Shoptalk 2024   //   March 22, 2024

How Nuuly tweaked its business model to hit profitability

Last year, Urbn-owned apparel rental service Nuuly announced that it hit profitability. Now, it has plans to continue to grow the business while keeping its financials in check.

“We always hoped and thought we had a chance to get [to profitability],” said Nuuly’s president and Urbn’s CTO David Hayne. “We intentionally positioned the brand — from a pricing standpoint, from a value proposition standpoint, from an investment standpoint — with the financial model that we thought could grow to a profitability position within a three to five-year timeframe.”

Hayne and Nuuly’s executive director of marketing Kim Gallagher sat down with Modern Retail earlier this week at Shoptalk. The two dove into the dynamics that helped bring the company to its current financial position.

Nuuly first launched in 2019, riding the coattails of the then-popular clothing rental space. Rent the Runway had yet to go public, but raised $125 million that same year, giving it a private valuation of over $1 billion. Nuuly worked by charging an $88 monthly fee that would provide rental access to over 100 brands that Urbn already sells. Hayne told Business Insider that it hoped to bring in 50,000 customers in its first year.

Fast forward to 2024, Nuuly now has more than 200,000 customers — the upward limit of what its 300,000-square-foot fulfillment center outside of Philadelphia can handle. Now, the company is opening a new 600,000-square-foot facility in Kansas City that “is going to allow us to triple our capacity,” said Hayne.

But before the company could open this new warehouse, Nuuly spent the last year tweaking its internal warehouse operations to make the business as efficient as possible. These changes included adding a white cycle to the company’s laundry workflow as well as upgrades to garment carousels to make them more automated, which helped reduce the time workers spend traveling to pick up items. “You add up a hundred of those small things and you get to improve performance,” he said.

But it wasn’t only streamlining the warehouses that helped the company hit this milestone. Marketing and pricing also played a big part.

“Our CAC has been really favorable since we launched,” said Gallagher, the company’s executive director of marketing. “A really decent percentage of our customers are coming in via word of mouth.”

According to Gallagher, the company has leaned predominately on influencers to market the company. Nuuly tested out a brand ambassador program this past fall and told Marketing Brew that 20% of its influencer revenue came from one creator with an especially diehard following. But, since the rental model is still relatively new, “it does require a lot of explanation and education — and no one does that better than friends and family.”

Even with much of the customers coming in from word of mouth, Gallagher still sees paid marketing as a necessary part. “Something that we maybe do a little bit more uniquely from some other companies is that we’ve probably invested a little bit more on the creative side on people that are social media experts,” she said.

“We have a content studio where we’re creating entertaining content, first and foremost — less so about directly selling the subscription, but more about making people laugh. We lean into humor quite a bit, but I think a lot of that content gets shared and, to me, that’s word of mouth too.”

Another big change implemented last year was a price hike from $88 to $98. While Hayne admitted there was a small amount of churn when the change was implemented, he said, “We tried to do it in a way that kind of softened the blow to a degree with our existing subscribers, where we kind of gave them notice that it was going to happen in a few months,” he said. Ultimately, he said, “We were quite happy with how that rolled out and how people received it.”

In many ways, Nuuly is an anomaly in the space. Rent the Runway, for example, reported a revenue drop at its third-quarter earnings last year, and announced this past January plans to lay off 10% of its corporate staff. At an earnings call, Rent the Runway founder Jennifer Hyman attributed some of its business shortcomings to an inventory depth issue.” Today, its stock price is less than $1 and its market cap is just over $26 million.

One issue for the industry may be that, despite being around for a few years, rental has yet to hit the mainstream. “I think there’s a lot of growth potential in breadth of market, and I do think more consumers are gaining trust and being introduced to it,” Nora Kleinewillinghoefer, partner at Kearney, previously told Modern Retail. “I think it’s still a relatively new experience for many consumers.”

Nuuly’s executives would agree with this sentiment — but is trying to use it to their advantage. “We still feel like we have a lot of growth and the reason we think that is because this market doesn’t feel saturated at all,” said Hayne. “It feels very new and nascent and we’re not in a position where we’re just stealing share from other people.”

But the challenge is to grow the business and the brand while not looking like an old behemoth. “We’re trying to kind of strike that balance — we don’t want to feel too big. There’s something uncool about feeling too big,” he said.

As such, the plan is to grow — but not at all costs. “[2024 is] really a year of efficiency for us,” Hayne said. “And I don’t mean that in terms of cutting costs — I mean that in terms of shoring up our infrastructure, shoring up some of our technology initiatives, making things scalable, getting Kansas City fully transitioned and up and running.”