A macro point of view on: Private/Flash Sale market – things to consider:
It started for me over two years ago during a conversation with Paul Hurley, CEO and founder of Ideeli. The basic concept was simple, bring the powerful aspects of the sample sale on-line.
Now mix in a fast growing successful overseas private sale pioneer (Vente Privee) as a model to emulate, coupled with a crushingly brutal economy creating massive inventory build-ups and you have the perfect storm. A perfect foundation for launching a new private sale site…or we should now say sites as conservatively there are at least 25 private sale sites live today.
My point of view has been consistent since the first call on this segment. Here are the short strokes that need to be considered:
- Technology: This is not a technologically difficult business to start, and in fact can be up and going very inexpensively. I know the leaders are now investing heavily in technology trying create a technical point of differentiation and advantage. This includes a new ground swell of innovators buzzing the venture networks with what I see as standard technological spins on this model.
- Opportunistic Business: It is analogous to the Jobber business (Jobbers have long existed in the fashion world to move excess inventory through various “approved” channels by buying the inventory for pennies on the pound). You can make great money as a jobber, but is it unto itself a venture back-able type business?
- Inventory levels then vs now: The world just went through the “perfect storm” creating the perfect time to start a liquidation business. We had inventory levels at an all time high as our economy cratered, particularly in aspirational and luxury categories. We also had consumers cutting back while still highly addicted to buying top quality brand names. Brands were fighting for their lives and a “safe” channel to clear inventory was just what they needed. Deeply discounted branded merchandise was the perfect answer for the budget squeezed consumer in need of a shopping addiction fix. But now inventories are being “right sized” or even “under produced” which intersects with a proliferation of “private sale” companies fighting for fewer excess goods – a new perfect storm. Some are talking about “MFO” (Made for Outlet) as a way to gain discounted inventory. In a physical outlet store these made for outlet products a person can see exactly what they are buying and might disregard a few cost saving short cuts that are part of MFO. But online people depend on the brand name to be their eyes and if they end up getting an item of lesser quality than expected it will quickly chip away at the brand and consumers confidence.
- Brands and Perceptions: The need for private sale companies to grow their business aggressively has made these sites much less “private”, which likely will reduce the way the brands look at these venues on their “plausible deniability” scale. Add to this the following statement from my discussion with a top creative executive, “I now go to the retail stores and see luxury fashion items I might have bought before, but now I make note of them and wait to see if they show up on the private sales sites”. Retailers won’t like this either – see next point
- The Traditional Retailers: You know those old brick and mortar, multi-channel, but also multi billion dollar businesses, are VERY important to brands for their true success and brand longevity, as well as some of the brands higher margin transactions. These same retailers can and will place enormous pressure on the brands showing that it is not in their best interest to liquidate through these “closed” private sale channels. Retailers may also insist on first rights to excess inventory for their own “basement/ off-price” channel and/or very easily open up their own private sale site. ”Mr Brand, we would love to buy $100′s of millions of dollars worth of your fresh high margin inventory but we have concerns… so we will take that order with rights to your excess inventory.”
Recently the number of inquires, due diligence, and strategic advisory requests to SchwartzGroup on the private sale segment have been substantial. This includes Private Equity, Venture, Top Tier Consulting Firms, Fortune 500 companies and friends and neighbors with “an idea”. A few months ago I even got a call from someone building a company looking to aggregate private sale offers. It’s great and I’m thrilled to be of service, but on a macro level this feels like a red flag, or should I say it feels uncomfortably familiar.
As an operator and an eCommerce leader I love these companies. They are fun. They are exciting. Your heart pounds as a shopper and your palms sweat as a operator watching the virtual doors being stampeded by eager consumers everyday.
Some private sale companies will succeed (I have my favorites) by building their own brand into a leading discount retailer brand and they will figure out how to best grow from there. Some will succeed in a financial way, that is investors will do well but in some cases the businesses perhaps not so much. Some will fail as their efforts to fuel venture expected growth will force them away from being jobbers and into becoming less and less “private” and they will find available quality brand inventory much harder to come by.
As a person who loves building great eCommerce companies all this capital attention frankly makes me a bit nervous. I am worried that with an already substantially capitalized “private sale” segment companies will begin acting unnaturally resulting in an unbalanced and unsustainable market one which will be tough on all eCommerce.
Overall my point of view is the “private sale experience” is fantastic and should be part of most eCommerce or multi-channel companies. It is another way to shop and to brings excitement to your customer (and we have the platform to make it easy). For the capital partners this excitement is directionally correct – eCommerce is moving into a new phase (and it makes money), look for many new models arising.” — more on both of these in part 2.
- Note: for fun be sure to see Launching Our Private Sale Site and get a preview of my new private sale site, GuiltyLook.com, Oy Oy Vey! (I couldn’t resist!)
- Private Sale Traffic Metrics from Compete below.
- If this topic or the subject of brands and eCommerce are of interest, connect with us Twitter @bobschwartz or email (icons on right column) to stay up to date on the follow up postings.
Compete.com Metrics (grouped as of 10/09)
The Top Traffic Group:
The Mid Traffic Group
The Lower Traffic Group