Gilt chairman Kevin Ryan is feeling good about the world. "In December, the month that just ended, we signed up more members than we've signed up in the history of the company," he tells me. Great news! So no problems on the flash sale front? "All the companies in the space are growing quite quickly. Not everybody's going to make it, but the category is doing extremely well."
Mr. Ryan is, to put it politely, in the minority. The flash-sale model, selling overstock products at deep discounts for a short period of time, saw great success a few years ago, but now venture capitalists are singing a different tune. "There will certainly be a lot of carnage in the flash-sale space," one funder with ties to the industry told us. "If you're not the leader, it's really hard."
"It's a horrible business, the margins are horrible, and they'll all be done in the next couple of years."
Scan the headlines and you'll see what he means. Everywhere you look, executives are bailing out. IPOs plans are quietly tabled in favor of one more funding round. Firms shed workers and pivot into different industries. Gilt itself has already shuttered one property and looked to sell off another.
Another prominent VC we spoke with was ready to write off the whole flash-sale sector as the financial equivalent of a slowly lifting hangover. "It's a horrible business, the margins are horrible, it's bad for the brands and they'll all be either done or relegated to some backwater in the next couple of years," he told The Verge. "It's a classic case of investors and entrepreneurs not really understanding how an industry operates."
Fab has given up on discounts entirely
Across the board, smaller companies seem to be buying into the doom-saying and shifting away from flash sales entirely. Lot18, a wine-focussed sale site, announced earlier this month that it was getting out of luxury flash sales entirely, shifting to a subscription-based model. Fab, often cited as a rare bright spot in the industry, has given up on discounts entirely. (Their latest move is even more traditional: a brick-and-mortar presence.) Others are resigning themselves to transforming into an overstock wing of a larger company, like HauteLook after its acquisition by Nordstrom's. It’s not as profitable, but it's better than going out of business.
It wasn’t always this way. When Gilt Groupe launched in 2007, it was riding a wave of eager brands and plentiful funding, alongside a then-surging daily deals sector. At their height, it was hiring a person a day — often high-profile editorial names like Ruth Reichl and Tyler Thoreson — and raising gobs of money against a billion-dollar valuation. It planned extravagant, attention-getting events, like a monthlong summer occupancy in an East Hampton mansion, which was called off only after an injunction by locals.
"The brands don't want to sell through Gilt for pennies on the dollar."
But by 2011, after Groupon’s disastrous IPO, Gilt started to run into trouble. Its full-price men’s offering, Park & Bond, underperformed badly, leading to massive public layoffs. The site was shuttered shortly afterwards. The IPO rumors that had circled throughout 2011 have yet to materialize. Whatever magic carried it through the first few years is now in short supply.
For many observers, the problem comes down to inventory. Flash sale sites' greatest success came amid the economic wreckage of 2008, when luxury retailers were stuck with massive inventory stockpiles, and were willing to discount them as much as 80 percent. As Fab CEO Jason Goldberg told us, "The brands ultimately don't want to sell through Gilt for pennies on the dollar. They want to be smarter in their inventory planning." Now that the panic has passed and planning has improved, those discounts are a thing of the past.
Ryan denies that Gilt had any inventory issues, saying, "If you read an article about TJ Maxx from 20 years ago, they were wondering the exact same thing." But many of Gilt’s recent initiatives seem to be addressing an inventory shortfall. The brand has expanded its purchasing from European brands, and increased private label contracts with manufacturers that don't require discounting. It has also started relying on vintage stock, and pack-and-hold stock held over from the previous season. Together, they've kept the site stocked — as Ryan points out, it's not as if Gilt has fewer sales these days — but it's a different, less exciting model than you saw in the site's early sample-sale days.
On a good day, more than half of Fab's sales happen through its app
At the same time, the e-commerce business is shifting from email to mobile, and many sites are at risk of getting lost in the transition. Goldberg says that in the past eighteen months, Fab's emails have gone from sending 75 percent of traffic to sending just 25 percent. Mobile has filled the gap. On a good day, more than half of Fab's sales happen through its app. That's a great opportunity for newcomers like Fab, but leaves the previous generation of sites in the lurch. Circa 2008, much of the strength of a flash sales site came from its email list, delivering millions of willing customers to different brands every day. As consumers shift to mobile, much of that base has to be built again.
Even for sites that clear all the hurdles, many find themselves in a business that's a lot less sexy and, more importantly, less lucrative than it seemed a few years ago. As one flash-sale funder put it, "it's the Filene's Basement problem. If you have multiple outlets of the same size and in the same space, they can compete the margin out of the business." Without the startup hype, the flash sales space is starting to look less like a glamorous new facet of the tech sector, and an awful lot like the online version of your local outlet mall.