Online Flash Sales: Second wave of e-commerce or next bubble?
|Saturday, 28 April 2012|
The first wave of e-commerce, online retail represented by companies such as Amazon.com outshined catalog retail by offering a nearly vast array of merchandise and selling it economically and rapidly. It satisfied demand, rather than creating it. The second wave of e-commerce, Flash Sales represented by companies such as vente-privee.com & ruelala.com is trying to do something more difficult create demand. Successful traditional offline retailers succeed at this by turning their stores into platform of consumer delight and convincing people to buy something that they had no intention of buying.
The flash sales industry has grown from zilch to a multibillion industry in just five-six years, showing endless potential. With tremendous growth of European flash sales stalwart vente-privee.comand American sites such as gilt.com and ruelala.com, it's clear that the flash sales sector is blossoming.
Rationale behind the name
As the name suggest, Flash sales are ‘sales in a flash’. They are excellent deals, sometimes up to 50%- 70% off but they only last for a very short period of time. For Brands and designers seeking to liquidate unsold or off-season merchandise, flash selling is promising to be a successful method of selling. Even Offline retail giants such as Wal-Mart for example have short term sales, and K-Mart has 'blue light special' that is a form of a flash sale.
It is also known as Private Sale, since it is ‘exclusive sales’ that are available only to members. One has to be a member of the website, to take part in the sales. The sale begins at a specific hour for a limited time and merchandise is sold out within a couple of minutes.
World economies are still struggling to survive, “Standard and Poor’s (S & P)” has downgraded rating of USA from AAA to AA+ and euro zone is in financial chaos, as a result the danger of second recession or slow down is looming large on economies, consumers being more careful with their money, hence flash sales are fast becoming the new avenue of shopping and getting the most value for your money.
This trend revolves around a fundamental principle: Create exclusivity and demand by limiting time and what you sell. Online flash sale sites in India have come up in response to rising investor interest in private sale websites across the globe with Gilt Group and Rue La La in USA and ventee-privee.com in Europe. Today, flash sale shopping sites have developed a faithful following. The range of products sold varies from fashion to home to loads of other categories.
Potential for business
If we analyze business opportunity with the help of opportunity matrix (refer: Figure 1), flash sales sites shows potential for success. As depicted in Figure 1, Flash sales sites may not be critical to consumers; however there is enough potential with respect to dissatisfaction among aspiring consumers (major buyer segment) due to awfully high prices charged by big brands and famous designers.
Flash sales appeal to those consumers who view shopping as entertainment or to Fashion-enthusiast and bargain-hunters. However, it is interesting to note unlike traditional online retailers where young men are the main customers, in Flash sales, it is largely women
In India, portals such as exclusively.in, bagittoday.com, fashionandyou.com, brandmile.com, theprivatesales.com etc have attracted the consumers where as sites such as vente-privee.com, ruelala.com, gilt.com, ideeli.com , billiondollarbabes.com, woot.com (Amazon), btrendie.com , jetsetter.com , myhabit.com ( Amazon) is ruling the roost in the American and European market
Flash Sales business model is recent phenomenon; every player has its own view on what strategy will work. For some, intangibles such as intent & persistence would be the key differentiator, and for others, creating urgency with countdowns on sales, ensuring exclusivity and creating demand, making it easy for members to share and invite their network or even making shopping a competition, will be the key parameters to success. Although, it is premature to come to any conclusion, however, Big Brands, Famous Designer Name and Best Deals have been the business mantra till now. Many flash sales retailers consider ‘Member engagement’ is biggest metric for success.
If we analyze flash sales industry with the help of porter’s five forces model (refer: figure 2 for detailed reasoning), industry appears moderately attractive in the long run, this is because out of the 5 forces, 2 forces are working against the business model i.e. threat of new entrants (High, since entry/exit barriers are low) and competitive rivalry (high due to proliferation).
Difference between Traditional Online Retail and Flash Sales
Order fulfillment & handling returns are the fundamentals to both forms of e-commerce. In an age of near-infinite alternatives, reputation is the king, and streamlined order fulfillment and handling returns is the bedrock to that reputation.
Inventory management is one area which separates both forms of e commerce. Inventory for flash sales is volatile, it carries more width than depth of Stock Keeping units (SKUs) (as opposed to traditional e-commerce), allowing for virtually no margin of error. In this background, every piece must be accurately accounted for. Mistakes lead to short shipment and, consequently, unhappy customers. Also, large portion of flash sales inventory comes from overstock, returns, and buyouts. Stock often arrives in terrible condition and accompanied by inaccurate or missing packing lists.
In general, challenges in flash sales are more or less similar to the traditional online retail, such as no uniform tax structure, lack of better e-commerce polices at the macro level, low Penetration of Internet especially Broad band ,inefficient logistics, less credit card usage, and Fragmentation of market. Besides, lacks of trust, since most of players are unknown and they are not part of any big and renowned business group, hence COD (cash-on-delivery) is most preferred payment method. With all the DNC (Do Not Call) restrictions, to reach to new consumers, companies have to search for better & cheaper alternative for sales promotion, Print, Hording and electronic media are the expensive proposition.
On the business side, lot of funding is coming from venture capitalists (VCs) or private equity (PE) players. But unlike earlier waves of e-commerce, which required funds to build warehouses and stock inventories to guarantee the availability of merchandise, the new e-commerce seeking funds for customer acquisition, technology, hence making it an appealing proposition to venture capitalists who might shy away from plowing their capital into inventory.
On the consumer side, people are keen on trying out online shopping and are not shying away with trial purchase. Good growth is expected from users in smaller towns and tier II cities.
On the competition side, private sales sites indicate a dynamic shift in the way that people shop online, and this space will continue to proliferate. After that, we can expect consolidation and one or two clear leaders in the long run. There are now flash sales sites for fashion, food, wine, traveland outdoor gear. Other reasons for the proliferation of new sites are that there are minimal barriers to entry and exit in this space. Many brands are now also manufacturing inventory specifically for this channel. Emerging designers are using private sales sites as a medium to approach the target consumers
In the end, originally flash sales were created to clear the inventory, but the trend will last for long time, because it's another avenue for offline and pure play retailers to increase their revenue. However, today there are 100 + ecommerce companies in this country and half of them belong to second e-commerce category. Post $ 1 billion valuation of makemytrip.com and Flipkart.com, mindless proliferation has started.
How long this industry will be attractive and profitable to many companies is yet to be seen. Porters’ five forces analysis also shows this business is going to be moderately attractive and profitable in the long run. The question, flash sales: second wave of e-commerce or next bubble still unanswered.
· Flash Sales: Gilt, Theoutnet.com and Others: What Are Flash Sales , by Amy Judd, April 10, 2010
· What is Flash Sale? The New Business Mantra, By Amandaword
· Online Flash Sales Market Is Heating Up, Will Get Overcrowded Soon: Salil Kumar, CEO, BagItToday , by Preethi J, June 15, 2011
About the Author:
Piyush is COO at Mother Earth Retail, Bangalore. He is alumni of IIM Bangalore and has around 14 years of experience in the retail industry