15 June 2022
2 ecommerce innovators in apparel, heading in opposite directions
Rent the Runway posted record gains, while Stitch Fix made layoffs. What does it mean for their models?
Rent the Runway posted record gains, while Stitch Fix made layoffs. What does it mean for their models?
Over the last decade, subscription-based business models emerged with the potential to reshape apparel shopping. With a return to in-person activities, two of the businesses that became the biggest success stories of this period are now at an inflection point that offers hints at where they are heading for the next decade.
After ecommerce platforms expanded online shopping options, a new wave of companies harnessed the on-demand economy and tech-powered personalization to create new approaches to outfitting customers. Subscription box-based styling services and rental platforms took new approaches to deliver clothes that offered shoppers a way to make style selections based on taste and keep up with trends, while packaging apparel them in a way that fit into their lives. In particular, Rent the Runway and Stitch Fix rose during this period of innovation to become public companies. While both saw success, they have unique business models that bring specific innovation to the shopper experience. It means that they will not always rise together. This was underscored by recent earnings reports for the first three months of 2022, which brought dramatically different results. Rent the Runway posted record subscribers amid a shift toward in-person experiences, while Stitch Fix had to make layoffs as it descended from the darling status it achieved during the pandemic.
A closer look at results thatthe companies reported over the last week offers insights into how these models are evolving:
With everyone going out more, getting dressed up is back in. That’s benefiting Rent the Runway, the subscription service that allows people to rent designer clothes. 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 builds on strategies Hyman laid out in April to drive growth, as Rent the Runway outlined opportunities it saw with a return to more in-person events following the relaxing of COVID restrictions. In particular, this year’s boom in events will help the company grow its funnel, Hyman said, and it is building out content centered around weddings in particular.
“Black tie is to 2022 as sweatpants were to 2020,” Hyman said on the company’s earnings call.
At the same time, international travel doubled as a use case for customers when compared to March 2021, Hyman said.
The timing for Rent the Runway appears to be right. But it’s worth remembering that the business has been building for years ahead of this boom. Founded in 2009, Rent the Runway combined ecommerce’s web-based ordering and distribution advantages, the on-demand economy’s penchant for local delivery and the benefits of rental within a constantly-changing fashion industry. It provides shoppers with access to a highly-sought look for a one-time wear for an event or season, and doesn't require ownership.
While Rent the Runway was well-positioned to benefit from reopening, the company was not posting these sorts of high-flying gains over the last two years. In fact, customer demand significantly declined during the pandemic. During this time, Hyman said the company went into a mode of frugality. It cut costs, doubled subscription margins and added automation in its warehouses.
In the process, it built the framework from which it now operates. That left the company set up for the twin dynamics shaping the economy during this time.
“Rent the Runway stands to benefit as the share of consumers’ wallets shifts towards experiences over ownership,” Hyman said. In a more price-conscious environment that is brought by the rise of inflation, Hyman added that rental also stands to be a more cost-efficient option. With reusable garment bags and a 2021 entrance into the resale market via a partnership with ThredUP, it is also keeping sustainability top-of-mind among an increasingly environmentally-conscious consumer base.
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.
A Stitch Fix box. (Photo via Wikimedia Commons)
Where Rent the Runway found a dip in demand during the pandemic and a lift from reopening, Stitch Fix is seeing the opposite.
The headline from the company’s earnings report told a story of cuts. The company announced that it is laying off 15% of its salaried workforce, or about 330 employees. That’s 4% of the company’s total workforce.
“While this was an incredibly difficult decision, it was one we needed to make to position ourselves for profitable growth,” CEO Elizabeth Spaulding wrote. “We are in the midst of a transformation and we know not every day or every moment will be easy. There will be tough choices along the way, and this is one of those.”
On the company’s earnings call following the announcement, CEO Elizabeth Spaulding detailed an 8% revenue decline year over year and an adjusted EBITDA loss of $36 million. Active clients declined 5% outlined a company in transition from a “Fix-only business to a Fix plus Freestyle ecosystem.” Freestyle refers to a new service that offers the ability to buy clothes directly from the company without the involvement of a stylist. Under the company’s original Fix model, clothes were selected by a stylist after a customer filled out a survey. Stitch Fix said it always employed machine learning and data science, but the human touch was still involved. With Freestyle, customers can browse a personalized recommendation feed that draws from a style profile, size and fit to offer a number of options.
Stitch Fix sees Freestyle as its future, especially when it comes to new subscriber acquisition. However, Spaulding said the transition “will take time and will not be linear.” Case in point: An issue with the onboarding flow in the previous quarter that affected conversion. Following adjustments, Spaulding said the company is seeing a 40% increase in conversions. Website traffic was also down, which Spaulding attributed to the fallout from privacy changes implemented by Apple. To boost this, she added that the company is moving into channels such as TikTok and YouTube as well as building influencer partnerships. It launched a campaign with comedian and producer Keegan-Michael Key.
But this did not stave off a restructuring that led to layoffs. To be sure, Stitch Fix is not the only tech company making workforce cuts against a wider downturn. Yet in this case, the transition away from its original model is evident in the areas where the company chose to lay off employees, as most came in non-technology corporate roles and styling leadership.
The transition has already been an uneasy one when it comes to the company’s workforce. Last year, hundreds of stylists quit en masse following a letter that informed them the company was ending its policy that allowed them to work anytime, BuzzFeed News reported.
Going forward, Stitch Fix will invest strategically in technology and product, Spaulding said.
It’s a fast fall for the company from its rise over the last decade and the highs it reached at the beginning of the pandemic. A pioneer of the subscription box model in the subscription box category that was founded in 2011 by Katrina Lake and went public in 2017, Stitch Fix proved to be positioned to ride the wave of ecommerce growth in the pandemic. The company’s stock reached a record high in December 2020 as it was setting records for new customers. It even proved uniquely adaptable to the shift to work-from-home. But after slamming into supply chain challenges and rolling out the Freestyle service, it joined the tech companies that saw a dip in 2022. The earnings report last week brought its stock toward an all-time low.
Another sign of subscription box struggles came on Nordstrom’s earnings call. The retailer is “sunsetting” Trunk Club, the subscription box service it acquired in 2014 for $350 million.
It is signaling a similar move to shift its model, but the conclusion it is reaching appears to be different. CEO Erik Nordstrom said the company is looking to retain the personal stylists that were at the center of the service.
“I want to be clear,” CEO Erik Nordstrom said on Tuesday’s first quarter earnings call. “This move reflects our belief and commitment to styling, and we are dedicated to growing and investing in these services. We have a range of styling services from low-touch outfit inspiration through our digital channels to a high-touch and personalized relationship with a stylist, all of which achieved high customer satisfaction scores. We are directing our investment towards these programs to ensure that we are well positioned to serve customer needs and drive growth.”
The bottom line, he said: “Customers spend seven times more and report higher levels of satisfaction when engaging with a stylist, either in-store or online.”
The subscription box offered a recurring revenue opportunity, a curated selection of products, a delivery model that fit with ecommerce patterns and the opportunity for personalization. Those trends remain on the rise in ecommerce, but they might not all be packaged together in the same way going forward. As the structure of Freestyle itself points out, advances in AI are allowing shoppers to curate their own selections. Still, kitting items as a box might yet prove to be a better fit for other categories, even if it declines in apparel. Where a new model starts isn’t always where it ends up.
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Macy’s CEO Jeff Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.