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Strategy, Innovation and Investment decisions in a crisis
Rent the Runway an evolving case study: 2 x 4 x 12 Strategy
#ecommerceRent The Runway In September 2021 Rent the Runway filed their prospectus for IPO like Allbirds I was interested to dig deeper. A very open and honest business in this prospectus. If you don't know the model, it buys expensive clothing aimed at women, renting the pieces out to subscribers and customers for a fraction of the retail price.
It is no surprise there was a dip in 2021 and in the first 6 months of 2021. Debt is huge at $381M and widening. And it is worth noting from within the prospectus this comment about new funding: "Any new funding, in part, will be used to service debts owed. The rest of the funding, “other general corporate purposes”.
I am not a financial whizz, but this is a seriously open and honest prospectus. It would take a visionary investor with a lot more than cash to turn this around or to take up the risks associated with it.
Some numbers: (6 months ended July 31 202 and 20212 respectively)
108,752 and 126,841 ending total subscribers, respectively, and 54,228 and 97,614 ending active subscribers (excluding paused subscribers), respectively; (83% of all revenue comes from subscribers)
2.5 million lifetime customers
Approx 88% of customers acquired organically. Post pandemic strategy is to acquire through paid means - this has enormous risk, hiring challenges and will incur the greater cost and create a much greater need for more efficient operational spending.
This prospectus goes into minute detail on how #PEST factors rail against them and creates an almost uninvestable story.
Brand and Culture:
There are a number of references to negative publicity “accurate or not” and culture being potentially detrimental to the brand. There are pages and pages of incredible detail as to risks they are frankly, not in control of. They are creating a multitude of hypothetical reasons to not invest. It is almost implying, they are in control of no aspect of their own future.
And then there is this: Our company culture has contributed to our success and if we cannot maintain this culture as we grow, our business could be harmed. – Note: competitive pressures to move in directions that may divert us from our mission, vision, and values; My read here is that they cannot retain the existing culture and will divert, hence a shift in culture – which is at odds with a key success driver.
There is little doubting the resilience of the mgmt team here. Incredibly visionary when it set up, but I fear tech, brands and the market is catching up on them. (15.06.22 maybe I was hasty!) What they have in their favour is a huge, loyal customer base with shared values. This to me would be worth more as an acquisition in a year or so as opposed to getting in at the ground level now. A fascinating business nonetheless. Let's see what happens!
15.06.22 – Fast Forward 6 months or so
In its recently-released earnings report for the first quarter of 2022, the company posted a 100% year-over-year increase in revenue to $67.1 million. At the same time, it ended the quarter with the record number of active subscribers of 134,998. The company gained 72% on this metric year-over-year. Its total subscriber count was also up 70% year-over-year, with 177,200 in all. CEO Jennifer Hyman added that company data shows subscribers are more loyal than the pre-COVID period, and more willing to rent multiple items for more use cases.
This is hardly surprising nor really noteworthy, though it is a nice turnaround. This is what their model was predicated on. Profitability at this point will be interesting. What also is interesting is looking at the decisions they made and the timing of them. They are of particular interest to me in how we balance decision making now. There was an acceptance of “something needs to give”. The determining factors were not necessarily difficult choices, layoffs, increased margins and the piece I am interested in – added robotic automation in its warehouses. This last investment decision gives them proprietary operating systems that will increase its value, make it more attractive and means, it is shifting course in how it is positioned. It can and should be an acquisition target or large enabler.
COVID Mantra: Survival first, re group and rethink where our investment $ go. Parallels now for many C level teams, where do we cutback, where do we invest.
Let’s read the public statements first before we look at the relevancy to decisions we should be considering ourselves.
Shareholder Commitments
RTR today (March 17 2022 – 2 years to the day after lockdown was announced) announced its impact strategy, outlining long-term ambitions with specific and measurable short-term goals to tackle pressing environmental and social issues that the brand —as a rental subscription model— is uniquely equipped to address.
Brand Vision
To displace the need for production of half a million garments by the end of fiscal year 2026, a continuation of its work to address rampant overproduction and waste in fashion. – As above, specific and measurable and public, with a capital P.
Brand Values
Being an agent of change is part of the fabric of Rent the Runway.
Brand Mission
We built a more sustainable business model for fashion by encouraging customers to buy less and wear more.
Brand Value
We’re taking our purpose to the next level, tangibly outlining through our Impact Strategy. Unlike most businesses in the fashion industry, our actions complement —rather than compete with— our bottom line.
A brand not greenwashing. It would have been easy to make glib comments about rent versus buy, circular economy. They chose to invest in proof of concept, at a time when the business was struggling.
Rent the Runway completed several activities over the past 18 months to quantify its baseline impact and refine its understanding of the opportunities most relevant to the business. Most significantly, Rent the Runway conducted its first-ever Life Cycle Assessment (LCA) in partnership with two 3rd party consultancies.
So what is their “Impact Strategy”
2 x 4 x 12
2 ambitions
4 priorities
12 specific and measurable goals (Consultants around the world salivate)
Here is what a strategy doc looks like.
I noted in the IPO doc that culture was a potential Achilles heel. So I was particularly impressed to see this addressed as a strategy turnaround policy – 1 of the 2 ambitions. By outlining these commitments to diversity, empowerment and inclusivity are accountable, they open new markets and customer segments – it’s not just good practice, it’s good business.
Investments when sh*t got bad
I was/am sceptical of the long term, but there is a real alignment here for acquisition. I would love to see who Brittain Ladd thinks could or should acquire them, but to me, this is next 12 months will see prospective suitors looking to pick them off.
Why?
Investment has gone heavily into their ability to manage logistics in complex ways through technology. As noted by Stephen Baldock, “Rent the Runway’s business isn’t only being shaped by the current dynamics taking place in the economy and society. It is expanding at-home pickup, continuing to improve warehouse technology and making tech investments to improve search and personalization. Yet the preparations it made over the last two years set it up to grow in the moment when it had a strategic advantage. As the economy enters a potential downturn, that’s worth noting. The steps a business takes for the future in a moment of crisis can help to improve positioning when the macro dynamics swing back in its favor.”
They invested at a time when it was undesirable, but now their proposition is shifting away from being a recycled fashion site, to a tech enabler. Think of the complex, costly and unseemly scenarios they manage – product drops offs and pick ups, Furthermore, “every garment returned to our warehouses must be cleaned and sorted before it’s available to rent again, so our goal is to automate the movement of goods where possible to streamline this process.” Says Mike Liberant (Director of Engineering) in an interview with MongoDB. This is one tiny example of the complex problems they are now solving.
When you step back and look at the macro picture of what is going on, they are solving problems almost all fashion retailers are looking to fix. In a world spiralling towards less additional consumption and more thought for our planet and how we impact it, this type of operation will be a baseline requirement for many in the years ahead.
COVID left this business in a fairly challenged spot, but a clear strategy, investment in the enablers and sticking to brand principles and clear propositioning has given RTR more than a fighting chance.
Reference Articles:
https://www.sec.gov/Archives/edgar/data/0001468327/000119312521291103/d194411ds1.htm