A vast, bright upstairs studio in New York’s achingly bohemian Chelsea district. A group of buyers and designers huddle over a black designer dress from one of fashion’s biggest names. A photographer looms, ready to capture the perfect shot.
But the ensemble will never reach Manhattan’s boutiques, or the fashion-hungry streets of Beijing. It is destined for the 3.5 million members of Gilt Groupe, the online sensation that’s disrupting the luxury goods industry with its exclusive sample sales and audience insight.
Sample sales are nothing new in fashion. They began as invite-only events organized by labels or retailers to sell past-season merchandise at vastly reduced prices. Early-morning queues of elegantly dressed women loitering outside improbable warehouses became a familiar sight from the 1980s onwards.
By the turn of the century, French entrepreneur Jacques-Antoine Granjon had taken the idea online. His Vente-Privee business is now the market leader, with sales of US$1bn in 2010. Rivals such as HauteLook, Rue La La and the Chinabased Glamour Sales site – which claims to have recruited 600,000 members in its first year – have helped create a market with such velocity that major brands cannot launch a new line without engaging the online discounters. Gilt – launched in 2007 by Alexandra Wilkis Wilson, Alexis Maybank and Kevin Ryan, former CEO of DoubleClick – is the impetuous upstart of the group. But its unique model, and its sheer ambition, are causing ripples in the industry.
Gilt’s premise is simple. It launches sales at noon EST, which last 36-48 hours. With 17 events a day, attracting up to 100,000 visitors each,The discounts are deep: from a Derek Lam dress reduced to US$499 from US$1,350 to half-price Burberry boots at US$499.
For brands, the attraction is a gated community that protects the exclusivity they treasure above all. Gilt understands this only too well. “We have two types of customers: our actual members, the shoppers, and our brand partners, who we really want to portray in the best possible light,” says Wilkis Wilson.
Maurizio Castello, a partner in Transaction Services at KPMG Italy, says he sees a growing number of brands signing agreements with off-price sites. “These sites’ main challenge is operational,” he says “They need to be sure they can deliver in the sizes and volumes their customers demand.”
Gilt’s logistics are well-regarded. But its cutting edge is its deep customer understanding. “When you receive an email from Gilt Groupe, it’s based on everything you’ve ever bought in the past,” says Ryan. “Gilt has an incredible amount of information about its customer base, more than any other e-commerce business…we know every single page any member has ever seen.”
This information is invaluable to Gilt’s buyers. It means the company doesn’t take on inventory risk, placing a reserve order with vendors and confirming quantities only after the online sale has ended. It also frees up working capital.
In 2010, Gilt posted sales of US$270m and expects to hit US$500m in 2011. Recent investments value it at US$1bn, but it has yet to turn a profit. Ryan believes market consolidation will help it into the black ahead of a 2014 target.
Gilt’s sales figures would appear to suggest a Midas touch. But analysts point to the finite supply of excess product, and Ryan admits theirs is “an easy business to start, [but] a really hard business to scale.” His plan is to use their sophisticated technical platforms in wider markets – Gilt has expanded into menswear, children’s wear and home décor. Gilt City is going head to head with Groupon with weekly, location-based deals to Gilt members.
The real surprise was Gilt’s leap into full-price merchandise. Park & Bond, its new menswear site, is a natural progression according to Ryan: “Over time, I wouldn’t be surprised if 50% of our revenue came from full-price… when you think about it, the market is bigger.”
Steven Dennis, an independent retail consultant and former SVP of Strategy at department store Neiman Marcus, says: “Off-price companies have grown rapidly, attracting members and significant investment capital, but the rocket fuel during the height of the recession was the substantial amount of surplus inventory manufacturers and retailers were desperate to turn into cash.”
Dennis sees the fashion industry producing specifically for off-price channels, which requires a higher mark-up than Gilt has been prepared to offer. According to some sources, up to 40% of Gilt’s womenswear is already exclusive to the site. That could damage smaller brands’ equity by forcing them to become discount designers. It could also fatally undermine Gilt’s USP, making it effectively just another retailer.
High-end brands’ engagement with online retailers is growing slowly. The internet offers a distribution channel, but its marketing value is less clear. “If you want to create a DNA for your brand, the internet can’t provide that,” cautions Hélène Béguin, Head of Luxury Goods at KPMG and a partner in the Swiss firm. But she says a multiple-brand model such as Gilt has a useful operational role to perform for brands in disposing of stock.
Ryan remains characteristically bullish. He believes e-commerce will account for 10-20% of total retail sales within five years and says Gilt will “probably” enter an IPO within three. There are many in the industry who are desperate for them to succeed. But there may be more than a few who privately hope Gilt and its ilk will prove another dot-com flash in the pan.
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Maurizio is a Transactions Strategy Partner and Head of KPMG in Italy’s Fashion & Luxury Practice. He has over 10 years experience in advising fashion and luxury brands on corporate strategy, restructuring, mergers and financing.