Daily Daze

Flash Dance! Luxury Flash Sales Sites Regroup After Layoffs

After bingeing on salaries and schemes, luxe deal sites start dieting. Can Gilt Groupe cross the IPO finish line without scuffing the lacquer on its Louboutins?
kevin ryan e1328106206536 Flash Dance! Luxury Flash Sales Sites Regroup After Layoffs

Mr. Ryan, at TechCrunch Disrupt New York last May.

Around 4 p.m. on a recent Thursday, all but 14 of the employees of the members-only luxury e-commerce site Lot18 got an email asking them to report to the new conference room for an urgent meeting. The remaining employees, including the vice president of operations and director of operations, received an almost-identical note but were asked to report to the “alt” conference room instead. They were told they were being let go, asked to leave the building immediately and instructed to return on Saturday to clean out their desks.

The survivors were shocked by the layoffs, which came a day earlier than planned due to inquiries by Betabeat. Lot18, which started with private sales for wine before moving into full-price wine and epicurean deals, has raised a total of $44.5 million from investors—its latest round spearheaded in November by the highly regarded Accel Partners. Lot18 also moved into a new office over the summer that features a tasting room, mounted LCD screens that pop up a buyer’s location on a map every time Lot18 sells a bottle and a permanent DJ booth. In its one-year existence, Lot18 launched several new verticals, bought Paris-based e-commerce site Vinobest, and announced a foray into Europe.

To industry insiders, the scenario sounded familiar. Mass flash sales—deep discounts that expire usually after one to three days—had been touted as the first real innovation in e-commerce in years, and start-ups that applied the flash-sales phenomenon to the luxury market had investors salivating. But the former venture capital darlings suddenly seemed to be hemorrhaging employees. Earlier this month, another site, Boston-based Rue La La, slashed 60 of its 550 employees after months of growth.

Suddenly, the question is being asked: Could flash sales for the well-to-do wind up being more of a marketing gimmick than a business model?

A week before Lot18’s conference room trail of tears, Betabeat broke the news that Gilt Groupe, the high-fashion flash sales powerhouse, was also shedding staffers. Back in November, Gilt Groupe CEO Kevin Ryan happily boasted about hiring a worker a day in 2011. But by late January, the company was admitting that 10 percent of its 900-person staff had been dismissed, despite the company’s having raised $138 million less than a year prior at a $1 billion valuation.

Mr. Ryan assured the press that Gilt would have its head count back up by the end of March. Insiders say the layoffs are part of a prudent debloating before the company packs up its PowerPoints and sets out to pitch investors in the ritual pre-IPO roadshow. Gilt has raised about $238 million from investors and Mr. Ryan says a public offering could happen by the end of the year, but insists it’s unrelated. “Forget IPO,” he told Betabeat by phone. “I think it’s the right time to cross over into profitability.”

The other companies had similar explanations for downsizing. Lot18 had grown too fast, management explained, and those being let go were “nonessential.” Lot18’s cofounder and CEO Philip James, an oenophile who has two wine start-ups and a Mt. Everest climb under his belt, emailed a statement: “Lot18 is a business built on core fundamentals and we expect to reach profitability on the money we’ve raised. I’m not going to preclude the possibility that we’ll raise capital in the future, but that would be for growth.” Rue La La brushed off its layoffs as a product of “restructuring,” “outsourcing” and “consolidating.”

With $500 million in revenue in 2011, Gilt Groupe is moving toward full-price and private label offerings, and is likely to emerge from the moment of reckoning on top of the heap thanks to its buying power with brands. (Unlike some competitors, sources say, it never resorted to the black market in flash sales early years.) But scuttlebutt from inside Gilt’s velvet rope is that some of its new verticals are falling short of hopes.

When Gilt Groupe arrived in November 2007, its sparse home page conveyed maturity, taste and exclusivity—a black and gold gateway into your own private sample sale. Super savings don’t have to be gauche, Gilt whispered, a relief amid the Great Recession, both for the luxury brands that found themselves unable to move handbags and for their status-conscious customers.

Mr. Ryan, a Doubleclick veteran from Silicon Alley’s early years, borrowed the idea for Gilt from Ventee-Privee, the grand-mère of flash sales sites, which launched in 2001 and claims a $3 billion valuation. But for the public face of the company, he put forth cofounders Alexis Maybank and Alexandra Wilkis Wilson: leggy, blond, accomplished Harvard Business School classmates, and living embodiments of the Gilt Groupe customer (chairman Susan Lyne joined later). Their first sale was a still up-and-coming designer named Zac Posen, whom they met at Harvard, natch.

As Gilt captured media attention, mindshare and $25 million in revenue in its second year, luxury flash sales sites began raking in venture capital. Ideeli has raised $64.8 million; Beyond the Rack is up to $53.6 million. In 2009, Rue La La was acquired in a deal worth $350 million; in early 2011, Nordstrom acquired Hautelook for a deal worth $270 million. One Kings Lane, the original Gilt Home, has collected a tidy $63 million in VC funding. Daily Candy launched a private shopping club; eBay launched a high-end fashion deals site. The luxury craze isn’t over: The Clymb raised $2 million for a members-based deals site for the outdoor market over the summer and Los Angeles-based LuxeYard just announced a $3.5 million investment last week.

Retailers had always struggled with the problem of unloading unsold merchandise without degrading their brands, relying on outlets like Ross Dress for Less or T.J. Maxx. Gilt Groupe presented a sleeker option, and the membership structure of “private sales” lent it an air of exclusivity. “It felt like you were walking through Barneys, it’s just that everything is 70 percent off,” said one former employee.

Gilt Groupe also found macroeconomic forces aligning in its favor. On the heels of the consumer boom that preceded the recession, estimates are that luxury goods inventory rose to 10 times its normal level. And Gilt was poised to help. By 2009, it was up to $170 million, and by 2010, $423 million. “They were just the shit, right?” said Matthew Carroll, founder of the outdoor brand Cloven Footwear and a Gilt Groupe vendor who has written something of a dissertation on the company’s meteoric rise on Forbes.com. “In 2009 I worked with them and I felt honored just to get an invite to the service. I felt cool.”

Soon, manufacturers began cutting production, and by 2010 the supply of high-end goods had dried up. Flash sales start-ups responded with varied approaches. Ideeli went downmarket. “I’m not the most popular guy at parties in New York because all our friends are after high-end brands,” Ideeli CEO Paul Hurley sheepishly confessed to Reuters. “But the opportunity is much larger elsewhere.”

Gilt stayed the luxury course, opting to sell more categories to that same affluent urban sophisticate. After Gilt for women, there was Gilt Man, then sites for kids, design, travelers, foodies and so on. Around Christmas 2010, they even sold a few Volkswagen Jettas. “Gilt was one of the first ones to get into flash sales and I think they wanted to do that for every luxury vertical and be the Amazon of luxury, rather than a flash sales site,” said a former Gilt employee. “It was really a sprint to own the market,” said another former employee about the new verticals. “At the time we were growing faster than eBay did, we were growing faster than Amazon did out of the gate. It’s slowed now.”

Mr. Ryan prefers to err on the aggressive side. “I certainly would rather launch five new things—and they might be verticals, initiatives or different promotions—and maybe one of them doesn’t work and that’s O.K. That’s fine. Being the last person to market? Certainly you’ll be a loser,” he said, adding, “From my point of view, to date, all of our verticals have worked.”

Not everyone agrees. Some of those new verticals, like Gilt Home and Gilt Taste, involved increasing the ratio of full-priced to discounted items. The men’s site Park & Bond, on the other hand, was Gilt’s first exclusively full-priced venture. To sell its move up-market, Gilt Groupe borrowed some gloss from the glossies, tapping Ruth Reichl, Gourmet’s raven-haired high priestess of haute cuisine, for Gilt Taste and partnering with GQ for Park & Bond. “They really went after people, really recruited, really made a big deal [of marquee hires] to the press, dangling stock options,” said one former employer. “I have to ask was any of that done with a sustainable business in mind.”

The reaction was mixed. “I understand there’s foodies out there, but then why did Harry & David go bankrupt last year?” said a Gilt Groupe fashion vendor. “They had people who had bought their shit at Christmas every single year for like 20 years and they still go out of business for specialty food.”

Park & Bond “was a huge, huge bomb,” one former employee said. “That whole part of the business is essentially being picked apart and sort of let go.” The departure of Park & Bond president John Auerbach was announced at the same time as the layoffs (Gilt said he left to pursue other projects). “Everybody knew Park & Bond was in trouble because they were trying to be aspirational, and being aspirational as a retailer is dangerous,” explained one Gilt Groupe vendor. “They were trying to buy these $10,000 jackets because ‘we need to be high-class, we need to be ultra-luxury.’ Well, that’s cool if that’s your goal, dude, but if it doesn’t work it doesn’t work.”

Not all the Gilt Groupe’s reaches were met with as much skepticism. Jetsetter, the luxury travel site, gets rave reviews from customers and does 40 percent of its revenue in full-priced offerings. But Gilt City, which bills itself as selling “experiences” and therefore overlaps with both the Jetsetters and Groupons of the world, failed to get much traction beyond a few core cities. Along with closing six markets as part of the layoffs, the company announced Gilt City president Nate Richardson would also be leaving.

Some of January’s fat-trimming was more literal. A tipster to New York spotted a new sign in Gilt’s normally generously stocked pantry: “Gilt has made a New Year’s Resolution to cut the following items from our purchasing diet across all locations: all fruits, all yogurt, all cheeses, Thomas’ English muffins, granola and health bars, Rice Krispie treats, Poptarts, and Pellegrino.”

When asked, Mr. Ryan cheerfully dismissed speculation that Park & Bond would fold into Gilt Man and rumors of Gilt City’s demise and promised all the remaining verticals are here to stay. “Park & Bond is doing very well, although not as well as we had in the budget,” he said. Mr. Ryan said the problem was merely one of single-digit inventory write-downs: “We bought more than we could sell.”

One former employee implied that missed projections were more than a miscalculation. “I think the feeling among the staff was that the revenue projections were pretty wildly irrational,” the source said. “I was not convinced that Park & Bond was being set up for success. I thought, if we make these revenue projections, it will be a miracle.”

According to the source, either the “premise was framed incorrectly” or the strategy was simply, “Let’s do this so that we can say we did it—on the backs of a lot of selfless, really talented people,” the source said, citing long hours and staffers’ commitment to the project.

Gilt Groupe President Andy Page responded to that idea by email, citing the changes inherent in a dynamic company. “Our performance is based on actual results, not what we forecast—especially for a new business. We reforecast every month, for each of our businesses, and our investors have visibility into that process. The way we demonstrate our ability to start a full price business is to create a successful brand, sell a tremendous amount of product and delight our customers. We did all these things. Park & Bond is the fastest growing business in the first 6 months compared to any of our other properties, but it was still over resourced.”

The same former employer disputed claims Gilt Groupe has been making to the press for years that the company is immune to industry-wide concerns about sourcing inventory. “It’s all spin and its all calculated to have a successful initial public offering, the people who have made it be damned,” the source insisted.

“I currently have visibility into our sales through June and anticipate having more access to product than we require,” Mr. Page replied by email. “That is for several reasons including our relative competitive positioning (more brands using us exclusively) and the volatile holiday season which left brands will a strong excess on hand.” He added that Gilt’s position in flash, “is currently the strongest it has been since I joined the company almost two years ago.”

For now, Mr. Ryan seems content to watch the industry shakeout from his Park Avenue perch, a familiar scene from his DoubleClick days. “I’ve watched this movie since 1996 where an area gets hot. In 1997, we had 37 competitors in ad-serving. Five years later, we were down to about five.”

The story had an portentous ring, especially when Mr. Ryan added, “We bought a bunch of them and a bunch of them went out of business.”

ntiku@observer.com, ajeffries@observer.com

A version of this piece appeared on page A1 of the February 1st, 2011 issue of the New York Observer.

CORRECTION: An earlier version of this story said the Lot18 office has a fireplace; that is incorrect.


  1. Notyourenemy says:

    “Nonessential”? So professional of you to say.

    Customer service, eghh…nonessential!
    Logistics, nonessential!
    “Certain” developers, non-essential!
    Recruiters….we definitely do not need those! They are non-essential!

    Why hire these people at all, some only 2-5 month ago? Think again…enough of belitteling people who worked for you as some type of nonessential and useless nobodies.

  2. YouKnowIt says:

    At the core these businesses are off-price retailers that live and die by inventory availability, margin and cheap fulfillment channels . There is nothing revolutionary about the core business model. Who is the most successful off-price retailer?  TJX Co.  Compare the Gilt offices and attitude with your average Marshalls store.   More layoffs and sub-leased suburban office parks are in the future for these companies if they ever want to be profitable.