Flash Sales Companies Challenges: Scaling & Daily Deals

Source: Business Insider, Feb 2011

All of these companies have grown extraordinarily quickly, rattling traditional retailers and the online ecommerce giants in the process. Two of the companies–Rue La La and HauteLook–have now been sold (GSI Commerce bought Rue La La for $350 million last year). One Kings Lane, which focuses on home-furnishings, just raised $23 million from Kleiner Perkins and Greylock.  Zulily, founded by former Blue Nile CEO Mark Vadon, focuses on the kids category and already has more than a million customers.

As is to be expected after such torrid growth, the flash-sale industry is also now experiencing growing pains: Growth rates are slowing, managing inventory and fulfillment is challenging, and none of the companies are consistently profitable yet. GSI Commerce just missed earnings and took a big write-off, which it blamed on Rue La La.  Between fulfillment, logistics, and merchandising (knowing what inventory to buy and when), the business is also extraordinarily complicated, especially at scale, and it requires more capital to build and operate than pure online businesses.

The challenge of transitioning from explosively growing startups to mature, profitable businesses isn’t the only issue facing the private-sale industry. The spectacular recent growth of Groupon, Living Social, and other “daily deal” companies, for example, has emerged as a new threat. Gilt Groupe has responded by launching its own “daily deal” competitor, Gilt City, but the explosion of competitors offering brands and retailers a new way to move inventory will likely put more pressure on profit margins.

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