As Americans ditch ownership, just ~300 startups exists in the rental goods space
5 Minute Read
What you need to know
- Americans are becoming more nomadic, with a steady growth in renters since 2006.
- The biggest companies, Rent-A-Center and Aaron’s, have catered for decades to lower-income clientele, often with predatory business practices.
How you can capitalize
- Market a rental goods company to college students, the most mobile populations in the United States. Or market toward boomers, who are scaling back on possessions but have been mostly neglected by current startups.
- With other companies renting furniture, focus on interior design and make good use of VR.
- Build a logistics platform that makes it easy for companies to rent, clean, and return items.
The United States is changing into a country that favors mobility, sustainability, and convenience — not permanence — and not enough businesses are keeping up.
According to Pew, there were more renters in the United States in 2016 than at anytime in the previous 50 years. The total number, 43m, has increased 26% since 2006. Meanwhile, the number of homeowners is about 75m, which has stayed flat since 2006.
The transition to a rental society has led to a population that wants to own fewer items. People are less and less comfortable with purchasing and hauling around luxury items and necessities for their homes.
Yet according to Crunchbase, just ~300 startups exist in the rental space. That’s less than the number of farming startups (343). And the rental goods space has been churning along — even through recessions — at a 4% CAGR. On top of the growth, Rent-A-Center, a longtime but controversial leader in rental goods, estimates $14B in white space for companies that master ecommerce in the industry.
Rent-A-Center and its competitor Aaron’s focus on customers with less than 700 fico scores, about 40% of the US population, according to a deck in the most recent quarterly earnings report for Aaron’s.
That leaves a majority of the population — a higher income bracket — that hasn’t been tapped. Although a few startups have begun focusing on furniture, opportunities remain in finding subscription rental niches — and in targeting college consumers, who are far more mobile than the rest of the United States.
New success stories
For decades, the only major players in rental goods were Rent-A-Center and Aaron’s. Rent-A-Center has been a mostly successful business since the 1980s but has also preyed on lower-income Americans, causing them to pay multiples above retail prices for furniture and similar items. Despite predatory allegations, Rent-A-Center and Aaron’s have thrived in recent years. Aaron’s stock, despite a dip in the third quarter this year, is trading at nearly three times its 2016 value. Rent-A-Center is up nearly 300% since March 2018.
They’ve been joined by startups that cater to younger and often higher-income consumers with more reputable business practices. These companies provide rentals of everything from furniture to linens to clothes to motor scooters — for longterm leases and daily or hourly rentals. The last half of November alone saw rental-affiliated companies take in more than $200m in funding, according to Crunchbase.
Although blockbuster companies like Rent The Runway attract the most attention, several lesser-known startups have gained traction.
How do you make money by renting products? By obtaining goods at wholesale price and renting them for higher. Fernish provides an example.
It is a subscription furniture service that lets users keep furniture for as long as they want and is available in Los Angeles and Seattle. It has raised $30m in funding since launching in 2018. The founders described their idea as stemming from living a life on the move: “We loved the idea of moving: new home, new city, new job, new furniture. But when it came down to it we just didn’t love the reality: The expense and hassle of moving existing furniture that might not match that new home or style, kicking cheap furniture to the curb and contributing to the 9.8 million tons of furniture that ends up in US landfills annually.”
- Fernish obtains the items at a wholesale price and makes money by renting them at retail rates. For example, someone who rents a sofa that retails for $1,508 pays $63 a month for a year (the rate is higher for shorter durations). If that person keeps the sofa for longer or chooses to pay until they own the sofa, they’ll never have to pay more than $1,508. Its pricing strategy differs from the Rent-A-Center model, in which people are charged a rate that adds up to more than the retail price.
- Fernish’s estimated revenue, according to Crunchbase, is $2m a year.
Opportunities for other rental companies
- Rental exercise equipment: For the growing numbers of people who want to exercise at home but not at Peloton prices.
- Interior design: Everything from standard rentals, a la Fernish, to higher-end subscription services that offer redecorating on an annual basis. VR could be used to let customers visualize potential new interior design options.
- A boomer-centric business: Younger people are renting because of mobility and unaffordability. Boomers have money, but they are also on the move and downsizing from previous homes. Tech CEO Ben Crudo has written that rental companies should “appeal to older generations, and perhaps even putting a cooler spin on age-related rental products like medical devices and mobility aids, could help bring boomers, and their enduring economic influence, into the fold.”
- Logistics platforms for rental companies: One of the major keys to success for Rent The Runway was building a system that allowed it to clean, repair, and rent clothing within a day. As more rental companies proliferate, companies that help them master this process will find success.
The college town surprise
Businesses will have the most opportunity for success in areas where people are the most mobile. There are three types of moving tracked by the Census that indicate mobility: migration to a new metro from inside the same state in the last year, migration to a new metro from outside the original state in the last year and migration within the same metro in the last year.
The Trends team crunched the numbers for every US metro area to get the total percentage of population that moved in the last year (you can see the full data here). We found that rental services geared at college students present a major opportunity. Seven of the 10 metros with the highest percentage of movers were major college towns:
- Ames, Iowa (Iowa State University)
- Bloomington, Ind. (Indiana University)
- Lawton, Okla.
- Hinesville, Ga.
- Jacksonville, N.C.
- College Station, Tex. (Texas A&M University)
- Lawrence, Kan. (University of Kansas)
- Lubbock, Tex. (Texas Tech)
- State College, Pa. (Penn State University)
- Corvallis, Ore. (Oregon State University)
Lafayette, Ind. (Purdue University)
Several other college towns appeared in the top 30, including Columbia, Mo., Iowa City, Iowa, and Ithaca, N.Y.
These are the metro areas with the highest aggregate number of movers:
- New York
- Los Angeles
- Dallas-Fort Worth
- Washington, D.C.
Established rental startups have been focusing on major metros with large young professional populations, like Seattle, Los Angeles, San Francisco, and New York. Few of those services have migrated to the college population, which is the most mobile and often looking to save money.
Although a focus on one college town wouldn’t present a large population, a brand that resonates with college students and their parents nationwide would bring a large potential market that is always on the move.
What type of services do college students, who have $574B in spending power, want the most?
- Clothing and shoes: They spend a total of $21B annually on these items. Think of a lower-key Rent The Runway that is geared for young adults.
- Exercise equipment: Students spend an average of $653 over the course their college experience on gyms and fitness.
- Car rental services: The annual spend by students on automotive services is $30B. Yes, Getaround and Zipcar offer short term rentals, but no brand is specifically targeted at college students in college towns.