The Trouble with Flash Sales

LONDON, United Kingdom — Last week, Arcadia Group CEO Sir Philip Green announced that he had taken a 25 percent stake in Mysale.com, an Australian flash sales site aiming to reach revenues of about $300 million this year. "[It's a] very, very interesting space. I like the business model, and the reverse season," Green told Women's Wear Daily. The site owns only 10 percent of its inventory. "Ninety percent is sold before they even buy it. I like that model," Green added.

It further emerged that Green plans to use Mysale as a sort of online outlet store for Arcadia’s many brands, which include Topshop, Miss Selfridge and Dorothy Perkins. There have also been “discussions,” according to Green, of an IPO later this year. Mysale — which currently operates in Australia, New Zealand and several southeast Asian countries — will soon launch in the US and UK, and plans to move its headquarters from Sydney to London.

But the investment is curious, not least because several once-hyped flash sales sites have run into serious trouble in recent years, failing to meet investor expectations and calling into question the sustainability of the business model.

When eBay acquired GSI Commerce in 2011 for $2.4 billion, the company shed some of GSI’s assets, including flash sales site Rue La La, which had been a drag on GSI’s profits, according to analysts. Last year, Gilt Groupe — the first flash sales site to launch in the US back in 2007 — finally crossed over into profitability and, earlier this year, the company was said to have hired Goldman Sachs to help edge along its long-stalled plans to IPO. But Forrester analyst Sucharita Mulpuru is skeptical. “They've been talking about Gilt's IPO since 2012 — probably before that. Maybe it'll be this year, depends on their numbers."

But it gets worse. Flash sales site Ideeli was acquired by Groupon earlier this year for just $43 million after raising $107 million in venture funding between 2007 and 2013, representing a significant loss to shareholders. And just today, Fab.com announced another round of job cuts, laying off 80 to 90 people, in a move attributed to the company’s on-going shift away from a labour-intensive flash sales model to a more standard e-commerce approach.

Indeed, while many of the original flash sales sites are still around, several have pivoted away from the model and none have accomplished the sky-high exits once expected of them. “I think, fundamentally, this is a tough business,” said Mulpuru.

The flash sales model first emerged in the US at the end of 2007 with the launch of Gilt Groupe, a site offering customers the alluring opportunity to get their hands on heavily discounted inventory from high-end brands at noon every day. Gilt executed well on several fronts. But perhaps more than anything, timing was critical to its rise. Back in 2007, with the Great Recession looming, fashion brands were desperate to liquidate large quantities of excess inventory and, from 2009 to 2010, Gilt’s revenue rose from $170 million to $425 million, according to estimates published in 2011 by Internet Retailer.

But as retailers readjusted their output and market conditions improved, acquiring quality inventory became a serious issue. “The fundamental challenge that anyone in the off-price sector has is how to acquire inventory — enough supply to drive sales and at a cheap enough price to drive volume,” said Mulpuru. “The big off-price retailers [such at T.J. Maxx] can make enormous buys, discreetly dispose of it and everyone is happy. But the supply of liquidated inventory isn't big enough even for them. That's why those big guys need to manufacture merchandise, or they make early buys and pre-commit to merchandise to increase their access to supply. Flash sales sites are much smaller and just don't have the purchasing power,” she continued.

What’s more, especially in the US market, regular markdowns have long been part of the way retailers do business. Specialty retailers and department stores alike offer 30, 40, even 50 percent markdowns on new inventory to help drive people into their stores and slash further when it comes to older merchandise. As a result, the deal offered on a pair of current season jeans by a department store like Bloomingdale’s can be more alluring than one offered by Ideeli on a pair that is three or four seasons old.

France, where sales are heavily regulated and occur only twice per year, is the exception to this rule, and perhaps it’s not surprising that the original flash sales site, Vente-Privée (the inspiration for Gilt Groupe) was launched there. The company generates about $2 billion a year in sales in Europe, though, in 2014, 80 percent of this will come from France, according to founder Jacques-Antoine Granjon. And although Vente-Privée entered the US in 2011 in partnership with American Express, growth has been slow. “We’re aiming for $100 million in sales [in the US] by the end 2015,” said Granjon, who points out that he can afford slow growth, while most of his venture-backed competitors cannot. “I can take the long-term view because we raised zero [at the beginning],” he said, adding: “We are fighting a war, you know. The inventory is the rare diamond.”

In the face of this scarcity, “some of them have done a great job in presenting themes, either around designers, or increasingly — and I think this may be a reflection of some of the inventory challenges — putting together themes like ‘little black dress,’ and then pulling together a lot of different inventory that relates to that theme, so that they’re not dependent on one designer to float a sale,” said Nikki Baird, managing partner at Retail Systems Research. “Typically when they do that, they’re also bringing a fashion blogger’s mentality and content to the game, so you’re not just cherry-picking the brands you like, you’re forming a relationship with the flash sale brand as well.”

Rue La La has also moved towards an approach that’s increasingly about the combination of content and commerce. “We have become as much of a destination for fashion advice as we are a new store that launches every single day at 11am,” said Steve Davis, CEO of Rue La La, which currently boasts 12 million members. “We’re thinking about it as a marketing vehicle,” he added.

Indeed, Rue La La regularly hosts themed sales and often teams up with studios to help market the premieres of TV series and films. Recently, it launched a themed boutique featuring products inspired by characters in Fox's romantic comedy The Other Woman, starring Cameron Diaz, Leslie Mann and Kate Upton.

Gilt Groupe, too, has invested in content and currently employs publishing veterans Tracey Lomrantz Lester and Tyler Thoreson. For Michelle Peluso, the former Citigroup marketing head who replaced co-founder Kevin Ryan as Gilt Groupe’s CEO last year, the focus is on keeping up with rising consumer expectations and improving engagement at every level, from bettering the mobile experience to ensuring the content and products displayed by the site are relevant to individual users. “I think this shift in consumer behaviour — in Gen Y preferences — is happening at an unprecedented, and arguably unexpected, rate,” she said. “Forget flash: that word has a lot of meaning and carries a lot of baggage. [Our goal] is to keep them excited every day about great brands.”

As for Mysale, the company’s potential remains to be seen. The Arcadia deal gives the site instant access to inventory, as well as additional capital for customer acquisition. But the power of the flash sales model remains questionable. “I think it’s a here-to-stay part of the retailing landscape,” said Baird. “But for me, the biggest indicator of the growth potential for this industry is the amount of inventory available to supply it. For the brands that supply this market, there is greater incentive to not have any clearance inventory left and thus capture as close to full price — and full margin — as possible. With that incentive in place, I doubt that flash sales will ever take over a huge chunk of the retail market.”