Consumer Nation

Members-Only Discounters Rise From Economic Rubble

With consumers feeling the recession pinch, the necessity for designer brands to unload excess inventories has given rise to a new breed of Internet retailers.

So-called sample-sale Web sites are springing up from the rubble of the luxury markets and attracting consumers looking to score a deal in the recession.


Companies are clamoring to fill this newish off-price, on-line niche, but unlike veteran online discount retailers such as or , which offer discounts on a large number of designer goods at one time, these new sites offer daily, short-lived (often 48-72 hours), single-designer sales to members at discounts of up to 70 percent.

But will these companies have staying power as the economy recovers?

Early results from MasterCard’s SpendingPulse survey indicate that while spending is still dropping, the rate of decline has slowed as consumer confidence increases. And many of these companies are hoping to secure longevity and growth by moving from solely women’s fashion, to selling for men and children, as well as home goods and electronics.

One sample-sale Web site procuring some significant buzz is Gilt Groupe. The company, dubbed “Most likely to be Worth More than a Billion Dollars” by Silicon Alley Insider readers, was co-founded by Kevin Ryan, former CEO of DoubleClick, the Internet ad-serving company acquired by Google for $3.1 billion in 2008.

Gilt brought in Susan Lyne as CEO, fresh off her stint turning around the battered Martha Stewart Living Omnimedia.

Gilt Groupe is a major cash cow for AlleyCorp, a holding company made up of six tech startups co-founded by Ryan. Last month Gilt Groupe’s membership surpassed the 1 million mark, according to co-founder Alexis Maybank.

A year ago the company had less than 25 percent of that subscription base. But today, with hundreds of brands and with around 30 sales a week, the company has top-line revenues well north of $100 million year-to-date.

“The tipping point was in mid-2008, [membership and sales went] from steady growth to explosive growth,” Maybank said.

Gilt Groupe competitor Hautelook also is finding solid footing in the new economy. The company raised $10 million last month. Insight Venture Capital headed the investment, and on Wednesday, two new investors were named.

For Insight Capital, investing in the budding off-price e-commerce biz was a no-brainer.

Jeff Lieberman of Insight points to the fact that the offline off-price industry is massive and discounters have been the bright spot in the otherwise dreary retail sector.

TJ Maxx has year-to-date comp sales of 1 percent, and Ross Stores, the country’s second largest discounter, is seeing year-to-date comp sales of 9 percent.

Lieberman says there is a “massive secular shift to the Web, [and off-price online retailers] will continue to do well.

“The format of sample sales is an exciting and new format for consumers,” he added.

So far, Insight’s bet on Hautelook has been paying off. CEO Adam Bernhard says membership continues to grow 25-30 percent month-over-month and he expects six to seven times more sales this year than last.

Bernhard attributed the site’s success to the fact that Hautelook does not hold inventory; instead, it is purely a platform for brands to sell their excess supplies. With department and specialty stores cutting back orders, Bernhard says brands believe online sample sales are the "ultimate solution to clearing inventory quickly and quietly.”

Gilt group’s Maybank echoes this sentiment, saying, in general, apparel is not moving through traditional paths as much as in past years, making sample sale sites a complement for other forms of distribution.

Regardless of the recent upturn in the economy, Lieberman has a bright outlook for these sample sale Web sites.

"Everybody loves a bargain," he said. "Always."

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