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Commerce companies often operate in a push and pull between growth and profitability. In 2023, Rent the Runway is right in the middle of it.
In 2022, the fashion rental service took steps to cut costs, undergoing what CEO Jennifer Hyman said was a “significant financial transformation.” That included layoffs to 24% of the corporate workforce and improvements to efficiency in product acquisition. It was a move to get out of the red, as the company doubled gross margins in comparison with 2019, and reduced cash consumption by 50%.
But 18 months after going public, Rent the Runway is not in the black yet. As is the case with many of the last decade’s generation of ecommerce companies that went public, Rent the Runway is not yet profitable, as it reported a loss of $138.7 million for fiscal year 2022. That was down from $211.8 million, and the company also made strides in net loss as a percentage of revenue as net revenue increased by 46%.
But to get to profitability, Rent the Runway must move back into growth mode. Hyman told analysts on the company’s earnings call this week that boosting the subscriber base is now the key to the company’s prospects for profitability. For 2023, the company is projecting ending active subscriber growth of 25%. That would bring boost cash consumption of more than $20 million on an annualized basis. At 185,000 average subscribers, it will be able to fully cover fixed costs, and break even on free cashflow on a maintenance basis.
“Higher subscribers are the most important inputs towards free cash flow profitability,” Hyman said.
In 2022, the company was not satisfied on the subscriber front, Hyman said, as it ended the year with 127,000 active subscribers. There are encouraging signs already this year, as that metric jumped up to an all-time high of about 141,000 as of April 8.
While a price increase in April 2022 likely hurt subscriber growth, this year’s priorities will not only growing subscribers, but putting a focus on retention. Rent the Runway is powered by a word-of-mouth engine that the company seeks to activate.
“The majority of our historical subscriber acquisitions have been organic, and almost 60% of customers hear about us from someone they know. Our customers have always been our best marketers. New customers will undoubtedly hear about the more positive experience we are trying to create via word of mouth,” Hyman said.
So by making the experience better, Rent the Runway can in turn increase the likelihood that subscribers will stick around, and that they will recommend the service to others. The first move on this front came as the company added a free extra item to all shipments in March. By providing five items instead of four, it is increasing the value of a subscription by more than 25%.
In 2023, the company will focus on getting more inventory to subscribers. It plans to invest $69 million-$72 million in increasing available items, and is shifting to styled models on the site that allow users to rent items from a look that is displayed.
“We are investing in greater depth amongst brands and styles customers love so that more of her desired styles are in stock when she's browsing and picking for her next shipment,” Hyman said.
The company also aims to improve discovery, and has already taken a step toward this by integrating a new product catalog. It is also seeking to improve speed on the Rent the Runway website.
Early results of this focus are positive, Hyman said.
“We are seeing significantly higher loyalty improvements amongst our full customer base than we had expected, meaning both completely new customers to Rent the Runway and tenured customers have all been churning less,” Hyman said. “Former subscribers are re-joining our program.”
Rent the Runway's recent moves demonstrate a couple of key points:
Fundamentals matter alongside making a splash. While Rent the Runway got a lot of press attention for the free item, site speed and search are just as important to improving the overall experience.
Growth and profitability require a balance. Often, these are presented as competing forces. But as it pursues growth to get to profitability, Rent the Runway shows that a focus can be placed on both at the same time.
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Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.