Instant Gratification by WSL Strategic Retail

The Retail ISSUE

Instant Gratification Flash-sale Web sites have exploded in popularity, as consumers flock to a format that offers luxury goods at insider prices. But for beauty, a category in which discounting is traditionally taboo, their value remains questionable.

very day at noon, across America, calls go unreturned, meetings unscheduled. Millions of young women with high disposable incomes stop whatever they’re doing to shop. Their destination? Flash-sale Web sites, members-only online sample sales, where everything from designer blouses to boutique hotels in Costa Rica are offered up at discounted prices for a limited amount of time. Now almost five years old, the format has emerged from the ashes of the recession as a viable and thriving channel that is fundamentally altering the retail landscape and consumer behavior. “These sites have stirred consumer interest and have changed the way people plan their days,” says Andrea Davey, executive vice president of marketing for P&G Prestige. “When I’ve spent time with consumers, people schedule their day to avoid meetings at noon so they can get online and see what’s on these sites.” Nordstrom recognized the importance of the sector, which is estimated to have sales of $1 billion and growing, when it bought one of the leading sites—HauteLook—for $270 million in late February.

By Jenny B. Fine Illustration by john ritter

High-end fashion, accessories and travel brands have flocked to the sites. But despite hard-core wooing by the four major players, many big beauty brands continue to balk. Today, the four major players in the flash sales arena are Gilt Groupe, HauteLook, Ideeli and RueLaLa. Gilt, which has the reputation of being the most “luxe” of the four, has about three million members, described by Alexandra Wilkis Wilson, founder and chief merchandising officer, as in their “mid-20s to mid-30s, largely urban, highly educated, with 69 percent earning over $100,000.” Sales typically last 36 hours, and discounts go up to 70 percent. Gilt has seven major category tabs on its Web site, including men’s, women’s, children’s, home, gift, jet-setter and city, the latter local-based sales centered on restaurants, spa and salon services and the like. HauteLook claims about 4.5 million members, and adds about 10,000 members a day, according to founder and chief executive officer Adam Bernhard. Its consumer base is about 90 percent women, 25 to 40 years old, with a household income of $75,000 a year. HauteLook, which sells 11 categories, is the only one of the big four where beauty has a permanent tab on the homepage. Ideeli’s ceo and founder Paul Hurley breaks down its membership of four million, 98 percent of whom are women, into two key demographics: A younger customer

wwd beauty inc

On the horizon in her late-20s to mid-30s, and an older audience that is more conservative. The and offer a straight discount on a current product. “Brands are incredibly sensitive about anything that provides a whiff of discount,” average household income of its membership is $100,000, and it, too, traffics in acknowledges Hurley. “But there are ways to manage that expectation with conmen’s, women’s, kids’, home, travel and experiences. sumers and protect the perception of full-price and, at the same time, the benefits RueLaLa has 3.2 million members, and counts as its points of differentiation the fact that its sales start at 11 a.m., rather than noon, and its full-size run on products, on the marketing side are enormous. When we were smaller, we were nice to have, but now we have an enormous audience. according to Stacey Santo, vice president of brand partner marketing. Despite their “The retail channel in general is slow growth,” Hurley continues. “How are you differences in brand merchandising philosophies, what all of the sites have in common is the thrill of the hunt. The average sale lasts for 36 to 48 hours, with discounts going to post big growth? Online. We understand that just selling units isn’t compelling. It’s the measured marketing value that is compelling. This company sent ranging from 15 to 80 percent. That sense of urgency has resulted in an incredibly me 200,000 clicks a year that cost $3 apiece—that is measurable value. We think strong emotional connection with consumers. “This format resonates with customers because the discovery-based way of shopping is very exciting,” says Bernhard. that’s the future of retail, the melding of demand creation, which the best brickand-mortar beauty counters do. It’s expensive and “Internet-based shopping is based on the fact that you hard to scale, but when it’s done right, you can make know what you want, you enter it in search and then a customer for life. How do you do that on a massive you see your options. But for women who love to shop, scale online? That’s what we’re trying to accomplish.” part of the excitement is going to a store and saying, Indeed, flash-sale sites have become adept at cre‘What am I going to see today?’ This model combines Top flash-sale sites around the world. ating initiatives to drive traffic beyond saving money. intent-based shopping with discovery. Every night, we “We’re getting quite savvy in personalization,” says remerchandise our entire store, so that every morning Privalia.com Gilt’s Wilson. “If a brand doesn’t want to be made when you come, it’s a different experience.” Barcelona-based available to our entire membership, we can put toWendy Liebmann, retail analyst and ceo of WSL Privalia Venta Directa SL, founded in 2006, gether programs where they specifically target a Strategic Retail, agrees. “Flash sites are another tool has operations in relevant customer. We come up with different franthat shoppers are comfortable adding to their arseItaly, Brazil and chises, such as a bridal event, where it makes sense to nal of, ‘how do I get the best value and great price?’ Mexico. Sales were up promote wellness, fitness, detox and dieting, for exThey also enable shoppers to become emotionally 141 percent last year to 168.4 million euros, or $235.5 ample. We’re adding a lot of new features like video, engaged in the shopping experience without having million at average exchange. The company has six million which is very helpful for beauty.” to walk into a store. Value in the pricing standpoint, members that log on for its 10 daily sales. According to In response to the d-word—discounting—most in the emotional connections standpoint and in the the company, Brazil accounts for around 28 percent of flash-sale executives point out the following: That accessibility—those three components make flashglobal revenue and Italy around 20 percent. sales generally only last two days and that because sale sites very compelling for people.” only members have access to the sites, Google’s spiMoreover, Liebmann says her anecdotal research BrandAlley.com ders can’t find their pricing and disseminate it online. shows that most people who are engaged in the catWith French and egory don’t just look at one site, they look at a numBritish sites, this ber of them. runs flash sales for For seasonal businesses like fashion and accesfashion, beauty and sories, when you’re “in” until you’re not, the model homewares, including makes perfect sense. But for beauty, a category built OPI, Halston Heritage espite widespread resison innovation, education and replenishment, the fit and Murad skin care. News International took an undisclosed stake in BrandAlley.co.uk in 2008. tance in beauty, there is not so neat. And when it comes to emerging retail have been converts, from formats, beauty has never been a category that could brands who view flash sites as a convenient way to be called an early adapter. Cocosa.com unload end-of-season merchandise to those who “The pure-play flash-sale sites have the challenge Bauer Media launched have used them as customer recruitment tools with that their model is about the discount, and that flies this members-only Web site in the site-specific value offers. “I really like them” says Jill counter to what the national beauty brands want to U.K. in 2008. It Scalamandre, chief marketing officer of Chrysallis, deliver,” says Liebmann. “At the same time, this is a features collections who has staged sales of the company’s StriVectin new channel where you can reach [consumers] on an by designers such as brand on Gilt and HauteLook. “I treat them like a everyday basis. It’s an opportunity, but a challenging Zac Posen, Costume National and Lulu Guinness, and channel. They are a great place to raise awareness opportunity.” launched men’s wear last year. The site also features with a very targeted efficient consumer reach. They “Consumers are expecting a superior brand experieditorial content. have foot traffic and their consumer profile is very ence on their time, and they are very open to interengaged in beauty and fashion. We treat it as an opfacing with different brands in different ways,” agrees Vente-privee. portunity to bring in new users and offer them an Claudia Poccia, ceo of Gurwitch Products. “They are com incentive with a gift-with-purchase, a bundle versus deciding how they are going to interface with the Born in France in a straight discount.” For example, on a recent sale brand, and to continually deliver that satisfaction 2001, vente-privee. on Gilt, the brand offered its core 5-oz. StriVectinto consumers is more and more important. But you com is widely credited SD cream with two 0.25-oz. SD Eye Concentrate for have to be mindful of where you’re going to play and with pioneering the Wrinkle tubes at a price of $135. On sephora.com what makes sense for your brand.” flash-sale Web site and macys.com, the product costs $135 on its own. Therein lies the rub: On the one hand, the millionmodel worldwide. It sells everything “from fashion to Products that do have a more obvious discount, such plus membership bases are certainly attractive. On fridges, handbags to holidays” and in 2010 posted gross as HS Hydro-Thermal Deep Wrinkle Serum, which the other hand, no major brand is willing to go mano sales of 823.7 million pounds, or $1.27 billion at average exchange, up 15 percent year-over-year. was $122.40 on Gilt and $153 at Sephora and Macy’s, a mano with its traditional retail distribution base

Flash-sale Web sites aren’t the only buzzy format piquing the interest of beauty brands. Here, we ask some top execs what other emerging channels they’re most excited about and why. “Selling product on Facebook is interesting and emerging. We recently had a fantastic sampling event, where women took a quiz, and if they had sensitive skin, received a free sample. We had 16,000 fans within 48 hours. The next step is, how do you link those fans to a sale.” —Jill Scalamandre

Global Phenomenon

“Military television. Web TV. Direct TV—all are interesting and give you the opportunity to educate consumers about a product that can sometimes be difficult if you’re in an open-sell environment.” —Caroline Pieper-Vogt “Beauty (and food) are categories that people seem willing to buy in lots of places—the good old lip balm at the car wash. I think it can go in places we haven’t even thought of yet. Why can’t I go to the movie theater and see something fabulous onscreen and why wouldn’t they sell it to me there? The connectivity of it and willingness of people to buy high-impulse items means there are almost no boundaries.” —Wendy Liebmann “Pop-up stores. If done well, they can really drive awareness among people who might not come into contact with your brand every day and turn them into devotees.” —Mike Indursky

Pieper-Vogt photo by john aquino; liebmann by Stephen leek; Poccia by George Chinsee

“Customization and consumers driving brands on demand. I had an amazing experience with Zappos and Nike, where I designed my own shoe, followed its progress on my iPad and got it a day later. Being there in a consumer-centric way and delivering a great experience is key.” —Claudia Poccia

are in the process of being transitioned out of the market, says Scalamandre, who notes that the selling model for flash-sale sites is similar to that used for TV selling. “You need a channel strategy,” she says, “against flash-sale sites, TV, specialty and department stores. How do you bring value to each of those channels and offer a different experience? If you were doing straight discounting, it’s a tricky situation and your retail partners won’t be happy. Here, it’s about offering value without a straight discount. We have a great business on QVC,” she continues, “where we mix up the assortment and sizes so that you’re getting something different. With flashsale sites, we’re doing the same thing.” Caroline Pieper-Vogt, the ceo of Fusion Beauty, has also found targeted success with flash-sale sites. “We see it as an enhancement, because it allows us not only to get our brand identity and message out there to new consumers, but it helps us balance inventories and focus on products that we want to drive,” she says. “It’s interesting. It’s definitely calculated. You have to be thoughtful about when and how you do it and how it mixes with the your overall strategy.” The consumer is driving the growth of such sites, points out Pieper-Vogt, noting, “She really likes luxury, but she loves to get a value and feel like she’s part of the club.”

Flash-sale sites have also proved extraordinarily effective at selling services. “These guys are meeting a need that existing channels didn’t do,” says Mike Indursky, president of Bliss World Inc. “This year, we thought about the channel strategically, at the beginning of our planning, asking ourselves, ‘What role can it play?’” The answer was to use flash sales as a way of selling in-spa services that drive people to buy products. Indursky was inspired by the success of Helmut Lang on Gilt, which used the channel to launch a clothing collection at full price, creating a value proposition for Gilt’s members that centered on having something first rather than getting a discount. “There are ways to give value that aren’t just dollars off,” says Indursky, noting Lang’s exclusive launch was of high value to the fashionista shopper who frequents Gilt. “The channel has been a great way for us to launch services, drive awareness and get people into our spas,” he says. “We find that the customer doesn’t just buy the service, she goes back to retail and buys the product. So we’re driving retail by offering services on our flash sites.” That’s not to say Bliss doesn’t discount—Indursky says the services being sold on Gilt, such as waxing or laser hair removal, sell on average for 30 percent off—but that the payoff is more than worth it. “For us to use their marketing muscle to help tell the world or a city about this wonderful service is a powerful way to get our message across and drive awareness.” For his part, Urban Decay’s worldwide general manager, Tim Warner, has utilized the channel primarily as an off-price opportunity. “It’s not a core strategy to sell more product,” he says. “We deploy it to sell off-price products that no longer have distribution with our normal retailers.” Urban Decay typically does about three sales a year, Warner says, with a minimum of 500 units per stockkeeping unit. Discounts are usually in the 50 to 80 percent off range. (The higher the discount, the better the sell-through, says Warner.) “If I can’t sell it, I have to destroy it,” he points out, “so any way I can sell it is positive to my cash flow.” To be sure, the numbers can get quite large—according to Bernhard, HauteLook sold 100,000 Urban Decay pieces in four hours. Despite numbers like that, Bernhard is well aware of the challenges going forward. Key among them is continuing to attract a fresh influx of brands to the channel. “The demand for great brands at great prices is insatiable,” he says, when asked what keeps him up at night. “So our ability to continue to secure the best brands in the industry in all of the different categories is what I think about.” Thanks to its recent acquisition by Nordstrom, largely considered one of the most adept retailers in America when it comes to integrated marketing, that’s a challenge HauteLook is likely to handle with equanimity. But as all retailers become better at managing postrecession inventories or decide to get into the flash-sale business for themselves (as Neiman Marcus has done), the future of the pure-play sites comes into question. “The first to market advantage was hugely valuable,” says Liebmann, “but what’s to stop the people with the goods or with the shoppers from doing it themselves?” she asks. “Is this a place where multibranded companies play in ways they’ve never done before? Are they thinking this is a new world of opportunity? Or ick! Get away from us? Or is this an idea they can poach? That’s the most interesting thing going forward.” ■

Bright Space: Five Key Points About Flash-Sale Sites Women Love Them: In less than five years, the four leading sites have built robust communities of millions of women with high disposable incomes. The Big But: As a category that doesn’t historically discount, many beauty brands are grappling with how best to approach the flash-sale format while not alienating their traditional retail base. Value Comes in Different Guises: Value doesn’t always mean dollars off. For many customers, having early access to a launch or service is just as appealing. Bring On the Bundle: Just as brands create different product propositions for TV shopping, so have some created flash-site-specific offerings. They Want You: Beauty is a key focus for the channel’s four major players.