When it comes to getting their retail fix, today’s shoppers are eagerly adopting new business models like resale and rental that save on both costs and carbon footprint. Young, conscious consumers have fostered the success of massive disruptors like luxury rental service Rent the Runway and premium online resale outlet The RealReal.
But the meteoric rise of both of these companies has slowed in recent months following some substantial hiccups.
A planned system upgrade derailed Rent the Runway’s operations in September, resulting in missed shipments and hundreds of unhappy tweets that rebounded across the web.
Over the past week, The RealReal has come under fire following revelations that the luxury resale platform’s supposedly stringent authentication processes are not run by the trained experts, as previously promised. Instead, a report by CNBC suggested that employees without the proper credentials or training have been responsible for verifying the legitimacy of the site’s rare and pricey products.
The results of these stumbles could be devastating for both companies, which have capitalized on the idea of consumer trust as much as the products and services they offer.
According to Jason Stoffer, a partner with Maveron, LLC, a venture capital firm that works with a bevy of retail brands like Allbirds, Everlane and Zulily, The RealReal’s authentication issues could be overblown, though it’s hard to be sure whether pervasive process issues or simply a few bad orders have colored consumer perception.
“You’re never always right—Sotheby’s and Christie’s get it wrong sometimes—but you can certainly get close,” he said of today’s luxury authentication standards. “There are operational ways to mitigate this and it’s important to understand the frequency at which these issues are occurring,” he added. AI tools as well as employee training could all but rectify the issue, but for now, The RealReal must focus on gaining consumers’ confidence back.
Rent the Runway suffered similar dings to its reputation, and those could prove costly in the long term, Stoffer said.
“The challenge with any shift in software is that it’s inherently risky, so you need to be extremely cautious and be able to deliver on a customer promise even if things go wrong. Clearly, they fell down on that,” he said.
Despite the setbacks that both have faced in recent months, Stoffer believes resale and rental models are the way of the future for young consumers who seek value and products that are beneficial to the environment. “I think these are two macro trends that are certainly here to stay, across luxury and down into the mass market as well,” he said.
“Where the rubber hits the road is in whether the underlying unit economics of a particular business are sustainable, he added. “Look at the cash burn and lack of profitability of a Rent the Runway compared with a Stitch Fix,” he asserted, explaining that the latter has been “cash-flow positive for a very long time,” while Rent the Runway is far from profitable.
After a decade in business and a $1 billion valuation earlier this year, one might look at Rent the Runway and ask, “Is that truly sustainable?” Stoffer posed.
In the wake of the company’s latest PR disaster, Stoffer said Rent the Runway’s most valuable asset is its consumer base, and that’s taken a hit. “It’s a brand that had a lot of customer love—but this is a debit, not a credit. It’s something that can be restored, but it’s going to take time and the rebuilding of trust.”
And as the economy faces a potential downturn, investors are going to be more shrewd than ever when it comes to throwing money at the next “unicorn” startup that comes their way.
“Flash back two years and people valued growth above all things,” Stoffer explained. “But in our segment of the market, when companies are going out to solicit funding, what we’re seeing is that the question has switched to ‘Do the underlying unit economics of a single order work?’”
Investors are becoming more bullish in asking about the profitability of each individual sale, he said, and what it will take for a brand to earn back the money it takes to acquire just one customer.
Stoffer pointed to lackluster (or failed) IPOs like Postmates and WeWork, citing them as examples of companies that are “being dinged because the market is not tolerant of big cash burns” without a clear path forward.
“Our belief here is that when a macro downturn hits, these businesses that don’t show a clear path to profitability, or that continue to show large operating losses, are going to be punished,” he said.