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Gilt Groupe’s Very Cloudy Future

The problem with being the hot new thing in a shiny new market is that you need something to fall back on when the shine wears off.

Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

Last month, Gilt Groupe closed on a nearly $50 million investment, which many companies would view as a positive sign.

But for Gilt, it was mostly a reminder that the company is still nowhere near ready for an IPO — something that investors and insiders have been banking on for years now — and that’s becoming a problem.

There are two main ways to characterize what has gone wrong at Gilt and what has put a once-can’t-miss New York City startup in a very troubling spot. On one hand, it’s easy to point to bad bets Gilt made over the years on category expansions that never panned out.

But the alternative reality is actually much more troublesome: The idea of building a giant, profitable business by selling higher-end clothing in limited-time shopping events called flash sales is just no longer feasible. And that’s the reality Gilt — and other flash-sale sites — now face.

Rue La La, which is nearly two-thirds the size of Gilt, shed about a half-dozen execs in January, sources say, including its CFO. Gilt came close to acquiring the company in the fall, but the deal fell apart late, according to multiple sources. In theory, a combined entity would have a better shot at profitability if the two sides eliminated overlapping costs. But revenue growth would remain challenging. A deal is still possible, though nothing is imminent, these people say.

It wasn’t always this way for the industry. In the first few years following Gilt’s launch in 2007, many viewed it as the next great e-commerce company with a model that was completely new to U.S. shoppers. Why has the business changed for the worse since then?

For one, there’s not nearly as much excess high-end inventory as there was around the time of the recession, when Gilt took off. Secondly, fashion brands are now selling the same excess inventory to a wider variety of sites and stores and placing more of an emphasis on their own e-commerce sites. Gilt is just no longer the go-to spot for excess inventory that it was six or seven years ago.

Lastly, Gilt’s main customer acquisition channel — email — is as challenged as it has ever been. That’s in part due to general email fatigue among customers and in part due to changes Google made to Gmail to filter promotional emails out of people’s main inboxes. Of all retailers, flash-sale companies are especially reliant on email and Gmail in particular. Gilt is no different — more than a third of its revenue in 2014 came from customers who found deals in their Gmail inboxes, sources say. And it isn’t getting any easier to reach those people.

Add these problems up and Gilt is facing a steep hill to climb after a tough year. In 2014, Gilt pulled in around $650 million in revenue, but growth began slowing in the first half of the year and then dropped off more in the second half of the year, according to sources. The company also isn’t profitable and current customers aren’t coming back as often as they once did, these people say.

In an interview with Re/code, CEO Michelle Peluso acknowledged that 2014 wasn’t a good year after a promising 2013. In addition to economic conditions affecting the industry, Peluso said the company was slow to pull the trigger on additional marketing spending in the second half of the year, when the business weakened. Gilt spent just five percent of revenue on marketing in 2014, according to the company.

With the help of the new $50 million investment, Gilt will increase marketing in international markets such as China and Australia where it believes there’s still room for much growth. International sales accounted for about 15 percent of 2013 sales and are expected to reach 20 percent this year. Gilt also plans to carry out more targeted digital advertising campaigns in the U.S. with the help of more sophisticated software tools that it didn’t have at its disposal last year, Peluso said.

Gilt also needs to do a better job of merchandising so that there’s enough new and fresh stuff to complement the brands that appear on the site more regularly. One of the biggest problems with flash-sale sites these days is that the same discounted brands are appearing on multiple sites.

“We didn’t have that mix right in 2014,” Peluso said.

To combat this, Gilt continues to develop clothing, carrying private-label brand names that it creates, and it’s also seeking out more up-and-coming designers who haven’t broken out yet. The company is dealing with the fact that a greater percentage of its new customers are lower spenders who don’t come back as often as in the early days, sources say. Further, Gilt is now competing with a new crop of women’s e-commerce companies such as Stitch Fix and online clothing resellers Tradesy and The RealReal.

So Gilt is experimenting with ways to keep its best customers from leaving and maybe even encourage them to spend more. It’s revamping its loyalty program and recently invited some of its highest-spending customers to an in-person private sale in New York.

“Most of the customers have spent as much or more in a one-hour in-store experience than they spent all of last year,” Peluso said. “I think there’s something really interesting there.”

But will it be enough? It’s going to be difficult, considering that a lot of these problems are not unique to Gilt — Gilt just happens to be the biggest remaining independent company in the space. HauteLook sold to Nordstrom in 2011; Ideeli sold for dimes on the dollar to Groupon; Vente-Privee USA — a joint venture between France’s Vente-Privee and American Express — closed down last year.

For now, Gilt has around $50 million to attempt to recreate its early magic. But the problem with no longer being the hot new thing in a shiny new market is that you need something to fall back on when the shine wears off. And Gilt’s still searching for it.

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