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Psst! Private-Sale Shopping Sites Are Hot

During last year's bleak holiday shopping season, fashion designer Lauren Merkin greatly overestimated the number of handbags she'd sell in upscale retail stores such as Neiman Marcus and Bloomingdale's. She found a good way to sell them elsewhere without consigning them to a bargain-basement rack that might tarnish the brand in the eyes of would-be customers. All year, she's been selling the excess goods for half-price on the members-only Web site Gilt Groupe, during 36-hour sales that are hidden from the view of the general public. "What we're selling is first-rung, but if it sits around at a sale I think the consumer gets the wrong impressions about the product," Merkin says. Saddled with overstock from the retail recession, makers of luxury apparel, home furnishings, and other high-end goods are selling their wares at reduced prices through Gilt Groupe and other private shopping sites. Many of these companies help fuel pent-up demand by limiting membership, forcing would-be clients to park on a waiting list or be referred by existing members. Lure for Bargain-Hunting FashionistasLuxury brands can use these members-only sites to hide markdown prices from retail shoppers willing to pay the full amount, while attracting scores of wannabe fashionistas willing to wait for haute couture at a low price. "The brands they offer are of such high quality, and because they're at discount prices it makes them much more attainable," says Meghan Donovan, a 24-year-old San Francisco resident who shops on The private-sale model also makes sense for Gilt Groupe and other sites that act as middlemen, because they carry no inventory and earn a wide margin on sales. Combined revenue at Gilt Groupe, Rue La La, and Ideeli, three of the top four players in the U.S., is expected to exceed $300 million this year. That, along with sales at other private-sale sites, makes up a significant portion of the estimated $1 billion a year in online sales of luxury apparel, says Sucharita Malpuru, e-commerce analyst at Forrester Research (FORR). Online private-sale fever is spreading. In October, upscale department store Saks (SKS) held its own online "flash sale," a 36-hour event open only to customers on its mailing list. Cable company Comcast (CMCSA) recently announced it's getting into the space by opening Swirl, a private-sale site affiliated with its DailyCandy newsletter, which provides an insider's guide to shopping and nightlife in cities such as New York and Miami. And on Oct. 27, e-commerce services company GSI Commerce (GSIC) said it will buy the parent company of Rue La La for up to $350 million, a deal that may see a range of GSI clients like Kate Spade (LIZ), Ecko, Calvin Klein (PVH), and Adidas (ADSG) lining up for private sales on the site. "Our brands want to sell a lot of inventory in a very quick period of time and they want to do it discreetly," says Michael Rubin, CEO of King of Prussia (Pa.)-based GSI. U.S. Market Heating UpRue La La, like Gilt Groupe and a few other private-sale players, was started in late 2007. But the business model dates at least to 2001, when French site first took the common sample sales of high-fashion Parisian designers online. has expanded to Germany, Spain, Italy, and the U.K., and has now worked with more than 600 brands in luxury apparel, wine, home decor, and other areas. In 2007, Boston-based venture capital firm Summit Partners acquired a 20% stake that valued at about $1 billion. Dozens of copycat sites have sprung up in France, fueling a substantial e-commerce industry there. The U.S. market for private-sale sites may be just heating up. "It looks like these sites are growing revenues significantly faster than any other part of retail," says JPMorgan (JPM) retail analyst Brian Tunick. At specialty retail stores such as Abercrombie & Fitch (ANF), Coach (COH), and Tiffany (TIF), same-store sales—those of stores open at least a year—have declined an average of 5% to 7% this year, Tunick says. By contrast, at the top private-sale sites, sales are growing fourfold and fivefold a year, he says. Venture capital firms have begun placing bets in the space. "We think the market is quite large," says Jeff Lieberman, a partner at Insight Venture Partners, which invested $10 million in members-only shopping site HauteLook in May. Gilt Groupe had sales of more than $85 million in fiscal 2009, which ended in June. The company says it's on track to generate sales of $400 million in fiscal 2010. Analysts say it's a strong candidate for an acquisition or a public offering. "If Gilt doesn't get acquired, it would be an interesting" IPO, says JPMorgan's Tunick. Existing e-commerce players like (AMZN) and eBay (EBAY), as well as brick-and-mortar retailers like Saks and Macy's (M), are likely suitors, says Gartner (IT) analyst Gene Alvarez. Expanding into New AreasJust as the recession has contributed to gains by private-sale sites, signs of recovery in consumer spending may dampen the sites' prospects. "It will be tougher for the private-sale sites to get merchandise," says designer Merkin, who expects to sell off her remaining 2008 holiday inventory during a sale on Gilt Groupe this holiday season. Merkin and other brands expect more shoppers to buy full-price items, and are more closely tying the number of products shipped to expected demand, resulting in lower stockpiles of unsold goods. Still, private-sale sites in the past year have expanded into new areas, such as online outlets for travel packages and marked-down home furnishings. The sites are a good showcase for young brands looking to get exposure and acquire new customers. "The online sale is marketing for new customer acquisition, but marketing that does not require an investment," says Annbeth Eschbach, president and CEO of Exhale, a New York-based chain of spas that offers discounted massages, facials, and manicures on Rue La La. Others are looking to distinguish their sites by tying online sales to offline events. Billion Dollar Babes, a Hollywood sample-sale business bought by e-commerce company OneStop Internet last year and brought online, still holds live sales in Los Angeles, San Francisco, Chicago, and New York, replete with DJs, bars, and personal makeovers. Says John Tomich, OneStop Internet co-founder and CFO: "Everybody's got excess merchandise. It's the dirty little secret of the industry." For the growing ranks of members who shop private-sale sites, the secret is out. For a closer look at 13 of the top members-only shopping sites on the Web, read this slide show.
MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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