Gilt Groupe was once considered a darling “flash sale” e-commerce companies. Founded in 2007, Gilt initially raised a $5 million Series A and by 2015, raised over $270 million. Gilt’s 2011 valuation allowed to company to enter Silicon Valley’s prestigious “unicorn” status – a startup valued at $1 billion+. But only a few years later in 2016, Hudson Bay Co. acquired Gilt for $250 million, at least $20 million below its capital raised, yielding a loss for many investors. Several other flash sale superstars experienced similar fates. Fab.com and Ideeli were both acquired at steep, fire-sale discounts (no pun intended). After raising $100 million, Ideeli was acquired by Groupon in 2014 for $43 million. Fab.com was once a peer to Gilt in the unicorn club, but sold in 2014 for $15 million. There are many more equally tragic stories. What happened? Aren’t companies with buzzwords like digitization and e-commerce always supposed to equal success?
In the mid-2000s, employees across Manhattan were often using their lunch breaks to attend “sample sales.” Sample sales carried high-end retail inventory and offered consumers an opportunity to purchase – usually apparel – for a substantial discount. The physical sales occurred in temporary locations for short time periods (often one or two days), and were typically exclusive invite-only events. With the onset of the 2008 global recession, retailers found themselves with large amounts of excess inventory to unload. The sample sale business model had several scalability restraints when faced with this supply increase including: need for temporary store space in high density areas, limited customer reach, and inventory storage and movement.
Several “flash sale” companies (including Gilt) emerged as an alternative, all with a fundamentally similar business models. These companies purchased excess inventory from retailers at a deep discount, and sold it via flash sales, each typically lasting for 24 – 36 hours. The online presence allowed companies to reach a significantly larger audience across the entire United States. It also provided customers the flexibility to shop when they wanted to – versus the commitment of attending a sample sale in person. Flash sales differed from traditional online retail in that they created a sense of urgency for customers to purchase immediately.
Despite the large support of venture capital funding for flash sales, Gilt and the industry faced numerous challenges. Gilt had tight operating margins as consumers expected to purchase goods at a substantial discount. As global economy recovered, luxury brands became increasingly hesitant to sell via flash sales to avoid tarnishing their image. Traditional retailers had caught up to the “discount frenzy” by flooding inboxes with discount codes. Gilt’s business model had a low barrier to entry, and retailers still willing to sell to flash sales, stopped being exclusive and sold to several websites. Gilt began running sales for the same brands constantly – thus losing its sense of urgency that discouraged consumers from buying. Finally, online shopping fundamentally leads to more returns than traditional brick and mortar stores and the excess cost of handling returned inventory, further eating into Gilt’s operating margin.
Although Gilt tried several methods of diversification and product expansion, its stand-alone digital business model inevitably was not able to handle the changing environment. Its operating model also had several cracks, mentioned above.
While we often hear that traditional brick-and-mortar retailers are on the out due to the digital displacement of e-commerce, a closer look at the underlying data says otherwise. Although e-commerce has been around for 20 years+, U.S. census data provides that brick-and-mortar stores still accounted for 92.3% of all retail sales in Q1 2016. Of the e-commerce sales, nearly 50% are attributed to retails with physical stores. The requirements for an online-only presence – IT, shipping / returns, and distribution centers – can cost nearly as much as running a physical store. Further, consumers often want the option to visit a store in person and see the physical product. Several companies who started with an online-only presence have begun to open traditional stores to supplement their online presence – including Warby Parker, Athleta and Bonobos.
Hudson Bay Co., the parent company of Saks Fifth Avenue, is currently integrating Gilt into its operations. Less than a year in, Hudson Bay now allows Gilt shoppers to return items in store and has opened a Gilt display in its New York City Saks Off 5th store. Hudson Bay and other omnichannel retailers (retailers that integrated digital and physical worlds into the customer experience) are expected to realize valuable synergies over those competitors who try to operate either strategy independently. Digitization can certainly create new avenues for growth and increased customer penetration. However, it’s important to be cognizant about the tangible value digitization in creating, and if a stand-alone digital model is preferable to integration.
Word count: 796
 Evans, David S., and Richard Schmalensee. 2016. “The Best Retailers Combine Bricks and Clicks.” Harvard Business Review Digital Articles 2-5. Business Source Complete, EBSCOhost (accessed November 18, 2016).
 Rigby, Darrell K. 2014. “E-Commerce Is Not Eating Retail.” Harvard Business Review Digital Articles 2-3. Business Source Complete, EBSCOhost (accessed November 18, 2016).