Flash sales are one of the fastest-growing e-commerce segments online. The only reason you aren’t reading about it every day is it’s been overshadowed by an even faster-growing e-commerce innovation — daily deals — but flash sales are a real, enormous market.
And one that’s been troubled lately, as layoffs at several flash sales companies have occured. Are flash sales just a flash in the pan? Or are they here to stay?
In this report, we take a closer look at this market. Here’s what we argue:
- Flash sales are a real, exciting market;
- The market is currently headed for a shakeout as some actors grew too big too fast, and others didn’t grow enough;
- Longer term, the market will still grow fast as flash sales move downmarket and grab share from offline, off-price retailers; we estimate that the market will be worth $6 billion by 2015.
Here’s what you’ll find in this report:
- A quick history and explainer on flash sales: what they are and how they work.
- Why the shakeout is happening and what’s going on.
- The potential for flash sales operators to get into an exciting adjacent market: fast fashion.
- Longer-term perspectives on the market and where it’s going.
How Flash Sales Were Born
As the world economy gained terminal velocity towards a cliff dive in 2008, networks of urban-sophisticates-cum-closet-bargain-hunters were suddenly abuzz with the newest e-commerce phenomenon: the flash sale.
Nascent flash site incarnations had the air of a sample show down a side alley with a secret handshake to gain entrance. Exclusive and largely invite-only, early sales promised patrons steep savings of up to 70% on chic lines like Ralph Lauren Purple Label and Zac Posen. While this may draw blank stares from a habitual jeans and t-shirt wearing research analyst, we are told these are impressively deep discounts on otherwise out-of-reach labels.
How were they able to pull off this feat? A combination of impeccable timing and an astute business model (with an emphasis on the timing).
In the run-up to the Great Recession luxury apparel companies drunk on the dream of inexorable wealth gain amassed staggering inventories — just as consumer spending was on the cusp of cratering. After the bottom fell out of the economy, the industry was left with an unprecedented supply overhang and difficult choices to make. On the one hand, they want to move the merchandise off the market as quickly as possible. On the other, they want it done in a discreet manner to maintain the aura of exclusivity they have carefully cultivated around their brand.
Historically, there was no ideal option for apparel companies to liquidate excess inventory. Invariably they would have to resort to off-price department stores with a reputation for haphazard brand management like TJ Maxx, Marshalls, and Ross Dress For Less. Given the uniquely large supply glut in 2007, offline retailers of all stripes were likewise incentivized to convert their own inventories to cash positions, translating to even deeper discounts and fewer brand protections for manufacturers.
Into the void stepped flash sale sites to offer companies a novel strategy to off excess inventories while simultaneously creating an illusion of exclusivity. It is important to point out that flash sales are not as entirely new as many Americans may think; pioneering French flash sale site Ventee Privée was founded in 2001 and profitable in 2004 (something no stateside flash site has yet accomplished). Nonetheless, what started in late 2007 with an e-mail blast to 15,000 friends and acquaintances at the Gilt Groupe, has turned into the latest online shopping phenomenom. (disclosure: Gilt co-founder and CEO Kevin Ryan is Chairman of Business Insider)
Kelton Research, for example, found that more than 3 out of 5 Americans preferred to spend money on discounted items online over physical retail stores. A Bain Consulting study with Communispace, meanwhile, determined that subscribers were drawn to daily-deal or flash-sale sites by the low prices and the “excitement of discovering new brands, products, and services.” The payoff has been huge: Domestic flash sale sites generated an estimated $1 billion of revenue in 2010, according to comScore.
How Flash Sales Work
Flash sales attempt to recreate the frenzy and excitement of a sample sale from the luxury of your own home (or cubicle). The process starts when the flash sale operator purchases excess out-of-season inventory at steep discounts from various brands. On the anointed day and time (usually noon EST), the operator sends out an e-mail blast to its members announcing the sales and the frenzy commences before winding down 24 to 72 hours later.
I will emphasise the word frenzy by the way. The first hour of a flash sale sort of feels like the virtual equivalent of the 1996 cinematic classic Jingle All The Way (wherein Arnold Schwarzenegger and Sinbad desperately battle each other for the last Turbo-Man action figure on X-Mas Eve, for the uninitiated). If you are an average size human being showing up to hour 30 of a flash sale looking for the right deal on that medium sweater, I have one piece of advice for you: fuhgeddaboudit. The flash sites are conscious of this trend: Gilt books 50% of its deal revenue in the first hour of a sale.
It’s easy to see why this is a win-win for all involved. The limited supply of high-end apparel at deep price markdowns creates the illusion of scarcity that protects a designer’s brand image, despite the fact that they’ve just thrown their doors open to the plebeian masses. Consumers get huge discounts on desirable brands while being made to feel like they were just hushed into a back room for an exclusive deal. The flash sale operators meanwhile — and this bears repeating — have created a billion dollar industry in a few short years on the ashes of a record supply overhang.
While the flash sale phenomenon has its roots in fashion and apparel — Gilt, Rue La La, HauteLook, Ideeli, Beyond the Rack — the industry has turned its eyes outward into adjacent lifestyle-oriented markets. Gilt, for example, now has Gilt City (a high-end daily deals site), Gilt Home (for interior designs) and Jetsetter (for travel). According to Gilt CEO Kevin Ryan, end-of-season apparel only accounts for 35% of revenue now (see screenshot below for all the new verticals).
Meanwhile, a new wave of niche flash sites have staked their claim in the market over the past year, pointing to an emerging fractionalization of the industry. Fab and One Kings Lane, focused on interior decoration and design, both recently raised huge rounds after staggering revenue growth. Lot 18 carved out a niche in wine sales and other epicurean delights and raised a massive round in the past year. Zulily, a flash site for baby and children’s products, raised $43 million at a valuation of more than $700 million. Artspace is attempting to bring the flash sale to the art world. Just how far can this go? Marketing consulting firm Catalyst S+F hopes to soon extend the flash sale concept to ad buying.
The success of the flash sale concept has also drawn interest from traditional retailers and a number of ‘me-too’ imitators eager to get their piece of the pie. Nordstrom’s bought HauteLook for a reported $270 million last February. Saks Fifth Avenue, Neiman-Marcus, and Amazon have all created their own flash sale sites. Meanwhile, pioneering French flash site Ventee-Privee teamed up with American Express to launch their own assault on the U.S. market.
The success of the industry ironically has become its own worst enemy.
The Coming Shakeout
Speaking to CNNMoney recently, Ideeli CEO Paul Hurley oozed optimism, “With the tail winds we have behind us, we’ll be a $3 billion business in 10 years and, frankly, getting to a billion, we’re gonna do that in very short order.” Make no mistake though; despite rosy predictions and early successes, all is not well in Camelot. Fissures have begun to appear in the flash sale model, leading some to question the ultimate sustainability of the concept.
To reiterate; in the immediate wake of the Great Recession, inventories of luxury goods stood at about 10 times their normal levels. Simultaneously, manufacturers and retailers retrenched and slashed production schedules by 10-15%. After the initial successes of Gilt and others, an influx of new flash sites increased competition over contracting inventories and debased the economics of the flash sale, limiting their ability to offer deep discounts. Apparel brands once reduced to price takers became price setters as they found a host of new companies eager to secure excess inventory. To bolster inventories, flash sites started stocking brands lower down the luxury/prestige scale. As a result, flash sites once accustomed to posting 70-80% markdowns now offer discounts in the 40-50% range (see chart above. Note: the chart, from this excellent post on Quora by industry executive Matthew Carroll, is not based on real numbers, but meant to elucidate the trend).
Still deep? Absolutely. But enough to maintain the industry’s momentum? Maybe not. An investigation by The New York Times found that many products featured on flash sale sites could be bought at comparable and even cheaper prices through conventional e-commerce sites. Because of the nature of the flash sale, these deals seem unparalleled in the thick of the frenzy — when consumers lack the luxury of price comparison. On top of that, most flash sites have limited return policies and charge for shipping (unlike many other e-commerce sites). The escalating cost of securing the ‘raw goods’ of the flash sale business threatens to undermine its value proposition: High-end product at unbeatable prices you can’t find anywhere else — all resting on the illusion of scarcity.
Thankfully, flash sites are seemingly aware of this danger and have not passively accepted the headwinds facing the industry. Some, like Ideeli, have abandoned the notion of luxury flash sales altogether to focus on lower-priced items where inventories are still bountiful. Others, as we mentioned, have diversified their revenue streams by extending the flash sale concept into other lifestyle markets. This strategy seems to have hit a snag: Gilt is axing 50-60 workers from peripheral verticals after they failed to deliver growth. More interesting though are a number of initiatives that would fundamentally alter the flash sale business model as it currently operates.
Gilt, for example, recently opened a full-price store for men called Park & Bond that represents a new direction for the brand. The site is focused on personal curation, with brand profiles and ‘stores‘ curated by GQ, hip brands, and popular blogs (see screenshot of GQ store above). The site seems like a natural extension of Ryan’s goal to create “a broader lifestyle brand, all high-end,” focused on creating customised user experiences. According to Ryan, Gilt now sends 2,000 different versions of their daily e-mail blasts and users are shown different sales based on customer data. In a bid to secure inventories, Gilt now practices ‘pack and hold‘ as well. If, for example, a brand has 15,000 orders but needs 20,000 minimum for their manufacturer, Gilt will step in and order alongside retailers and hold the product till the end of the season.
Fab has also experimented with the flash sale model by introducing a series of virtual ‘pop-up stores’. The curated collections are organised around a specific theme and usually last for a few weeks. The stores have been successful for the company so far and CEO Jason Goldberg hopes to run two or three pop-up shops concurrently in the future.
The most oft discussed pivot for the industry is the introduction of private label apparel. While Gilt has toyed with the idea, none of the major players have decided to take the plunge. Saks’ FASHIONfix stocks excess inventory like other flash sites, but now also asks vendors to manufacture private product out of excess inventory. It is easy to understand the reluctance of flash sites to start private labels. They would be competing with their suppliers — never a great idea. More importantly, the success of the venture is far from guaranteed. Would consumers choose a Gilt or Ideeli line over the brands that initially drew them to these destinations in the first place?
The most interesting prospect for the industry, however, may be one that has not been explored by any of the major flash sale operators — yet.
Is Gilt Groupe the next Zara?
Industry executive Matthew Carroll raises an interesting possibility. Zara, along with H&M and Topshop, are pioneers of fast fashion, which upended traditional retailing by capturing current fashion trends using breakneck design and just-in-time manufacturing. A thoroughly vertically-integrated organisation, Zara’s floor managers communicate directly with its designers to let them know what is and isn’t selling. Using reams of consumer data and one of the most complex logistics systems in the world, Zara is able to turn out product for stores in as little as two weeks when it takes many competitors six months.
If they wanted to, flash sales sites could compete very effectively with fast fashion sites like Zara and H&M. But they probably won’t. Why? Because luxury brands are the flash sales companies’ real customers. Without them on board, they don’t get the good inventory; without the good inventory, they’re toast. So they’re not going to be competing with them any time soon.
What’s interesting about this chatter, as Carroll points out, is that flash sites are probably sitting on more data about real-time fashion trends than anyone else in the world. He also identifies an inherent advantage over fast fashion retailers too: the data is completely automated (clicks, views, and buys). Flash sites could not only use this data to glean insights for its own sales but could share with its vendors to secure inventories, or even start a profitable fashion data and consulting business.
The Future Of The Market
The flash-sale industry is going through some growing pains as elusive inventories and falling discounts caused some to question the ultimate sustainability of the flash sales model. Nonetheless, we estimate that the flash sales industry generated approximately $1.5 billion in revenue last year, about a 50% improvement over 2010. While flash sales have lost shine in the eyes of some observers, we remain bullish on the the industry long-term.
Conventional wisdom thus far has held that flash sales represents a threat to luxury retailers like Saks and Neiman Marcus, presumably because they stock high-end merchandise and serve an affluent clientele. We have never been convinced by the idea that regulars at Bloomingdales or Barneys are ditching their position as fashionable first-movers to wishfully hope the season’s best finds will fall into their laps at bargain prices online months later. Rather, we are of the opinion that the success of flash sales is the result of its ability to induce opportunistic impulse buys — purchases of brands previously out of reach or pieces at more attractive price points.
However, what started in luxury markets is quickly shedding its upscale pretensions and moving down the price chain. Ideeli has abandoned luxury to focus on more middle-market, mass-produced brands, while companies like Karmaloop-owned PLNDR and Thrillist-owned JackThreads have brought the flash sale to the t-shirt and jeans set. We believe that the flash sale will continue to open up to a larger market and will ultimately disrupt the off-price retailing market. Flash sales provide a better service to brands than offline retailers like the TJ Maxx and Marshall’s outlets of the world and we expect that excess inventories will continue to migrate online.
We estimate that the six largest U.S. off price retailers will generate approximately $36 billion of domestic revenue in 2011. Flash sales have only just started to disrupt the model of the off-price retailers, who have themselves flourished through the depths of the recession as consumers changed their consumption habits. Based on flash sales moving downmarket and taking increasing share from offline retailers, we predict this trend will accelerate in the coming years and capitalise on the shift to online bargain hunting. We are forecasting that flash sites will continue to see robust growth in the near future and will generate revenues of approximately $6.2 billion in 2015.
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The astronomical early growth of flash sales was partially the result of an unprecedented supply overhang in luxury goods, but also a novel strategy to unload excess inventories in a manner that respected brand integrity.
While that momentum has cooled recently, we are still bullish on flash sale companies because they:
- Offer apparel companies a better value proposition than any of the offline, off-price retailers
- Tapped into something unique in consumer psychology
As a result, while the market is due for a shakeout and painful consolidation, we remain very bullish long-term.