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The Rise of Gilt Groupe: Gilt Ascends to Dominate the US Private Sales Landscape [Part 2]

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The Rise of Gilt Groupe is a three part series on the evolution of the New York fashion startup, Gilt Groupe, which dramatically reshaped the online retail market for fashion by building a community of high value consumers around limited-time, members-only "privates sales" for designer apparel at steeply discounted prices.

Part 2, Gilt Ascends to Dominate the US Private Sales Landscape, looks at how Gilt provided a transformative, efficient, and brand-sensitive way to capitalize on the massive inventory supply glut following the onset of the recession.

This is deeper dive investigation following the publication of a recent Business of Fashion article, The Rise, Stumble and Future of Gilt Groupe’s Business Model.

The Rise of Gilt Groupe

1.     The Rise of Gilt Groupe: The Great Recession Fuels the Perfect Storm [Part 1]

2.    Gilt Ascends to Dominate the US Private Sales Landscape [Part 2]

[ Subscriber Graphs & Metrics ]

[ Revenue Graphs & Metrics ]

[ VC Financing by Round & Enterprise Value Implied Valuation ]

2.1   Four Critical Success Factors of Gilt’s Dominant Ascension

[ Subscriber Growth Charts & Metrics ]

2.2   Unique Strengths of Gilt’s Business Model

[ Gilt Groupé Revenue Breakdown by Business Unit ]

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Matthew A. Carroll currently runs an outdoor brand Cloven Footwear (raised $4.1m in Nov '10) and sits on the board of two tech startups in San Francisco, California.  You can follow (and show some social love) via@Fail_Harder, FailHarder on Facebook, and Quora.

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Gilt Ascends to Dominate the US Private Sales Landscape

In consumer-fashion, there are two general categories of players in the business landscape: Retailers & Brands.

Figure 3 - Brands Versus Retailers

The extreme market conditions of the Great Recession created an acute financial imperative for retailers — off-price, as well as full-price — to convert their own excessively large inventory positions into cash by canceling the inventory procurement pipeline & aggressively cutting prices to turn existing inventories as quickly as possible.  Chart 2 from Part 1 - The Rise of Gilt Groupe: The Great Recession Fuels the Perfect Storm, illustrates how clothing retailers voraciously slashed inventory levels (the blue line) which means that consumer-fashion brands were abandoned in such a way that left many brands almost without any viable sales channel, let alone one that would protect brand equity from dilution.

Considering the supply in the marketplace, brands were at the mercy of retailers and the often predatory positions of brick and mortar off-price retailers who were in many cases completely unreasonable - sometimes pushing for 90% discounts to take excess inventory.  [Note: Although my previous brand VÆL Project collapsed under the market pressures, I totally understand the retailers’ perspective - it was a fire sale and there was absolutely no incentive for them ‘help a brand out’ when the retailer’s livelihood was at stake.  Eat or be eaten - unfortunately on that brand... I got eaten]

In 2008, Gilt charges onto the scene by using their incredibly innovative demand generation platform to effectively liquidate a brand’s inventory position. Gilt’s most most significant value proposition was that it built a community of high-value consumers around limited-time, members-only "flash sales" for designer apparel at steeply discounted prices. The generation of an engaged demand source (members who are actively looking for deals) is Gilt’s core strength.  Figure 3 illustrates the Gilt’s subscriber growth since it’s launch in Nov ‘07:

Figure 4 - Gilt's Membership Growth Statistics

Although the generation of nearly 5.0m members through Q4 2011 is impressive, it’s the monetization of this member-base that is second to none.  In November 2007, Gilt launched with 15,000 members and Internet Retailer-estimated sales of $425 million in 2010, up from $170 million in 2009 and $25 million in 2008.  Figure 4 shows this meteoric rise in revenue:

Figure 5 - Gilt's Est. Revenue Growth

The strength of Gilt is furthermore evidenced by sustained increase in their post-money valuation following the completion of Gilt’s Series E Round of $138m bringing their total funds raised to $238m.  Figure 5 breaks down the steady increase in the valuation:

Figure 6 - Gilt's VC Financing & Enterprise Value Implied Valuation

2.1   Four Critical Success Factors of Gilt Groupe’s Ascendancy

There are four main critical success factors that define Gilt’s meteoric rise as a leader in e-commerce:

1.  High Value Customer Base: Gilt is one of the premiere examples for friends of friends building a scalable community of high value customers. Gilt’s member-base is comprised of one of the most desirable demographics in retail - Urban Sophisticates

Figure 7 - Gilt's Demographic Analysis    Source: Luxury Daily

Gilt’s core customer base emanated from the friends of the founders & core employees referring new customers to Gilt – generating incredibly high quality network effects. This initial community was comprised of highly influential, successful, and talented people from both tech & fashion - meaning that their circles of friends (i.e. network effects) would be comprised of similar individuals.  In fact, Alexis Maybank, one of the founders of Gilt Groupé, told the WSJ last year:

“This is a business that has grown predominantly through word-of-mouth marketing. Seventy-five percent of our membership has come from the suggestion of a friend, using our onsite 'Invite Friends' feature [in exchange for a $25 credit.] That's how we launched. We sent invites to a list of about 15,000 people—friends, former colleagues and classmates, dating back to grade school!” (Source WSJ)

2.  Transformative Demand Generation:  The foundation of Gilt’s business model relied on proactively supplying product to the customer in a revolutionary way – a highly desirable product distributed directly in their email - and imposing timing & supply constraints to compel immediate action (50% of all revenue from Gilt sales come in less than an hour [after the sales start online]).

Gilt changed the world of online fashion by leveraging technical developments in email marketing in a way that caused members to completely re-evaluate their relationship with retailer emails.  Gilt introduced the opportunity to discover incredible deals from amazing brands directly in the members’ inbox. Outside of Gilt, deals for designer brands were constrained by timing (Nordstrom’s Half Yearly Sale –(HYS)), uncertain availability (a customer would have no knowledge about products available during Nordstrom’s HYS), and high transportation costs (huge investment in time, effort, and energy required to find deals at Nordstrom’s HYS with an uncertain payoff).

3.  Unparalleled Product Assortment:  The core team at Gilt ‘07 - ‘09 brought with them powerful relationships with brands that, in conjunction with the highly valuable customer base, created one of the most unique product / value propositions in the industry – they were able to secure incredible product delivering a decisive value proposition to their members.  This delivery of product / price value proposition:

  • built Gilt’s luxury brand & cultivated significant good will for style expertise,
  • created emotional engagement with customers (as the gatekeeper to incredible products), and
  • generated a high-value proposition for brands doing business with Gilt (other top tier brands + customer demographics).

4.  Protected Brand Position:  The product offering coupled with Gilt’s customer-base meant that brands could sell excess inventory at a discount while still maintaining a positive brand image. Generally speaking, a brand studies very closely to whom and where they close out their inventory - in a manner that both optimizes cash flow AND ensures that the target audience doesn’t see it.  For fashion (specifically on small, higher-fashion brands) once your customer knows you are at Nordstrom Rack, it means you are mass market and creates a negative brand stigma - the brand dilution discussed earlier.

2.2   Unique Strengths of Gilt’s Business Model

Social:  The Great Recession had a very powerful impact on consumption & consumer psychology.  The narrative that I use to explain is that consumer’s played by the ‘rules’ of the 00s boom - they bought single-family homes, had a good job in Corporate America, & leveraged their assets to ravenously purchase ‘stuff’.

Following the market collapse of 2008 and in conjunction with the assimilation of Facebook in the daily lives of web users, the consumer was slapped in the face for this ideology as mortgages turned upside down, indiscriminate layoffs drove unemployment to nearly 10% (much higher when the more accurate U7 or U8 measures are used), and predatory contraction in consumer credit by banks.

Facebook & Twitter enabled a direct channel of communication with customers to evoke a sense of “similar to me” psychological triggers.  As fan & follower bases expanded in social networks, brands were able to have multiple touch points with the customer to build customer mindshare (brand recognition & a passive reminder that “hey I like this brand”) and communicate a personality (tone of updates, images from the team).

The brilliance of the Social Web is that it enables brands to develop a personal & substantive relationship with each person - creating an emotional bond with each customer that fosters a sense of personality, ethical, and philosophical alignment.  This is a process called emotional engagement - where a social presence of a brand cultivates a sense of who the brand is by virtue of the people that work there & how they communicate to the level of “my buddy works at this brand.”

Here is an example of one Twitter message exemplifies their top tier social strategy:

Figure 8 - Gilt's Social Dominance

Tablets / Mobile: Gilt derives 17 - 30% of revenue (depending on the day) from Mobile/Tablet channels.  This demonstrates their deep knowledge in building a system that enables commerce on various platforms and capitalizes on situational relevance - a subscriber browsing deals from an iPad over morning coffee and, later on their iPhone waiting for the subway.

With order values 30% higher on the iPad than their website or iPhone application, their focus on the experience to engage their users is working (Source:  NRF Shop.org)

By June 2011, Gilt was “seeing 15% of our revenue coming from mobile, which is a significant source of business for us and witnessing engagement metrics over and above our website,” said Jason John, Sr. Director of Online, Mobile and Social Marketing at Gilt Groupe. (Source BrandApproved.com interview)

Vertical Product Extensions:  Gilt has done an incredible job with voraciously capitalizing on their success by investing in new businesses that will enable them to capture a larger % of disposable income of each customer & diversify it’s revenue model as growth moderates to more mature levels.  Kevin Ryan, a CO-Founder & Chairman of Gilt, has been focused on the execution of the strategic evolution that, “two years ago, 95% of what we sold was excess inventory that was not sold in stores in men's and women's [clothes]. Today, that is 35% of business.” (Source: AOL Interview) – exemplifying the generation of substantive revenue from new channels.

Figure 9 - Gilt's Revenue Breakdown by Division

Gilt Groupe’s Business Units

Finally to close off the case for Gilt’s ascension into the dominate player in the fashion industry - Figure 5 illustrates a 5-year revenue forecast & implied market share calculation:

 

Figure 10 - Gilt's Projected Revenue & Gilt's Implied Market Share

Part 3 --> The Rise of Gilt Groupe: Gilt’s Strategy to Combat Full Frontal Assault by Competitors