The Risk of Renting Luxury Fashions to Chinese Millennials

A recent deal reignited interest in the luxury sharing economy in China. Women’s clothing rental business Rent the Runway secured 20 million from Alibaba founders Jack Ma and Joe Tsai via Blue Pool Capital. Although Rent the Runway is already profitable, its co-founder and CEO Jennifer Hymann sees the investment as an opportunity to ramp up growth, targeting Asia next. Founded in 2009, Rent the Runway allows women to rent designer dresses at a low percentage of the retail purchase price. The company has since introduced a subscription model that lets women rent clothing for everyday wear. It has attracted many investors, securing 60 million in Series E investment led by Fidelity, with additional funds from existing investors like Bain Capital Ventures and TCV. Blue Pool Capital is the company’s first investment in Rent the Runway to come from China. Does Jack Ma's interest in Rent the Runway signal a coming partnership with Alibaba, or even an acquisition? Hyman has not given a definite answer. According to Recode, Blue Capital will simply send an executive to act as an observer on the board of Rent the Runway. This doesn’t preclude the possibility of Alibaba learning from Rent the Runway’s nine years of experience to help find its own way of participating in the luxury sharing economy in China. Even though Chinese consumers contribute roughly 35 percent of total luxury sales in the world, they have become increasingly aware of the value of their purchases, looking for bargains even for the most high-end items. A forecast from the National Information Center estimates that China’s sharing economy will contribute over 10 percent of the country’s GDP in 2020. Transportation and accommodation will no doubt make up much of this 10 percent, but the fashion market potential seems huge given how enthusiastic young Chinese consumers are about sharing and luxury brands. One of the main challenges to luxury rental companies is the risk of losing expensive stock to damage and theft. Alibaba invested in Y-closet in 2017, whose business model is very similar to Rent the Runway, but is adapted to young Chinese consumers’ shopping habits and unique credit environment. It works with Sesame Credit, the credit rating service developed by Ant Financial Services Group, an affiliate of Alibaba, which uses data from Alibaba’s services to compile credit scores for potential customers. If customers’ sesame credit meets the minimum requirements, Y-closet waives its usual 300RMB deposit. Following this logic, if Rent the Runway is to enter China, it might well adopt Ant Financial's credit system as well. Other luxury brands are also looking at ways to help Chinese consumers by using credit. In August 2017, Michael Kors began accepting Huabei (花呗), the virtual credit card that's part of Alibaba's Alipay app, on its online boutique stores in China. The function allows consumers to pay in installments and pre-order items. Although Michael Kors is the first luxury brand to form such a close partnership with Huabei, brands such as Burberry, Tag Heuer and Fendi also accept credit payment options on Alibaba’s Tmall or rival JD.com. The risk here, of course, is millennials’ ability to pay their debts. Sixty percent of Huabei users have never owned a credit card, and have limited financial knowledge. An Accenture report shows that post-95s are 60 percent more likely to place impulsive orders compares to the generation before. Jack Ma’s investment in Rent the Runway suggests he is bullish not only on the future of the luxury sharing economy in China, and the ability for Chinese millennials to establish a reliable credit score, but also their ability to pay their debts.

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The Risk of Renting Luxury Fashions to Chinese Millennials