (NASDAQ:AMZN), whose Prime Wardrobe service lets its loyalty program members try on as many as eight items in a seven-day period, and return anything they don't like, paying only for the ones they keep.

So far, so good

The boom is showing that retailers like what they see. A single article of clothing can be rented out several times, generating more money than would be possible if it was simply sold. Rent the Runway has said 85% of the customers who use the Unlimited subscription service it launched in 2016 use it weekly, renting four items for 30 days at a cost of $89 per month.

About half the customers using Ann Taylor and New York & Co rental services are new customers, according to CaaStle, the company that runs the backroom logistics of their respective services. Urban Outfitters new rental service, called Nuuly, is a completely in-house operation, built from the ground up by the retailer.

Pulling on the thread

Yet just because a retailer launches a clothing rental service doesn't mean it will staunch hemorrhaging sales. Sears still went bankrupt despite launching a fast-fashion line, and J.C. Penney is dangling by a thread after doing so as well. Gap, despite successfully converting Hollister into a fashion-forward chain, couldn't replicate the model with its namesake stores.

Once consumers have become used to the idea of renting their clothes rather than buying them -- and that the internet is their virtual closet and they don't need an entire wardrobe filled with actual articles of clothing -- retailers may find that convincing them to go back to buying isn't as easy as it was to get them to rent.