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Flash-Sale Sites Reinvent the Model

Once touted to become significant online players to rival eBay and Amazon, many sites are now retrenching to adapt to a more realistic growth trajectory.

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Are flash-sale sites a flash in the pan?

This story first appeared in the February 11, 2013 issue of WWD.  Subscribe Today.

“It’s definitely a viable concept,” Martin Zagorsek, chief executive officer of Launch Collective, which provides strategic and operational support to fashion and lifestyle companies, said of the members-only e-commerce sites featuring limited-time sales geared to create a sense of urgency in shoppers. “But the format is not a game changer. It’s a great idea, but not nearly as big as all the start-ups and venture capitalists thought.”

The first wave of sites bowed in 2007, touted by their founders and investors as the next big retail trend, the platform poised to become a significant online player to rival eBay and Amazon. That hasn’t happened, and now many sites are retrenching to adapt to a more realistic growth trajectory.

According to industry experts, only 3 percent of online shoppers buy apparel from flash-sale sites. This despite the fact that 85 percent of consumers browse the Internet for apparel and 72 percent buy clothes online.

One reason for the low percentage may be the nature of online shopping. “It’s part of the trolling process,” said Paco Underhill, founding president of Envirosell. “Whether on Gilt Groupe or other sites, there’s a portion of the public that’s just there to look. They might buy something [occasionally], but they’re actually using it as a recreational activity. It’s a time-filler for them.”

“There’s still a little growth left, but not that much,” said Tommaso Trionfi, ceo of Merchantry.com, an e-commerce software provider for retailers. “The market in the U.S. could be about $5 billion to $6 billion. Gilt Groupe did about $600 million in 2012. Ideeli, MyHabit and Rue La La all do between $200 million and $300 million each. There should be consolidation. They’re fighting each other.”

One problem for flash-sale sites has been securing inventory. During the height of the recession, when affluent consumers put the brakes on spending, luxury brands were happy to sell excess inventory to flash-sale sites. Now, the pipeline for luxury goods has slowed and sites are finding it harder to secure the best labels as manufacturers cut production. In addition, retailers such as Saks Fifth Avenue, Nordstrom and Neiman Marcus have introduced their own flash-sale sites, increasing the competition for inventory.

“It is no secret that this business has been challenged,” said Sucharita Mulpuru, vice president and principal analyst at Forrester Research. “We knew the biggest challenge would be the inventory. You sell the inventory you have access to. You gain traction based on your access to inventory. At some point, the reality hits that this is an easy business to launch but a really difficult business to scale.”

“Nobody wants to give away their inventory at a low price,” said Trionfi. “Technology is helping manufacturers forecast better and better. There will always be some leftover, but it’s getting smaller.”

“We do some things that we didn’t do before,” admitted Kevin Ryan, ceo of Gilt Groupe, who is stepping down and will be succeeded by Michelle Peluso this month. Ryan, a Gilt cofounder, will remain chairman, and Susan Lyne, the current chairman, will become vice chairman. “We do more cutting, and we are increasing private label.”

“Gilt is going around asking brands to ‘do a run for us,’” Trionfi said. “Gilt will say, ‘I have 2 million members. Your product will be seen by 2 million people. How many people go through Bloomingdale’s in a day? I can expose a much larger inventory to a much larger audience. I’m selling you communications, I’m selling you advertising.’”

According to experts, some brands are manufacturing specifically for flash-sale sites. “If you see a large and steady supply of a designer, chances are they’ve made a decision to cut for the channel,” Trionfi said. “To meet production minimums, it may make sense to take the risk.” Geren Ford is an example of a small designer that is said to have cut directly for Gilt. “We’ve talked about it [doing manufacturing runs for flash-sale sites],” a spokeswoman for Halston Heritage said. “It’s actually been up for discussion in the last few weeks. We don’t think it downgrades the brand.”

Gilt has started designing and manufacturing its own children’s apparel, which gives the site more control over its destiny. It may be a precursor to other categories. “Gilt created new product in men’s and a few other categories,” said Mulpuru. “It hasn’t been very successful. Let’s see if it works in baby, which isn’t as heavily branded.”

To compensate, some sites branched into new product categories and services, with mixed results. Gilt, the largest flash-sale site in North America, shuttered Park & Bond, its full-price men’s site that launched in September, after the holiday season, merging Park & Bond with Gilt Man on the main site. Gilt put its Jetsetter travel business up for sale in October and has scaled back its food businesses. Ideeli is dropping the travel category, phasing out kids’ and exiting the men’s business, moves intended to allow the site to focus on women’s fashion and its core mainstream and aspirational female customers.

The changes to the site will “add a lot of incremental sales,” said Ideeli founder and ceo Paul Hurley. “We think there’s a $1 billion business to build here.”

Ideeli wants to be less reliant on overruns. “When we want to broaden our assortment of private label, we’re able to address that from a vertical standpoint,” Hurley said. “We have this amazing infrastructure to use. Bob [Rosenblatt, who was hired in October as president of Ideeli] was responsible for sourcing at Tommy Hilfiger. He did a lot of things in the factories.”

Hurley said private label at Ideeli accounts for about 30 percent of sales. “We’re getting out of the men’s business, but we’ll continue to offer men’s products to women to buy for men,” Hurley said. “The most successful business models are very focused.”

Ideeli.com’s sales volume in 2011 was $100 million to $200 million. Hurley declined to give a 2013 estimate.

Analysts estimated Gilt’s gross revenues rose from $25 million in 2008 to $605 million in 2011, an annual growth rate of 189 percent. The company in September said it would turn a profit for the first time in the second quarter of 2013. The company said it turned a profit in the second quarter ended Dec. 31, 2012.

Nordstrom continues to invest in HauteLook, which it acquired in February 2011, with the expectation that it will become more profitable. “Earnings are a little bit below breakeven,” Mike Koppel, Nordstrom’s executive vice president and chief financial officer, said during a third-quarter conference call with analysts. “HauteLook’s doing fine,” a Nordstrom spokesman said. “The business is on track to achieve its sales plan for the year, which will be a roughly 50 percent sales increase. “We continue with our teams at Nordstrom and at HauteLook, to work to find new ways to enhance all the channels we have available to sell product to customers.”

The Web site is providing Nordstrom with some learnings and synergies. “[HauteLook] has been growing, not retrenching,” the spokesman said. “It has been putting up some pretty impressive growth in both sales and membership.”

The site has more than 11 million members, up from 4 million last year. “Our integration is coming along, and we’re pleased with the value we’re getting from HauteLook,” he said. “Our customers have been responding favorably to this form of discovery-based shopping for some time now. We’re also finding there are benefits to being on the same team as we work together to try to secure the best product available. We’ve added a lot of talent and capabilities [to HauteLook], and we see a lot of opportunity.”

Sneakpeeq.com, a social shopping site that combines limited-time sales with aspects of gaming, is switching to a marketplace format. On Sneakpeeq, users turn over tags to “peeq” at an item’s price, encourages users to share their finds with friends, who also peeq at products. As items get more peeqs, their price continues to fall.

Sneakpeeq, which offers 3,500 brands, is “looking to double that number,” said Judy Zhu, vice president of merchandising. “We’re seeing month-over-month double-digit growth. Because we have 3,500 brands and so many more waiting to get on, Sneakpeeq.com is becoming a marketplace.” Brands such as Kerastase hair care, Dana Blair Designs and Chella skin care will be able to load the products themselves and collect the same data Sneakpeeq collects. “We already have a vendor portal tool that brands can use to process an order,” Zhu said.

Sneakpeeq could pull out and create Web sites for its most popular categories. “If beauty, the fastest-growing category, continues to grow, Sneakpeeq could create a separate beauty destination,” Zhu said. “We could have a more luxe boutique. It would be a different environment for shopping. We could do something with the personalization aspect.”

While Gilt and Ideeli have narrowed their focus, Rue La La founder Ben Fischman revealed that the site will be expanding into several new businesses. “We’re launching a much larger men’s experience in the next six months,” Fischman told WWD. “Also, home will be relaunched in the first quarter. Women’s continues to be an incredible growth driver. So does the shoe business and men’s. We talk about whether there’s any fatigue in the space. So many people are trying to get into the space. There’s a very low barrier to entry.”

“At the end of the day, brands don’t want to offload too much of their inventory that way,” Trionfi said. “Brands will scale back production, which is what the top brands have done. Louis Vuitton offers any inventory remaining at the end of the season to employees of LVMH Moët Hennessy Louis Vuitton, then destroys anything that’s left. Once the sale [to employees] is finished, they take all the clothing and burn it. You will never find Louis Vuitton on sale, and they don’t have outlet stores.”

Brands may prefer to sell to flash-sale sites over off-price retailers because the Web sites can pay 10 percent to 15 percent more for inventory than off-price chains, experts said. Flash-sale site operators said that their sites can help maintain a brand’s image through beautiful photography, while at off-price stores, garments can be sloppily displayed. “It’s a great way for consumers to get luxury goods at discount prices in a way that doesn’t degrade the brands,” Zagorsek said.

Department and specialty stores such as Saks and Neiman’s are taking advantage of their own cache. “They’re doing flash sales the right way because they don’t consider the sites a primary way for people to shop,” Zagorsek said. “It’s a way to get rid of some stuff that they [the stores] overbought. In a healthy retail environment, discount is not as big.”

Saks tries to leverage its full-price site and Saksfashionfix.com in the hope of migrating event-oriented flash-sale shoppers to higher-end price points on the main Web site.

“All of a sudden the industry had $1 billion of excess inventory that went to Gilt and other flash sites,” said Stephen I. Sadove, chairman and chief executive officer of Saks Fifth Avenue. “Now, the availability of [that degree of] inventory for flash sites has dried up.” Estimating that the amount of crossover shoppers patronizing luxury stores and flash-sale sites is less than 10 percent, Sadove said, “There is a role for these sites, but I wouldn’t worry about them taking over the industry in the future.”

 

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