Consumer

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Flash-sale sites are turning out to be a flash in the pan as investments.

On Thursday, Gilt Groupe -- which, like other flash-sale operators, offers steeply discounted goods for a limited time -- agreed to sell itself to Saks Fifth Avenue owner Hudson's Bay Co. for $250 million. That's a pretty puny price for a company once valued at about $1 billion that was fawned over as a darling among Internet startups.

Then there's One Kings Lane, which Re/code reported Wednesday is trying to offload itself at "fire-sale" prices. Another flash-sale site with unicorn aspirations, the home-goods online retailer is now willing to sell for less than the purported $230 million it's raised from venture capitalists. Last year's sale of Zulily is another case in point. The once high-flying flash-sale site for parenting goods sold itself to QVC owner Liberty Interactive at a multiple roughly in line with what a beaten-down AOL got from Verizon.

Shoppers just don't flock to flash-sale offerings like they used to -- even luxury ones like Gilt's. For one, there are just too many sites and too many e-mails clogging up inboxes. Traditional retailers also learned from these companies' successes and started offering discounts of their own to lure back customers. As a result, companies such as Gilt and One Kings Lane have seen sales growth wane and struggled to attain sustainable profitability, forcing layoffs and a reining-in of ambitions.

The humbling of Gilt and One Kings Lane doesn't bode well for fellow flash-sale operators such as fashion site Rue La La (owned by Internet firm Kynetic) and Wayfair's Joss & Main, which sells home goods. Hedge-fund manager Whitney Tilson has said he's selling Wayfair stock short, citing among other things the challenges of competing with Amazon and becoming profitable. He's not alone: After an almost 50 percent climb since its 2014 IPO, Wayfair is one of the most heavily shorted stocks in the Russell 2000 Index, according to data compiled by Bloomberg and Markit.  

Wayfair and the Bears
The stock is one of the most shorted in the Russell 2000 Index.
Source: Bloomberg and Markit

Flash-sale sites have a shot at survival when they're used in conjunction with retailers' own discount offerings. Nordstrom acquired HauteLook for $180 million in stock in 2011 and linked the site with its Nordstrom Rack outlet business, allowing customers to shop both through the same account and return items ordered through HauteLook to Rack stores. According to Nordstrom, things seem to be going pretty well. Off-price sales increased 12 percent in the third quarter, led by better-than-expected online growth.

Buyer's Remorse?
After initially rising on the news of a potential Gilt takeover, Hudson's Bay shares dropped after the deal was announced.
Source: Bloomberg

Hudson's Bay will try a similar strategy with Gilt, combining the site with its Sak's Off 5th division. Whether this is the best use of Hudson's Bay's finances is another question (more on that here). Shareholders certainly gave the purchase a cold shoulder, sending Hudson's Bay shares down as much as 4 percent in New York. 

It turns out, the dream of flash-sale operators becoming successful stand-alone companies, let alone the next Google or Amazon, was as fleeting as their promotions.  

For Gilt and other flash-sale sites,  succumbing to a sale -- if even at a fraction of their former values -- may be the best shot at turning a fizzling fad into a longer legacy. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net