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Two brands born on the Internet — Bonobos and Rent the Runway — have turned to physical retail to expand their businesses.

Jennifer Hyman, cofounder and chief executive officer of Rent the Runway, said that New York — which comprised 15 percent of the business — saw a doubling in conversion after a brick-and-mortar store was opened there.

This story first appeared in the October 28, 2014 issue of WWD.  Subscribe Today.

“That was significant,” Hyman said, noting that everything she and cofounder Jennifer Fleiss do is based on an “MVP model of testing,” from opening the first retail space in the company’s New York City headquarters to forming a partnership with Henri Bendel to opening the store on West 18th Street. It took just one month for the latter to become a reality — from the time Fleiss found the space on 18th Street in August to the day doors opened for business on Sept. 3. During the first six months of this year, Hyman said that renttherunway.com has rented the equivalent of $300 million in retail value of dresses and accessories. She predicted that this amount will reach about $600 million by the end of 2014 — not including the Unlimited business that rolled out this summer.

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“That’s how quickly we want to open things….We’re taking data and iterating it and not being afraid of what the consequence will be. Often people paralyze themselves with too much strategy and not enough execution,” Hyman said, crediting speed to the fact that Rent the Runway is a technology company first.

Bonobos founder and ceo Andy Dunn, who was on a panel with Hyman moderated by WWD deputy managing editor Evan Clark, said that although technology is an important facet to Bonobos, it’s not the most important thing the company does.

“We had this battle early on. Was this a tech company or a retail company?” Dunn asked, adding that Bonobos used to have a brand office in New York and a technology office on the West Coast. At the core, he called the company a “merchant” — one that’s been maniacal about updating fit for the American guy, as well as providing the optimal customer-service experience, both online and off.

Both executives lauded mobile and online for helping to reinvent the store experience by making it more personal than it’s ever been. For instance, associates at Rent the Runway stores are privy to consumer information such as past rentals, products she’s loved on the site, as well as height, chest size and weight.

Dunn called being able to “merchandise to the individual” — versus merchandising to a specific region or city — one of the benefits to being an e-commerce company at the core and a retail operation at the fringe. Originally, Bonobos’ brick-and-mortar Guideshops were placed on the second stories of buildings, but foot traffic exploded once they were moved down to the ground floors. Doors began to see a population made of two-thirds new customers and one-third returning customers — when the exact opposite holds true for the Web site, which is largely a repeat-customer business.

Hyman agreed. After a consumer books a one-on-one appointment at a Rent the Runway location, a stylist uses personalization algorithms and behavior to select options that the client will like. Clients can go straight to the dressing room upon arrival.

“We dedicated about 65 percent of the square footage to the dressing room experience. People will walk out of the dressing room transformed. We want that to be front and center,” she said.

Hyman pointed out that more than 70 percent of U.S. families are headed by women, with 49 percent single-parent households. “She is busy, which is why Amazon does so well,” she added. “Stores have to distinguish themselves and give her a reason to walk in. Convenience.”

Her advice was for retailers to follow Amazon and Zara to see where the market is headed. “The customer is 28 years old with an income of $100,000 and she’s never walked into a department store because Zara looks so good,” Hyman said.

Like Rent the Runway, freestanding doors have also become integral to Bonobos, which already has 10 Guideshops and plans to open an additional 30 in the next two years. “We are in the first pitch of the first inning in terms of vertical brand building,” he said.

Ironically, Dunn started his business online in 2007 because he wanted to offer a level of customer service that wasn’t found in-store. But he wound up venturing into retail — by accident — and now boasts among the highest net promoter scores (a tool that measures customer satisfaction). That score now is higher than the score of his Web site.

“People want to still touch and feel and try on clothes — duh,” he said of the brand’s first accidental store, which was just two fitting rooms in the lobby. It became a place where e-commerce transactions started to occur, and thus the first Guideshop was born. The reimagined retail experience emphasized customer service, with the product sent to the customer later.

Dunn admitted that it’s been a longer ride — investment and profitability wise — than he would have guessed.

“It’s been humbling how much capital is required to build a great e-commerce business,” Dunn said, reminiscing back to 2007 when he “started small. I raised $750,000 and I said to an early investor, ‘Do you think we’ll ever raise money again?’”

He soon realized he wouldn’t be able to turn a profit on his less-than-a-million in funding, discovering that an enormous amount of infrastructure goes into building an e-commerce brand. Customer service is a mandatory investment — including free shipping and returns — as is marketing, which adds up when building a vertical brand from scratch online.

Another irony of the business for Dunn is that the Guideshops have actually proven to be significant moneymakers and “great standalone enterprises.” It’s actually been harder to turn a profit on the e-commerce portion of a company than it has been for freestanding doors.

Bonobos has raised more than $127 million to date over the course of seven rounds of funding. The latest round, a $55 million Series D that closed in July, included participants like Accel Partners, Nordstrom, Coppel Capital and Lightspeed Venture Partners.

Dunn pointed to successful e-commerce brands like Zulily or Diapers.com — noting that they’ve each raised $50 million to $100 million-plus to get to scale.

“It takes a decade and it takes a lot of capital. I think that’s a good thing,” he said, adding that means brick-and-mortar retailers then have a chance to close the gap and catch up. He contrasted this to the music and film industries, which were caught off guard by the downloadable music trend and still have not figured out how to compete.

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