Do you know any female friends who are obsessed with designer brands or designer sample sales? If you do, then it’s not difficult to understand why Gilt Groupe and other flash sales or private sales sites are so successful. Why is Gilt so golden? Gilt’s CEO, Susan Lyne, explained:
“Gilt was going to solve a problem for a lot of women I knew. How do we shop for things we love when we really can’t get out to shop the sales, the good sales, the sample sale?”
…there’s no store in the world that could change its entire inventory in a night. We do that every night. Customers know they’ll see something new tomorrow.
When talking about the rise of non-tech focus web startups, besides Groupon, everyone pay attention to the success of flash sales sites, like Gilt, HauteLook, Rue La La, ideeli…etc, as they are extremely profitable. Founded in 2007, Gilt Groupe reportedly had US$25 million in sales in its first year, posted another US$170 million in 2009 (a stunning figure for a start-up), and planned to double that amount in 2010!
During its most recent round of venture capital financing, the company was valued at $400 million. And not surprisingly, with this tremendous growth rate, Gilt is planning for an IPO in a year or two.
Invitation only shopping
His company sells high fashion at prices around 50 to 70 percent off retail. Access is invite-only, limited to friends of the Gilt community, although everyone can get an account if you ask for an invite. Their sales are announced by email a week ahead of time with most of them lasting 36 hours or until everything is sold. According to New York Magazine:
During the hour after its weekday sales kick off, between noon and 1 pm…its site is visited by an average of roughly 100,000 shoppers. For that time, it might as well be the most crowded store in New York.
Gilt is simply a viral-marketing phenomenon because they don’t really have to advertise. Instead it gets referral through users’ personal networks and offers incentives (e.g. $25 credit) to current members to invite their friends to join their community. Result: more than 2 million members and growing rapidly.
High sell through rates
Also, the site’s members are ideal for designer brands because most of them are female, young and high income. According to New York Magazine:
At a department store, a designer’s sell-through rates—the proportion of inventory that is actually purchased—might be around 65 percent over a twelve-week season, but on Gilt, several designers told me, sell-through rates can top 90 percent. Its customers buy everything.
Savior for young designers during recession
From the beginning, the company’s greatest challenge was going to be getting enough merchandise at such a low price level. Many brands worried that lowering prices will hurt their images.
And then recession came in late 2008. People predicted that a deep recession would mean the death of demand for luxuries; however, Gilt has thrived amid challenges.
As incomes tightened during recession, the fashion brands was left with a large amount of inventory. Gilt took the opportunity to suck up all those extra goods, saving a lot of young fashion designers from going out of business.
According to their CEO:
If a designer believes in six items and thinks they’re going to be really big, we’ll agree to take x number as a minimum but we’ll agree to take as many as y. If they can sell the difference at full price, fantastic. If they can’t, we’re going to buy them.
In this difficult times, Gilt offered a quick way to generate some cash flow for these young high fashion brands which operate as small businesses without their own warehouses or factory outlets.
Help designers make more money
However, besides liquidation, why would designers use Gilt if they can’t make any money?
In order to help designers make more money, the site allows members to place orders at the beginning of the seasons, purchasing items that haven’t become overstock yet. In this way, the cost per item will go down because of the increased volume which means that the designer can make more money overall.
Moreover, Gilt is demanding designers to make exclusive lines just for the site. There is a secret in the fashion industry that nobody wants to talk about – designers actually make low quality clothing specifically for sale at outlet malls, which means you could never see those items at retail. Basically, they are planned overstock, helping designers to make an extremely high margins.
Gilt wants to use the same model to expand its inventory. According to their CEO, 35 to 40 percent of Gilt’s women’s apparel will be acquired through this channel this year. Of course, Gilt nor the designers want to let the buyers know which items were made exclusive for the site because they are usually lower in quality.
Although the site is wildly successful now, their CEO believes:
This is an easy business to start; it’s a really hard business to scale.
Why? Because there is only so much surplus product in the world. As the company expands and competitors come in, it will be harder for them to get enough pipeline and maintain the quality of their deals.
As a result, diversification is crucial to the future of the company. Before their IPO, they have to prove that their model is able to work outside of just female luxury fashion products. At this moment, Gilt has expanded into multiple categories like men, children, gifts and travel deals.
As legendary angel investor, Ron Conways, recently said on TechCrunch:
Flash marketing, or social commerce, startups like Gilt Groupe and Groupon have “come out of nowhere” and are revolutionizing ecommerce. In three years, he says, you won’t think about Walmart, Target and Amazon when you think about ecommerce. You’ll think about this whole new wave of companies doing flash marketing.
To put it another way, we are witnessing a fundamental and systematical changes taking place in the way products are bought and sold online.
Finally, the success of Gilt has taught an important lesson that happy customers is everything. Why? Not sure if you have noticed, Gilt’s website actually doesn’t apply any Web 2.0 features, SEO tricks or SEM strategies. They just work hard to deliver a simple brand promise – you come every day and it’s new every day. Result: a huge community of loyal customers.
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