Flash Sale vs. Local Sale: One Model Outperforms

When it comes to fashion online, it might be better to think national rather than local.

with contributions from Vicki M. Young
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When it comes to fashion online, it might be better to think national rather than local.

That appears to be the growing consensus among fashion brands and industry observers as the battle rages on between local-sale sites such as Groupon Inc. and flash-sale ones like Gilt. Right now, it appears the Gilt model is winning.

Groupon certainly is making more news of late — its stock hit an all-time low Thursday, closing at $11.76, a drop of 54.9 percent from its opening price of $26.11 when it went public Nov. 4. The decline follows news of multiple lawsuits over a larger-than-expected net loss last month, while additional factors — such as flaws in the model that fail to provide enough customer information to participating retailers — are leading many to question the fate of “daily deals” in the online arena.

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Groupon pioneered the local deal phenomenon in the online space when it launched in 2008, and the company went public five months after its initial public offering filing in June. Ever since then, there has been backlash, controversy and speculation as to whether the brand should have gone public in the first place due to accounting practices that have raised a multitude of questions. But all the hubbub is unlikely to have any effect on the apparel industry, according to experts.

Sucharita Mulpuru, online and multichannel retail analyst at Forrester Research, said fashion isn’t a significant classification in the local-sale space because it’s challenging for brick-and-mortar retailers to generate a profit from this type of online deal — while the flash-sale model lends itself more to this category.

“I had a conversation with a mom-and-pop shop [recently], and they just don’t have the margins [to partake in a local deal]. It’s too rich of a cut that Groupon takes. From the get-go it’s a nonstarter. I certainly haven’t heard of anyone getting a tremendous amount of success from offering them,” Mulpuru said.

She explained that, if a retailer partners with a company such as Groupon, it is looking at a 50-50 split of an item at a 50 percent discount — and with margins that are “50 percent at best, it’s really hard to make that work, especially if you think of lifetime value and future customers. “

Mulpuru added that, for some of the bigger and more attractive retailers that work with Groupon, the Web site has been willing to compromise with a variable compensation structure.

According to a spokesperson from Groupon, deals on the local-sale site are roughly broken up into the following classifications: 30 percent food and restaurants; 30 percent spa; 30 percent activities and retail, and 10 percent miscellaneous. Any scan of Groupon will tell consumers that retail is a small percentage of the offerings. As a result, one could infer that retail accounts for less than 30 percent of the overall category — perhaps as little as 10 to 15 percent of overall deals.

The company disclosed larger retail brands that performed well include the Gap and Old Navy, with 5,000 and 100,000 deals purchased, respectively. On the more localized level are deals such as ones with boutiques in Englewood, N.J., and multiple locations of Ground Zero Clothing and Boardshop — with total deals listed as “over 1,000.” Groupon doesn’t reveal final totals of sales, so final units sold might be higher than numbers listed on the site.

At a panel presentation Tuesday at the Daily Deals Summit at the Crown Plaza Times Square in Manhattan on “Making the Deal Model Work,” panelists concluded that one of the top problems with daily deal sites is that customer information isn’t available to merchants, a critical component of any sale because it allows the small business owner to reconnect with the buyer. That’s not true of flash-sale sites where the merchant has the e-mail and shipping information of the customer.

There are other flaws in the daily deal model that are not inherent in the flash-sale model.

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