Squeeze Play: The Luxury Off-Price Market Hits the Wall

During the past 18 months luxury retail consumers have come to enjoy wide-scale deep discounts.  Many of the deals came from established players such as Neiman Marcus, Saks, Barneys, who–stuck with inventory they could not sell when consumer demand dried up–resorted to extensive promotions to turn merchandise into cash.

The real sizzle to the story, however, came from the so-called “sample sale” or “flash-sale” sites such as Gilt, Rue La La and Haute Look.  These new companies came to market in a perfect storm setting

  • They offer an innovative, fun, convenient new business model (well, to the US anyway, they really just “borrowed” Vente-Privee’s formula)
  • The recession handed them millions of deal seeking high-end consumers
  • There was a glut of inventory available as manufacturers and retailers get caught off guard by the recession.

So things got off to a really good start and the flash-sales sites grew like topsy, with U.S.  industry leader Gilt Groupe quickly gaining more than 2 million members and said to be on track to do some $500 million in sales this year.

Industry incumbents suddenly woke up to the fact that there is a large segment of affluent consumers who really like to get a deal and don’t necessarily want to head out to the sticks to the factory outlet mall (Nordstrom–you get a pass because you figured this out a long time ago with your Rack stores).  So Neiman’s and Saks started experimenting with their own “flash” sales (though, shockingly, neither has yet to mount a serious online counter attack) and announce plans to accelerate the opening pace of their clearance stores.  Lord & Taylor and Bloomingdale’s announce their own forays into the off-price channel.  More “flash sales” sites get launched.  And just yesterday EBay (yes, EBay) launched their own entry into the market.

But here is the problem: the supply of excess merchandise is dropping dramatically just as the consumer offerings–both online and in bricks and mortar stores–are increasing.  The competition for authentic luxury merchandise that can be sold at discount levels that are truly attractive is becoming increasingly intense.  Something has to give.

The reality is that, going forward, there is no way for all these guys to meet their product needs by buying true clearance merchandise (that is, product that was originally meant to be sold at full price in traditional retail channels).  In the near future they will have to have the majority of their product made specifically for their channel (what I like to call “faux clearance”).   Now this is not an impossible hurdle.    Nordstrom, Saks and Neiman’s do this already for their own clearance stores (trust me, I worked on this strategy at Neiman’s).  And you may not realize it, but most of that stuff in those manufacturer’s factory outlet stores is made for those channels as well.

The strategic challenge is that the price value equation for the consumer is changing.  Last year, manufacturers were desperate to unload product and in some cases would unload it to the Gilt’s and Rue La La’s of the world for below cost.  This is turn allowed the flash sales sites to promote product at very deep discounts and still make a solid gross margin.  However, when product is manufactured specifically for these channels the manufacturer is not selling at fire-sale prices, but rather is looking to make more of a regular margin.  Plain and simple, this adds to the acquisition price of the merchandise and that means that the resulting price for the consumer is going to be higher.

The result of all this is that the consumer offering is going to look a lot different in the future: fewer unbelievable deals on true designer product and more faux clearance.  This is certain to change the customer mix for these players as well; fewer well-heeled Fashionista’s looking for a great deal and more aspirational customers taking advantage of lower prices to buy from well-known retailers and brands.

This is not necessarily a bad thing. But it will be a different thing.  And the companies in this arena will have to deftly manage the transition very carefully or the shake-out could be quite traumatic.  Stay tuned.

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7 thoughts on “Squeeze Play: The Luxury Off-Price Market Hits the Wall

  1. Steve!

    Let me start by saying that I am in love with this article as I have had numerous discussions concerning this topic with friends and colleagues alike. One aspect is particularly amusing to me is the “faux clearance” merchandise. It is amazing how many consumers have no idea that companies manufacture goods specifically for outlet stores. Even some of the sharpest shoppers are shocked to find out such a fact.

    I’ve always been a Nordstrom Rack & Last Call fan, but having a business background, I’ve always known that once the economic climate became less grim, those stores would no longer host the appeals that originally drew me in. It is sad to say, but at this rate, the best “discount luxury” outlets will be nothing more than Marshalls or Ross with a face lift.

    On a lighter note, you & I have been Twitter/Foursquare compadres for quite some time AND both can be found at SMU during the week. As I randomly stumbled across your blog and made the connection, I knew I had to at least give you a shout. 🙂

    Like

  2. As you and I discussed back in January, I couldn’t agree with you more. I have to say though that I have been impressed in the last few months with the strategies these off-price websites (Gilt Groupe and Rue La La) have devised to drive sales. They have partnered with major magazines such as Cosmopolitan and Vogue to do flash sales for various items from participating brands; brought in hotel and travel partners to do flash sales of hotel rooms, vacation packages, cruise deals, etc.; and even ventured into the world of home goods.

    However I’ve noticed that the brands now being featured on these websites are not luxury but better brands which is obviously indicative of the lack of surplus luxury goods in the market now. It begs the question, are they driving the same volume in sales with these better brands and alternative strategies?

    Also most brands have re-aligned their pricing and are now realizing much tighter margins on regular price sales. This will certainly make attempting to manufacture “faux clearance” even more difficult.

    Like

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