If I were a cartoon character, I’d be Curious George (I’m the proud owner of 3 Curious George mousepads). I’ve also got a fascination for retail and fashion. So when I read that Gilt Group, a 2-year old private online sample sale retailer, just raised $40 million at a $400 million valuation, my ears perked up. I did some basic research on the emerging business model Gilt follows. Here’s a brief overview of a model that’s turning a well-established but troubled industry on it’s head:
Value proposition to manufacturers. Private online sample sales (“POSS’s”) help brands clear inventory without the negative brand impact of selling via traditional discount channels. Brands of apparel, housewares, watches, handbags, shoes and other items don’t sell all their fashion / seasonal items at full price. The goods that don’t sell are marked down, and what doesn’t sell must be liquidated (sold at steep discounts via third parties). However, a brand like Gucci doesn’t want to tarnish their brand equity by selling handbags at 70% off on the shelves of TJMaxx. They also want to avoid conflicts with retail partners by having the same handbags for sale at full price at Neiman Marcus, and on sale at TJMaxx. Private online sample sales let producers move discounted product without tarnishing their image or creating channel conflicts. POSS’ accomplish this by:
- Creating an aura of exclusivity (many are, at least in theory, invitation only)
- Selling in a non-competitive channel (via email), and by
- Selling a limited amount of goods for a limited time.
Value proposition for consumers. POSS’s attempt to recreate the excitement of designer sample sales by selling goods in limited quantities for short durations of time. Like most designer sample sales, they are invitation-only. Consumers get a chance to buy high end products at deep discounts. The limited-time offers and air of exclusivity add to the excitement.
Products. So far, most companies have concentrated on clothing and accessories for women, and home furnishings. However, existing companies are rapidly expanding into new categories, and new competitors are cropping up quickly. Gilt recently added childrenswear and menswear, and I’ve heard they are planning to stake their claim on travel shortly. Ideeli recently added electronics, luggage, cosmetics, and housewares.
Inventory. POSS’s vary in terms of the way they own inventory. Supposedly, Gilt acquires most of its merchandise outright, which lets them ship quickly and accept returns (for Gilt credit). They buy the rest on consignment. They are the merchant of record for all transactions, and process all transactions themselves. Some other POSS’s have been criticized for slow deliveries and poor customer service, which may be indications that they sell more product on consignment.
Progress. There are approximately 4 million people actively purchasing on the top sites today – though the number is more than doubling each year. They spend in the neighborhood of $85 on an average purchase, and make about 3 purchases per year. That puts the total industry revenue at over $1 billion.