SCOTT GALLOWAY: My predictions for the retail IPOs from Rent the Runway, Allbirds, and Warby Parker

A woman wearing a cloth mask is shown walking in front of a wall display of shoes inside an Allbirds store.
Galloway says that Allbirds’ should focus on branding more, since design and merchandising matter more than they used to .

  • Scott Galloway is a bestselling author and professor of marketing at NYU.
  • The follow is a recent blog post, republished with permission, that originally ran on his blog, “No Mercy / No Malice.”
  • In it, Galloway talks about recent and upcoming retail IPOs and Rent The Runway’s business model.

Person of the year

I make predictions, which is a shitty business. If they come true, circumstances leading up to the event make the prediction seem less bold. If they don’t, the Twitter troll army comes for you. On a risk-adjusted basis, bad idea.

Like that’s going to stop me.

Time’s 2021 Person of the Year, and likely recipient of the Nobel Peace Prize, will be Frances Haugen. Lawmakers, academics, journalists, philosophers, and Borat have all railed against the global menace that is Facebook. And for good reason. The KGB, CCP, and Iranian Ministry of Intelligence could not have dreamt of a more perfect weapon. An ordinance that spread death, disease, and disability across the US via an unnatural increase in vaccine hesitancy, catalyzed an insurrection at the Capitol by people fed a steady diet of misinformation, and contributed to a decline in the mental health of America’s youth. And … we financed it.

Many sounded the alarm. But all we’ve done is put on a masterclass re the difference between being right and being effective. Ms. Haugen’s rollout (multichannel, branded, coordinated) is the first time it feels as if we’re fighting Panzer tanks with tanks, versus on horseback.

But that’s not what this post is about. Let’s sit back and watch “Breaking Bad,” season 9, starring Ms. Haugen, and stay out of the way.

What to talk about? I know: Dresses. Specifically Rent the Runway and some other recent retail IPOs.

Scott Galloway

Last week we filmed the pilot for our upcoming show on CNN+. I arrived, no joke, in the above outfit and nobody at CNN said a thing. I have found my people. The ensemble is the outline for this post – Warby Parker, Rent the Runway, Allbirds, and the Swiss shoe company On.

Note: Search your emotions. After absorbing the above pic, you are disturbed … but compelled. Anyway, why do I dress in drag? A: Because it makes me happy.


There’s a reason Warby Parker’s direct listing was well received last month. Numbers. By every metric, this is a strong business. The glasses retailer has a Net Promoter Score of 83, 2 million+ active customers, and a gross margin of 60%. In 2020, Warby’s customer acquisition cost was $40 on an average order of $184 … and 42% of the firm’s customers made a repeat purchase. In addition, when the pandemic throttled its physical retail channel, Warby expanded its ecommerce business – the company started online, enabling consumers to try on glasses at home and return the ones they don’t want.

Scott Galloway

The challenge – and opportunity – for Warby is the industry is concentrated. Luxottica, the Milan-based eyewear heavyweight, has been eating anything in its path. (Think: Ray-Ban, Oakley, Oliver Peoples, Persol, Ilori, and Sunglass Hut.) In 2018, Luxottica registered three-quarters of glasses sales in North America. But the Monster of Milan suffered a 17% sales drop and a 90% decline in profit due to the pandemic. Warby is a digital native, with direct consumer relationships, which has yielded an enduring advantage. Disruption is less a function of the innovator’s skill than of how fat, happy, and lazy the incumbent is.

Warby is positioned to disrupt, as Luxottica is the mother of all unearned margins. There are few businesses as big, or as dependent on brand equity, or that have worse distribution. Think about where you buy sunglasses. The only worse retail experience is a gas station. BTW, Tesla is a great car, but people miss the real consumer benefit: exiting the gas station ecosystem, where it feels as if you could pick up a rare form of cancer or get shot.

My shoes

Two high-end sneaker companies are venturing into the public markets: On, which had a banner IPO in September, and Allbirds, which filed for an IPO in August. Both have similar strengths and face similar challenges, but On is the (much) better bet.

There’s not a lot to distinguish between the companies on paper. Allbirds has a stronger NPS score of 86, versus On’s 66. But On’s 59% gross margin tops Allbirds’ 51%. On is growing faster: From 2019 to 2020 its net sales grew 59%. Allbirds registered 13% growth.

That slowing growth is troubling, and it might be why Allbirds scores high on another measure: Yogababble. (Shiv’s favorite business cat term, natch.) Allbirds’ original prospectus was filed as an SPO – a “Sustainable” Public Equity Offering. This wasn’t your standard IPO, the company claims. “Historically, businesses have primarily focused on maximizing stockholder value,” but a sustainability framework meant Allbirds was an “exception to the rule.” Until it wasn’t: The company later amended its prospectus to include no mention of an SPO. Allbirds (and its lawyers) likely realized you go public on Wall Street, not Woke Street. Folks, you make shoes.

And there’s a hint of the squishy metrics – reminiscent of WeWork – that have become rife in the SPAC market. As Professor Daniel McCarthy highlighted in the Prof G Pod, Allbirds reports “contribution profit,” which is gross profit less any variable costs associated with selling the product. This is a useful metric, especially for a company projecting strong growth, as it accounts for costs that are harder to minimize through scale. But the only thing Allbirds deducts from its gross profit to determine contribution profit is credit card processing fees. Something they don’t deduct is store operating costs – but stores don’t scale like software. To sell more shoes through stores, you need to operate more stores.

Warby, by contrast, does deduct store opex when it reports its contribution profit. On doesn’t highlight contribution profit at all. This doesn’t make a huge difference – only 11% of Allbirds’ sales came through its 27 retail stores in 2020 – but it’s a red flag that speaks to a management team that’s reaching.

Like Warby, both shoe companies are entering a concentrated market, in this case, a 60%-player, Nike, and a strong No. 2, Adidas. But unlike Warby, neither built an innovative model to disrupt the incumbents. They’re relying on brand strength and product innovation. Good luck.

The companies diverge on branding. Both got off the ground with word-of-mouth, community-driven marketing, but Allbirds has transitioned to what it calls “full-funnel” marketing. That’s Latin for “we raised a ton of cash, and we’re now pouring it into television and print.” In the first six months of 2021, Allbirds spent 22% of its revenue on marketing. On spent 13%, and its S-1 makes clear they’re sticking with their strategy.

Our view: Allbirds’ organic growth is sputtering, and management is buying transitory growth to support the stock price … until management can sell. The era of premium margins for mediocre products with Don-Draper-like TV budgets is over. Design, merchandising, distribution, and supply matter more. Brands still matter, but branding is a new ballgame. On’s voice holds together better.

Red dress

There’s a lot to love about Rent the Runway. It was cofounded by two impressive women, and the concept is powerful. One problem: It’s a shitty business …

Rent the Runway’s active subscriber base was cut in half last year. As lockdowns have eased, it’s begun climbing back, but it still has substantial ground to cover to return to where the firm was two years ago.

Scott Galloway

The company glossed over this in its financial summary by emphasizing the number of “total subscribers,” but a footnote revealed that this number includes those who have “paused” their account. In other words, half the “total subscriber” base isn’t paying.

If “total subscribers” is the company’s concealer, RtR’s profitability metrics are its botox. First, it creatively adjusted its EBITDA, though even with those “adjustments,” RtR’s earnings are negative. Next, the company broke new ground in creative accounting. Companies including WeWork and Aspiration have concocted variations on EBITDA to smear lipstick on bad numbers. RtR has moved this tactic up the income statement to the gross profit line, reporting “gross profit excluding product depreciation.” That means they’re removing their primary cost of goods sold – the cost of the clothes they rent – from their, well, cost of goods sold. These are delicate goods subject to the vagaries of fashion, not factory equipment. In a section of the S-1 titled “Key Business and Financial Metrics,” this novel measure improved RtR’s gross margin from 27% to 51%. Those are healthy retail gross margins – except that another 24% of real economic cost is lurking down the income statement, plunging EBITDA to negative territory.

Scott Galloway

The company also boasts (in an enormous font) that 88% of its customers are acquired organically. Impressive if true, but this is difficult to believe, as its customer acquisition cost is $55. Consider the math: If 88% of your customers are acquired for $0 but your overall CAC is $55, then you’re spending $458 for every customer acquired through paid channels. Something’s off.

But the real tell is the company’s private financing history. Last fall, RtR struggled to raise $125 million of debt and equity at a $750 million valuation. That was a downgrade from 2019, when it achieved unicorn status. But 2021 is going down as the greatest bull market for private companies in history. There’s an ocean of capital pouring into late-stage venture companies right now, and if RtR was anything other than a solid manifestation of greater fool theory, the firm’s existing investors would have stuffed another $200 million to $300 million into it. (Warby and Allbirds both announced monster private rounds in 2020.) RtR’s IPO is the last helicopter off the roof of the American embassy in Saigon. Investors left behind are going to experience a hostile market.

RENT jumped 17% in its first two hours of trading, but the shares soon began a downward march that won’t end until the equity reaches single digits. Between Wednesday’s peak and close of business Thursday, the equity was down more than 20%. It’s still overvalued. Thursday’s close pegs the company at roughly $1.2 billion. But RtR has less than 100,000 active subscribers, so this valuation implies each subscriber is “worth” more than $12,000. That’s an order of magnitude more than the market values subs at comparable businesses. (Even if you include “paused” subscribers, it more than doubles anyone else.)

Scott Galloway

Rent the Runway’s business model distills to this: Deliver $200 worth of service but charge $100. It’s a great service (and an inevitable downward slide should make RtR an acquisition target for Amazon, Shopify, or another player), but it doesn’t add up to a viable standalone business – the firm incurs losses matching its revenue. In sum: Don’t rent the runway. Sell it.

Regression to the mean

Fall is the best time of year, except in Florida, of course. Dry, crisp, light, and there’s a breeze that delivers a bite of winter. A season saying in hushed tones … I’m coming. But it feels as if a bomb cyclone may also be near. Metaverses … Shiba Inu coins … and a Trump SPAC worth billions. We’ll see.

Consumer IPOs, a 56-year-old in drag, and Frances Haugen. Something meaningful, something joyous, and someone profound, respectively.

Life is so rich,


P.S. My final Brand Strategy Sprint of the year is open for registration. 94% of previous students said the course positively affected their career growth. Join us.

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Rent the Runway enters the $30 billion resale market, making its secondhand designer clothes available for all shoppers to buy, as well as rent

rent the runway
Rent the Runway.

  • All Rent the Runway shoppers are now able to buy, as well as rent, its secondhand clothes.
  • Previously, only paying members of its clothes rental services could buy its clothes.
  • Rent the Runway has had a tumultuous pandemic year, closing stores and laying off staff.
  • See more stories on Insider’s business page.

Rent the Runway, the designer clothes rental business, is now selling clothes too, entering a booming resale market.

This week, the startup confirmed that all shoppers could now buy used designer clothing from its site at a discount. Previously, this option was only available to people who paid an ongoing subscription to rent clothes.

The news of this change comes after a tumultuous year for the company. The pandemic ravaged its business and demand for renting one-off pieces or officewear dried up overnight, wiping $250 million from the company’s valuation and forcing it to close its stores and lay off or furlough half of its staff.

Meanwhile, the resale market is booming, and according to estimates from the analyst Jefferies, generates nearly $30 billion per year and is on track to make up more than 10% of the apparel market over the next 10 years.

Read more: EXCLUSIVE: Rent the Runway CEO Jennifer Hyman, one of the most successful female founders, is fighting to save her company

In an interview with Vogue this week, Rent the Runway CEO Jennifer Hyman said the company hoped to broaden its reach by reselling clothes.

“This is another way for customers to engage with us for the first time,” she told Vogue. “There’s a very broad audience of people who want to consume secondhand, but potentially didn’t come to our platform in the past because they weren’t ready to subscribe, or they didn’t have an upcoming party or event.”

And by combining rental with resale, the company can boost profit margins through multiple transactions on the same item, she said.

“Because we monetize the product through subscription, by the time we’re selling something, we may have already rented it a few times and made money on it.

“We don’t have to charge as much as some of our competitors, who only have one opportunity to make their margin. There’s a value to the customer that she’s likely going to find better pricing on our platform,” she said.

Rent the Runway already has a partnership with online resale platform ThredUp, which launched in September last year and brought used, unsold inventory onto ThredUp’s site. Insider contacted Rent the Runway and ThredUp for more details on their future plans for this partnership, but did not immediately hear back.

As of Thursday, hundreds of items from Rent the Runway were listed on ThredUp’s site.

Read the original article on Business Insider

Gwyneth Paltrow is Rent the Runway’s newest board member – but she’s never used the clothes-rental service

Gwyneth Paltrow Getty Images
Gwyneth Paltrow joins Rent the Runway’s board.

  • Gwyneth Paltrow is joining the board of directors at clothes-rental service Rent the Runway.
  • Paltrow told The New York Times that she’s never used Rent the Runway.
  • “I’ve got my welcome code in my inbox, so I’ll soon be trying it out,” she told The Times.
  • See more stories on Insider’s business page.

Gwyneth Paltrow, actress and founder of lifestyle brand Goop, is joining the board of directors at Rent the Runway, the clothes-rental service. The news was first reported by The New York Times.

Paltrow told The Times that she’s never actually used Rent the Runway.

Rent the Runway started in 2009 as a way to rent one-off items for special events. It’s grown into a platform for people to rent everyday clothes instead of buying new ones. It has also added kids’ clothing and homeware rentals, via a partnership with West Elm.

“What’s fascinating is that, in my own way, I’ve been renting the runway for years,” she told The Times. “Borrowing a dress from a designer for a single moment at a premiere or an awards show, then giving it back afterward. Now I guess everyone is doing it. But I’ve got my welcome code in my inbox, so I’ll soon be trying it out.”

Read more: EXCLUSIVE: Rent the Runway CEO Jennifer Hyman, one of the most successful female founders, is fighting to save her company

Rent the Runway CEO Jennifer Hyman is hoping to tap into Paltrow’s entrepreneurial expertise. Critics say some of Goop’s products and recommendations, including its $66 vaginal jade eggs or bee venom therapy, are backed by unsubstantiated health claims, but Paltrow has built the brand into a $250 million empire.

“Gwyneth’s keen understanding of consumer psychology and unparalleled ability to tap into and define the cultural zeitgeist will play a key role in propelling Rent the Runway forward in a post-pandemic world,” Hyman said in a LinkedIn post this week, adding that the two have known each other for longer than a decade.

Rent the Runway started in 2009 as a way to rent one-off items for special events, and it’s grown to become a platform for renting everyday items as an alternative to buying new clothes. It has also added kids’ clothing and homeware rentals, via a partnership with West Elm.

Pre-pandemic, CEO Jennifer Hyman was prepping it to become the “Amazon Prime of rental” by diversifying into new areas. But when the pandemic hit, people went off the idea of renting clothes. It wiped $250 million from the company’s valuation, and Hyman was forced to close its stores and lay off or furlough half of its staff.

Read the original article on Business Insider