Rental is the latest development in temporary ownership of luxury items. Previous temporary ownership models include fractional ownership/timeshare, mainly in connection with property assets although more recently with private jets, yachts and classic cars, and by reselling on the second hand market. Whilst the concept of renting is age old, ecommerce sites like Avelle.com (formerly Bagborroworsteal.com) and frombagstoriches.com, both founded in 2004, have led the expansion of this segment. It is no coincidence that this phenomenon has emerged during the second wave of dotcom expansion: its success stems directly from the success of internet sites such as Ebay and Portero in highlighting the secondary market value of small luxury items and in changing consumer attitudes towards ownership. The internet has also crucially provided scale necessary for these capital intensive sites to work by allowing them to operate on a national and potentially international platform. Other elements which have fuelled the growth of luxury item rentals include the shortening of fashion cycles, resulting in consumers wanting more churn in their wardrobes.
A segment still finding its feet (but will it have legs?)
The segment is in its infancy and the key players are still exploring their business models. Avelle started off by renting handbags with unit values of between $200-400 but its users kept on asking for higher value items. Now the site has a much higher proportion of couture and high fashion items. Both Avelle and frombagstoriches have expanded their offerings; the former to jewellery, sunglasses, luggage and most recently to watches, whilst the latter expanded the services it offers to include refurbishment of customers’ own bags as well as the possibility to rent customers’ bags on their behalf.
We do believe there is potential for this market to grow further in bags, accessories, watches, jewellery and to a certain extent sunglasses. These products fit the bill in terms of ease of transport and fashion content and are also more durable than, say clothing or shoes. Companies operating in this segment are taking a significant stock risk, therefore getting the product right will be crucial to their survival. Another key issue in the case of watches and jewellery would be whether insurance costs would cripple the economics of renting higher value items.
Treading on the toes of luxury brands?
According to sector players, the luxury industry’s response has been at best muted, if not negative. “Many manufacturers view this as a bastardisation of the values of luxury” says Dan Nissanoff, author of FutureShop: How to Trade up to a Luxury Lifestyle Today. Issues such as lack of control over distribution, concerns over product quality and authenticity as well as the bypassing of the brand’s own carefully designed store environment echo the industry’s initial reticence towards third party ecommerce sites in the late 1990’s/early 00’s. Added to this the fact that luxury manufacturers benefit in no way from the secondary trading of their products, one can see why the industry is reluctant to embrace this phenomenon.
As has been the case with ecommerce of luxury goods (see Savigny Newsletter Issue 4, June 2007), brands’ potential concerns that this channel would focus on low value items and the less affluent customer are proving to be unfounded. “I was surprised at our customer profile … I thought this would be an entry point” says Karen Richter, founder of frombagstoriches.com. Mike Smith, CEO of Avelle, agrees: “Our typical user is a college graduate in a managerial position … who owns 20-25 bags … and keeps on buying bags” adding “the demographic of the typical Avelle customer is higher than the demographic of the typical customer when I was at Nordstrom”. Affluent consumers also appear to have less of an issue about owning as opposed to renting and are therefore more likely candidates for this segment. Whilst it is impossible to replicate the shopping experience, rental companies have invested in high quality packaging for their products. They also have quite stringent quality control procedures in place and extensive refurbishment programmes for returned rental items so as to ensure utmost product quality.
Another major concern for brands is that the rental of luxury items will eat into their sales. Mike Smith argues that “this will be a third leg to the consuming stool: buy new, buy used and borrow” and that “this allows customers to be more adventurous”. Frombagstoriches offers the possibility to purchase any item hired but has very little uptake on this option. Both Avelle and frombagstoriches claim that their customers have full wardrobes and use rental as a means to rotate other items without using up too much additional wardrobe space. Dan Nissanoff argues that rental is a more efficient use of capital and allows consumers to benefit from the use of several items in the place of owning one. It is clear that the customers who use these sites can afford to buy instead of renting and that they actually are continuing to buy luxury goods; so we would argue that so far there is no evidence cannibalisation of full ownership. However the current economic crisis might lead us to a different conclusion.
In times of crisis, rent
Business across the luxury rental sites remains brisk although this may be partly attributed to the relative youth of the segment. There are however a number of factors that bode well for it. The key difference between rental and other forms of temporary ownership is that there is no tie-in, much more flexibility in terms of product available and time span of possession, and the risk of ownership remains with the provider. Consumers may therefore feel that they are taking less of a risk in renting these items as opposed to investing in a piece that may go out of fashion faster than expected. The option of renting may also be a more appealing alternative to trading down the luxury value scale as a means of saving money: “Rental companies might actually thrive in this environment …. people that might have not looked at this before as a way to maintain this lifestyle may actually do this [rent]” says Dan Nissanoff. The luxury for hire business model might indeed allow luxury consumers who have fallen on hard times to continue sporting that oh so desirable item of the season. Will luxury rental prove to be one of the few businesses to benefit from the current crisis?