The leading by-invitation-only (BIO), also called private-sale or flash-sale, company in the U.S., Gilt Groupe, is raising $80-$100 million from private-market investors, industry sources say.
The deal will likely value Gilt at around $1 billion.
Gilt Groupe was founded by Kevin Ryan, Dwight Merriman, Alexis Maybank, Alexandra Wilkis Wilson, and others in 2007.
Gilt's numbers look like this:
- Venture Capital - The New York-based company has raised more than $80 million of capital in several rounds from Matrix, General Atlantic, and others.
- Revenues - $270 million in revenue in the fiscal year ending June 2010.
- Projections - $500 million for the fiscal year ending June 2011.
- Valuation - $1 billion
The valuation for this latest financing will be about 2X revenue, which is similar to the price Nordstrom paid for HauteLook last week (an industry source says HauteLook's revenue was $115 million in 2010 and will be about $150-$160 million this year).
The online BIO industry appeared out of nowhere about a decade ago when French entrepreneur Jacques-Antoine Granjon founded a company called Vente-Privee in France. Vente-Privee is still the world leader, with more than $1 billion in sales last year, and Granjon's goal is to become the "Amazon of the event sale," with $15 billion of revenue a year.
Following on Vente-Privee's success--and reversing the normal trend of US online business-models being copied abroad--the following US private-sale businesses have been founded in the US in the past five years:
- Gilt Groupe - Launched in 2007 and is the leading BIO company in the U.S and has raised $80-$100 million from private equity investors.
- HauteLook - Founded in 2007, HauteLook is a U.S. leader in the BIO sector, and was acquired by Nordstrom's in mid-February for $270 million.
- Rue La La - Located in Boston, Rue La La was founded in 2008 and acquired by GSI Commerce for $350 million in 2010.
- One Kings Lane - Founded in San Francisco in 2008 by Susan Feldman and Alison Pincus (wife of Mark Pincus, founder and CEO of Zynga). The site was launched in the spring of 2009 and quickly gained ground in the world of group buying. Focuses on home-furnishings and recently raised $23 million in venture capital from Kleiner Perkins Caufield & Byers and Greylock.
- Zulily - Founded in 1994 by Amazon's Mark Bezos and Blue Nile CEO Mark Vadon, focuses on the kids category and already has more than one million customers.
- ideeli - Founded in 2006 by Paul Hurley, a serial entrepreneur who wanted to create a shopping community that sold luxury brands.
As is to be expected after such torrid growth, the BIO industry is also now experiencing growing pains:
- Growth rates are slowing.
- Managing inventory and fulfillment is challenging.
- 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.
According Krista Garcia, eMarketer research analyst, the four leading flash-sales sites—HauteLook, ideeli, Gilt Groupe and Rue La La—as reported in the "Flash Sales: What Retailers Need to Know", are projected to generate 2010 revenues of $900 million and double the number of visits to the category over the previous year. Multichannel retailers are also starting to adopt flash-sales techniques, but first they need to understand the consumer and how to make scarcity and exclusivity work for them.
Gilt Groupe, for example, is rumored to have been stuck with a hefty chunk of unsold inventory last year, a factor that one industry source believes contributed to its decision to raise more capital now.
A source at Gilt says the inventory story is overblown: Gilt was indeed left with more inventory than it wanted after last summer, the source says, but compared to a traditional retailer, Gilt's level of inventory is still very low. The company has only $45 million of inventory now, equivalent to about 10% of this year's sales, and it turns its inventory an impressive 8-10 times per year. (This compares to 2X-3X for some traditional retailers). As Gilt becomes more efficient, our source says, the company believes it can increase its inventory turns to 10X-12X per year.
Importantly, these growing pains are nothing new in the online retailing business, and was made more difficult by the Great Recession, which hit online brands very hard. Amazon, is an excellent example of a company which endured the Dotcom Bubble, incurred fulfillment problems due to its rapid growth, but after consolidating its distribution, and improving its fulfillment, merchandizing, and marketing efficiency, Amazon is now a model of efficiency and has become a global ecommerce powerhouse.
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.
Amazon's inevitable entry into the BIO space also looms as a future threat: The company acquired BuyVIP, a European private-sale site, last fall, and one industry source says it is now hiring people to help it enter the apparel sector in the US.
All of these issues make HauteLook's decision to sell and Gilt's decision to raise more cash look prudent.
And, importantly, the broader picture remains excellent, especially for the industry leaders.
As the industry's extraordinary growth over the past five years illustrates, private sales have developed into a major new sector of the ecommerce industry. Nordstrom's purchase of HauteLook shows that traditional retailers feel they need to enter the business, and none have had any success launching flash-sale sites themselves. Walmart, Target, Macy's, TJ Maxx, and others are potential buyers of the remaining pure-play companies, as are Amazon and eBay.
Amazon's recent purchases of Zappos and diapers.com show that the company is not afraid to buy its way into attractive sectors instead of building them, and Amazon also has the wherewithal (and balls) to pay the premiums that industry leaders command.
The suddenly-rejuvenated IPO market, meanwhile, offers another potential attractive exit for Gilt Groupe's investors.
In short, despite its growing pains, the flash-sale business represents a huge opportunity, and Gilt is still the clear US leader. So it's not surprising that there's demand for the company's stock at a ~$1 billion valuation.
COMMENTARY: The Great Recession and drop in the sales of designer brands and luxury goods from high fashion-to-glass ware, has given rise of the online By-Invitation-Only (BIO) retailer. I have covered BIO's on my blog several times, more recently Rue La La and ideeli. BIO's are membership-based and require that you be "invited" by a current member.
BIO's offer 50%-70% discounts on top designer brands. BIO sales are announced just a few days before they are scheduled, which is why they are often referred to as flash-sales. Sales are limited to a few well known luxury brands, merchandise and quantities are limited, and the sales last for only a few days. The strategy of BIO sales is to give the buyer or member, a sense of exclusivity, and is a big selling point. Marketing and promotions is primarily through opted-in email and targeted display ads. Speaking of targeted display ads, I profiled Rue La La and ideeli, and their display ads popped up regularly during my online visits. My fear is that Gilt will do the same thing. Keeping my fingers crossed.
Courtesy of an article dated February 21, 2011 appearing in Business Insider
Do Gilt Groupe have the same methodology with Groupon?
Posted by: Brad Fallon | 03/06/2011 at 04:34 AM