Online Flash Sale Stores: A New Market for Apparel

New Market for Apparel: Online Flash Sale StoresECON 1465, Fall 2010 Brown UniversityJina Park

Significance of Online Retail • According to new forecasts by Forrester Research*, online retail in both the U.S. and Western Europe is set for a strong period of double-digit growth over the next five years. * Forrester Research an independent technology and market research company providing proprietary research, consulting, events, and peer-to-peer executive programs.

Significance of Online Retail (cont’d) • U.S. online retail will grow at a 10 percent compound annual growth rate over the next five years to reach nearly $249 billion by 2014, up from $155 billion in 2009. • In Western Europe, Forrester expects a 11 percent growth rate for online retail sales, going from $93 billion (68 billion Euros) in 2009 to $156 billion (114.5 billion Euros) in 2014.

Significance of Online Retail (cont’d) Forrester Research http://www.forrester.com

Significance of Online Retailing (cont’d) • "Much of the overall retail sector's growth in both the US and the EU over the next five years will come from the Internet," - Forrester Research Vice President and Principal Analyst SucharitaMulpuru. • Three product categories that dominated online retail are apparel, footwear, and accessories; consumer electronics; and consumer hardware, software, and peripherals. These three product categories represented more than 44 percent of total online retail sales ($67.6 billion) in the U.S. in 2009.

Types of Online Stores for High-end Apparel • Brand’s own online stores: stores that carry items of own brand (ex. http://www.gucci.com/) • Department Store Sites : stores that carry multiple brands that are also present in actual stores (ex. www.saks.com) • Independent Multi-Brand sites: stores that carry multiple brands, sometimes with discounts. (ex. www.net-a-porter.com, www.shopbop.com (with sales section) ) • Flash Stores : stores that sell goods from multiple brands at discounted prices for a limited time (usually a few days) and quantity of stock. (“flash sales”) (ex. www.gilt.com, www.ideeli.com)

What is a Flash Sale? • Flash sales are exactly what their name suggests – sales in a flash. They are discount deals, sometimes up to 70% off but they only last for a very short period of time. Smart consumers have to know what sites are having flash sales and what time that flash sale will be taking place. • Some stores have flash sales as well; Walmart for example has short term sales, and K-Mart has 'blue light special' that is a form of a flash sale. But online, consumers do not have to compete physically with others to get to an item, as they are just a click away. However, consumers often have to register with the site to gain access.

What is a Flash Sale? (cont’d) • Flash Sales are quickly becoming the new way to shop online • With the economy still struggling to survive and consumers being more careful with their money, flash sales are quickly becoming popular and the new way to shop online and to get the most value for consumers’ money.

Importance of Flash Sale Sites • Under bad economic circumstances, the retail market has been hit hard, often leaving millions of dollars worth of inventory unsold. • Flash sites like Gilt, owned by the Gilt Groupe, HauteLook and Rue La La are amongst the pioneers who helped designers unload unsold merchandise. • Recently, more established companies like eBay are joining the market. In April, eBay launched their version of the flash site called the Fashion Vault.

History and Developmentof Flash Sale Sites • vente-privee.com : originator of the concept. French website launched in 2001. • In the US, in November 2007, Alexis Maybank and Alexandra Wilkis Wilson launched Gilt Groupe after stints at, respectively, eBay and AOL, and luxury brands Louis Vuitton and Bulgari. (with initial funding of $5 million from the venture capital firm Matrix Partners.)

History and Developmentof Flash Sale Sites (cont’d) • Today, Gilt groupe along with RueLaLa, HauteLook and Ideeli, are leaders of the market. They buy directly from manufacturers because they need bigger numbers of items than third parties, such as retailers, can provide. Membership for each hovers around 2 million, with the median household income around $100,000. • The business is blooming. For example, Ideeli is projected to generate $100 million in revenue this year. • Details: • Vente-Privee – originator of the concept in 2001, nearly $1 billion in revenue in 2009, in France, Germany, UK, Italy, Spain, • Gilt Groupe -$500 million in revenue after founding in 2007. • Ideeli – 1.3 million members, recent $20 million VC funding • Rue La La (GSI Commerce) - acquired by GSI for $350 million • Hautelook- $90 million in revenue

History and Developmentof Flash Sale Sites (cont’d) • Smaller sites such as Billion Dollar Babes, Jasmere and Urbanbloke seek to differentiate themselves from the Big Four by featuring emerging designers or focusing on a slightly different customer base. • Billion Dollar Babes started in 2001, with high-end sample sales in Los Angeles, New York and the Hamptons. Teamed with a charity, and include events featuring bars and DJs. The site plans to continue with live events, says managing director Dylan Brown, as well as online sales. • At Jasmere, the staff tests everything. They seek out upscale, eco-friendly items such as Brazil's Beija-Flor jeans and Greensbury Market, which ships fresh frozen organic beef, chicken and pork nationwide. • Urbanbloke concentrates on menswear

Current Situation of Market • Rapid revenue growth (Vente-Privee – 0-$1 billion in 6 years, Gilt Groupe 0-$400 million in 3 years) • Extremely attractive financials (e.g. very low customer acquisition cost due to viral invitations) • Larger players buying-in (GSI Commerce acquiring Rue La La for $350 million and rumors of Amazon buying Vente-Privee for up to $3 billion) • Incumbents adding Private Sales to their sites (Neiman Marcus, Saks, Comcast(Swirl)) • Venture Capitals funding new entrants (BuyVIP, Secret Sales, Private Outlet)

Rules of the Market/Defining Characteristics of Flash Stores • Flash Sales has different variations but is generally defined by the following: • Invite-only – access requires an invitation from a friend • Name brand merchandise – quality merchandise, renown brand items. not just cheap or out of date items. • Discounts – compellingly priced to drive impulse purchases and loyalty • Selling Event – timed event at which the merchandise is offered until it sells out or a time limit is reached (limited stock and time)

Other Characteristics of Flash Sales Stores • Giveaway: Free giveaway events that keep consumers motivated to visit the site (ex. Ideeli) • Customers can see previews of upcoming sales • Reminders can be sent out to notify customers of the sales through email and smart phone applications (ex. Gilt application for iPhone) • Items can be returned according to return policy • Special paid membership on some sites that guarantee access to more exclusive sales or earlier access on sales (ex. Ideeli)

Other Characteristics of Flash Sales Stores(cont’d) • Diverse categories of products: Women, Men, Beauty, Living, Kids, Travel (“Getaways”) -> encouraging a more loyal customer base, to not only use the store for apparel.

Key Design Elements • A successful Flash Sales model requires the creation of an exclusive club, a viral invitation-only system, a highly loyal customer base and a powerful demand for impulsive purchases. • In order to achieve these objectives, several key design elements have become best practices in the market.

Key Design Elements (cont’d) • 1. Viral invitations -New customer acquisition is driven primarily through people inviting their friends. This dramatically reduces the traditional customer acquisition cost of Search engine optimization (SEO), paid search and affiliates. • Each consumer gets a fixed amount of credit each time a “friend” he/she invites makes their first purchase (“referral credits”) ex. HauteLook, RueLaLa ($10), Gilt, Ideeli ($25) • Each site facilitates inviting friends through either Facebook Connect or adding contacts through Plaxo (online address book). Search engine optimization (SEO) is the process of improving the visibility of a website or a web page in search engines via the "natural" or un-paid ("organic" or "algorithmic") search results. (wikipedia)

Key Design Elements (cont’d) • 2. “Cart” reservation – One of the biggest complaints from Private Sales shoppers is that an item will sell out in the time it takes them to move an item placed in a cart to checkout. The most common approach to address this issue is to provide a reservation time buffer once an item is placed in the cart to allow time for checkout. • Some of the sites extend the time when another item is placed in the cart. A notable difference is whether the reservation time should be shown; which is a consideration between notifying the customer that they may continue shopping to drive up average-order-volume vs. the risk that they will horde merchandise in their cart.

Key Design Elements (cont’d) • 3. Sale events always start at the same time - It is important to train customers to come to your site at the same time for each sale to start. This maximizes the impulsive purchases, the rate of product sellout and converting return visitors. It does create a huge challenge for IT to support extremely spiky traffic but the business benefits of training customers to come to the site everyday at the same time greatly outweigh the additional IT costs and related performance challenges.

Key Design Elements (cont’d) • 4. No site search - Most ecommerce sites offer search or guided search to find products. Most Flash Sales sights do not. The goal is to create a window-shopping experience where a shopper spends time looking at each event to create an impulse to buy. Shoppers are not coming to the site with an intent to purchase a specific item. However most of the sites do offer a variant filter such as size and color.

Key Design Elements (cont’d) • 5. One page event list - A traditional ecommerce retailer may have thousands of stock keeping units(SKUs) in a hierarchical product catalog broken down by category, sub-category, and product page. Large Flash Sales sites may have dozens or even a hundred simultaneous events, but are listed on a single page. The emphasis is on encouraging browsing to create the urge for an impulsive purchase.

Key Design Elements (cont’d) • 6. Order stays open for a few hours – Compared to traditional shopping, a Private Sales shopper is motivated to check-out before the inventory depletes or her reservation runs out on her cart. This creates a situation where a shopper is forced to checkout soon after adding an item to the cart. This means that buying many items may require several checkouts, inevitably leading to complaints about multiple shipping charges for same-day purchases. Advertising that free shipping is available for additional items purchased within a given number of hours builds goodwill, increases order volume, and most importantly does not create disgruntled shoppers.

Possible Future Key Design Elements • As private sales is still a young retail concept, rapid innovation in the user experience is expected. Here are some of the advances we may see on leading sites over the next years..

Possible Future Key Design Elements (cont’d) • 1. Club for top invitee networks – The most valuable shoppers are not the ones that buy the most, but the ones that have invited groups of people that buy the most. These networked influencers should be addressed separately to keep them loyal to the brand (if they switched to a competitor they could bring a lot of people with them). Flash Sales sites could market to them directly with special offers, increased incentives to extend invitations or competitive leader boards to see who is the biggest influencer.

Possible Future Key Design Elements (cont’d) • 2. Customer idea community - Which brands are the shoppers most interested in seeing? What site improvements are most desired? Flash Sales sites have many loyal customers that are deeply engaged. But none of the sites are fully leveraging the potential value of this community. Poll questions or blogs with comments would be a good start to tap into the open innovation potential of the clientele. This also allows for effective use of Social Networks to extend reach.

Sources • Desiree Adib and Mary Mueller, Online Frenzy for Flash Sales: Limited Time Sales Offer Deep Discounts on Designer Brands, ABC News, April 10, 2010 <http://abcnews.go.com/GMA/Technology/shoppers-find-deep-discounts-online-designer-goods-flash/story?id=10321467> • Beth Hughes, Flash sales sites become big deal for shoppers, June 2010 <http://articles.sfgate.com/2010-06-13/living/21907952_1_online-sales-sample-sales-sites> • Amy Judd, Flash Sales: Gilt, Theoutnet.com and Others: What Are Flash Sales, April 2010 <http://www.nowpublic.com/tech-biz/flash-sales-gilt-theoutnet-com-and-others-what-are-flash-sales-2603661.html> • Marc Osofsky, Flash Sales: A red hot ecommerce solution, Sept 2010 <http://www.optaros.com/blogs/flash-sales> • Erick Schonfeld, Forrester Forecast: Online Retail Sales Will Grow To $250 Billion By 2014, TechCrunch , March 8, 2010 <http://techcrunch.com/2010/03/08/forrester-forecast-online-retail-sales-will-grow-to-250-billion-by-2014/>

Thank you!

Online Flash Sale Stores: A New Market for Apparel