It was mid March and businesses were just starting to feel the impact of coronavirus — even highflying startups weren't immune.
During a virtual company-wide meeting, Rent the Runway co-founder and CEO Jenn Hyman told staff that the clothing rental company would freeze hiring for the rest of 2020, cut its marketing budget, and that the leadership team would all take pay cuts. Some staffers were also told to negotiate better terms with vendors, like extended payment terms, by their managers.
"We were all beginning to get worried, and knew that layoffs were a possibility," said a former employee who attended the meeting and was ultimately laid off. "But you always just hope it's not going to be you."
Just a few days later on March 27, employees received an emotional video message from Hyman in their inboxes and were instructed to join Zoom calls where various department leads told members of their teams that they would either be laid off, furloughed, or receive a pay cut, according to three former employees with direct knowledge of the event. Former employees told Business Insider that their email accounts were disabled within 30 minutes of the calls.
Rent the Runway has furloughed corporate employees — roughly 35%, according to the company. It also laid off "less than 10%" of its overall headcount, but wouldn't be more specific. The cuts are a result of the fallout of the coronavirus, the company confirmed to Business Insider.
"We built Rent the Runway so our customers could 'show up' feeling powerful and confident every single day, whether they're at work or in a Zoom meeting," Hyman told Business Insider. "No amount of scenario planning could have prepared any business for the fallout of coronavirus, but our path forward remains unchanged, and even in a new normal, our mission is more relevant than ever. We will continue to be here for our customers so they can access the closet in the cloud with total flexibility."
These cuts coincided with the startup laying off its entire retail staff late last month, on the heels of its retail stores in Chicago, New York, Los Angeles, and Washington, DC, being forced to shut in the wake of the pandemic.
A slew of startups, from lingerie startup ThirdLove to luggage unicorn Away, have been grappling with the effects of the pandemic with states mandating the closure of non-essential stores and customers curtailing their spending.
But as a flag-bearer for the new breed of direct-to-consumer brands, Rent the Runway's ability to withstand the crisis and avoid a repeat of past missteps could serve as an important test case for startups facing the biggest business threat in a generation. Particularly for those in the sharing economy, as consumers rethink borrowing rather than buying cars, apartments and clothes for safety reasons even once the pandemic passes.
Business Insider spoke with 10 former Rent the Runway employees. Some were directly impacted by the layoffs and worked at the company as recently as last month, while others left the company over the course of the last 15 months. They said that they thought the company was on solid ground before the pandemic hit.
These sources' identities have been confirmed by Business Insider but they requested anonymity because they are not authorized to speak publicly about the company.
Unexpected roadblocks for the unicorn
Rent the Runway pioneered the concept of women borrowing high-end designer clothes without shouldering the financial burden of purchasing them and has long been heralded as one of the hottest tech startups. Started by Harvard Business School classmates Hyman and Jenny Fleiss, it's raised $337 million and notched a valuation of $1 billion.
But the company's ability to expand its retail footprint, grow its business, and go public is now in question.
US retail sales, including clothes and accessories bought in stores and online, fell 8.7% in March, according to the Commerce Department — the largest decline in the nearly three decades that the government has tracked the data.
Rent The Runway's business is no exception as consumer behavior has shifted in the wake of social distancing and mandatory work-from-home policies.
With many customers working remotely, spending $159 a month for an unlimited office wardrobe may no longer make sense. And with few weddings or special events, there's little need for designer dresses.
"There's a confluence of factors that, unfortunately, is all running counter to their business," said Sucharita Kodali, VP and principal e-commerce analyst at Forrester. "They're in apparel, where everybody's gasping for air right now; their core customers are not going out anymore; and they may have reservations about renting clothes and receiving packages in the middle of a contagious pandemic."
The layoffs at Rent the Runway impacted employees across teams including operations, customer experience, talent, product and business development in offices across the country, a company spokeswoman confirmed to Business Insider.
Temporary workers at the company's two distribution centers in Secaucus, New Jersey; and Arlington, Texas, did not have their contracts extended. Rent the Runway has also shelved plans to open an office focused on customer experience in Denver.
The company has had growing pains
In its first few years, Rent the Runway's business was focused on one-time designer wear rentals. But since then, it's added subscriptions tiers, retail locations, new sustainable brands and categories like home furnishings, and distribution and collection partnerships with companies including WeWork and West Elm. The idea was for the company to ultimately help people rent anything, from dresses to home furnishings, Hyman told CNBC last summer.
"Our goal is to be the Amazon Prime of rentals and reach every single person in the US and the world," she said.
But that expansion has come with growing pains.
The company's culture was the subject of a 2015 Fortune Magazine report that described a "stressful and occasionally hostile" workplace at the startup and documented a high rate of executive churn at the company. In October 2019, a weeklong shutdown affected roughly 14% of subscribers and halted new membership. A recent Medium post by a former employee criticized its handling of COVID-19.
While Rent the Runway has bounced back from these stumbles, according to the former employees, some said that they feared that it may not be able to shrug off the impact of the pandemic as easily.
The company has said that more than 75% of its revenue is from subscriptions, while the rest comes from one-off rentals and sales of items. A reliance on subscriptions represents a challenge to Rent the Runway's ability to maintain profitability, the former employees said, because subscriptions — particularly the popular unlimited tier — have low margins.
Rent the Runway has been creating new subscription tiers (it just launched a new plan between its single swap and unlimited tier that lets members exchange eight items a month), and entering into profit-sharing agreements with new brands and designers. These moves were a bid to improve margins, these former employees said. But the coronavirus coming out of the left field will likely make things harder, they said.
"Rent the Runway was headed in the right direction," a former employee told Business Insider. "But it's a tough spot to be in right now, because rental fashion isn't the highest margin business to begin with, and combining that with a recession only makes things worse."
Business Insider was unable to pinpoint the precise financial impact of the coronavirus on Rent the Runway's business, but some former employees said that the company is trying to weather the downturn by extending the duration of its sample sale, which is typically done to swap out clothes that can't withstand the dry-cleaning cycle. It is also giving subscription members two bonus spots for swapping clothes to get them to stick to their memberships versus canceling them, according to the former employees.
As the coronavirus's spread threatens thousands of businesses and retailers, Rent the Runway's future remains uncertain.
"There's not a lot that you can do except ride it out, preserve as much cash as possible, and cut costs with layoffs, salary cuts, and variable expenses with as much of your core assets intact as possible," said Forrester's Kodali.
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