Flash Sales Business: a business model which needs to be revised?

The flash sales businesses burst onto the fashion scene during the recession to try to move a mountain of unsold clothes. The original flash sales model for the U.S. exploded during a time when there was this huge abundance of excess inventory. Since there is now is less luxury excess inventory, will these businesses go down? There is a huge risk which has forced these companies to pay more or find other ways to get their products.

Flash-sales websites offer steeply discounted products for a limited time. The model was started by Vente Privee in France a decade ago and focused on luxury apparel and accessories. Vente Privee grew fast and profitably in Europe and that spawned similar businesses in the United States. Gilt, which started in 2007, is the largest flash sales business in the United States, followed by Rue La La, HauteLook and Ideeli, according to GreenCrest Capital analyst Anupam Palit.

Soon after these companies started, the financial crisis ravaged markets and deflated the fortunes of many newly wealthy people. Luxury goods inventory rose to about 10 times its normal level, giving companies adequate supply, good pricing and brands willing to talk to them. This lasted well into 2009, allowing flash sales sites to offer top brands at discounts of 70 percent or more, which attracted lots of new customers. By September 2009, Gilt had 325,000 unique monthly visitors to its website, while HauteLook had 433,000. Ideeli had 312,000 and Rue La La had 206,000. A year later, unique visitors to these four websites had more than doubled. While that growth was happening, retailers and manufacturers cut production by 10 percent to 15 percent. By early 2010, there was a lot less inventory.

As companies grow, they can usually reduce costs by buying more in bulk. But as flash sales sites expand, they must get products from a shrinking supply, which raises costs. Their price discounts have fallen this year, partly because companies are competing for inventory and paying higher prices. Gilt discounts used to be 70 percent, but 40 percent to 50 percent is more common now. Ideeli moved away from top brands to take advantage of lower-priced items because there is more inventory. Gilt and Rue La La have branched out into travel, home decor, food, wine and daily deals. Flash sales companies offer fewer top luxury brands now.

In conclusion the Flash Sales Business will not go down. It will have to adjust its business model the new trend of the economics, and as usual in the digital world the sooner the new strategy (diversification to travel, food less high-end brands) the higher its bottom line. And the bisiness in the US should be impacted by the launch of vente-privee USA, who built a JV with American Express and its over 40M email addresses listing.

Sources: NYT, WSJ, Reuters