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What’s a Dress Worth?

The online retailer Gilt Groupe offers a great deal: Buy designer clothes at deep discounts. But is it good or bad for fashion?

The wave rolls in every day at noon Manhattan time. It gathers invisibly, out in the digital netherscape. A few minutes before the hour, the online retailer Gilt Groupe blasts out an e-mail, and a hush falls over many a workplace, as phone calls are cut short and spreadsheets minimized. Gilt Groupe is in the business of selling high fashion at deep discounts, and as you might deduce from the company’s name, with its Frenchified “e,” it presents itself as an exclusive club. In reality, that’s just artifice—Gilt is a viral-marketing phenomenon. During the hour after its weekday sales kick off, between noon and 1 p.m., the company claims, its site is visited by an average of roughly 100,000 shoppers. For that time, it might as well be the most crowded store in New York.

Countering predictions that a deep recession would mean the death of demand for luxuries—a new flagellant aesthetic—Gilt has thrived through the downturn, selling labels like Rodarte, Derek Lam, Christian Louboutin at prices around 70 percent off retail. Within the e-commerce sector, what Gilt does is called a “flash sale,” or a virtual version of a designer sample sale. The site’s best finds disappear immediately, and scarcity promotes covetousness, competition, and loyal attention. A number of other recently launched sites employ a similar business model, but none has had as much of an effect on the New York fashion industry as Gilt Groupe. Its executives say that in 2009, just two years after its launch, it posted revenues of $170 million—a stunning figure for a start-up. (Internal sales and site-traffic numbers are impossible to confirm, however, as Gilt is a private company, so caveat emptor.) This year, the company is forecasting that its revenues will more than double.

Gilt Groupe recently surpassed 2 million members, three quarters of whom are female, and they’re disproportionately young and high-income: basically a designer’s notion of the ideal customers. Gilt seldom advertises; instead it crawls through personal networks, offering current members incentives to invite their friends to join the Groupe. “All of a sudden, one day, every woman I knew was on it,” says a friend of mine who worked last year as an executive at a major New York corporation. She says her colleagues would often push lunchtime meetings back a few minutes just so they could check out Gilt promptly at noon. Nobody wanted to miss the wave.

The success that Gilt has enjoyed stands in stark contrast to the gloomy mood that has gripped the rest of the fashion industry. “What Gilt did, I think it’s a combination of vision and smarts and timing,” says Steven Kolb, executive director of the Council of Fashion Designers of America, which has been working in partnership with Gilt Groupe, acting as a bridge between the company and designers. Last year, as incomes tightened and the fashion industry was left with ruinous amounts of inventory, the company’s business model proved to be a countercyclical savior, sucking up goods that otherwise would have moldered. “There was an abundance of merchandise that needed an outlet,” Kolb explains. “They created a genuine fashion space that felt right and had an aesthetic and clearly had a consumer base.”

In the view of Gilt Groupe executives, this is what makes the business work: It offers designers a safety net—and potentially more. Some designers have found Gilt’s model lucrative enough that they’ve decided to do away with their brick-and-mortar sample sales; others are now making clothes specifically for the site. “We really strategize with these brands,” says Alexandra Wilkis Wilson, one of Gilt’s founders. “We’re not just about taking leftovers.”

To a fashion business racked by losses and self-doubt, Gilt’s success suggests that however pestilential the times, consumers still desire finer things. The bad news is, they don’t want to pay retail. Gilt executives say that customers prize the site as an experimental channel, a way of trading up to a label that they might not be able to afford at full price. But another possible scenario—one more troubling to the industry’s future—is that Gilt customers are taking a good deal where they can find it, and, perhaps, adjusting their cost expectations downward.

Designers take a Victorian stance toward discounting: Almost everyone does it, but nobody likes to admit it. Before the recession, many high-end labels wouldn’t have been caught dead disposing of their overstock in a forum as public as a website, for fear of debasement, but these days, brand integrity looks like, well, a luxury. Still, many designers wonder about the long-term consequences of the bargain they’ve struck. They worry that Gilt and its brethren may be undermining the expectation, carefully cultivated over many years, that the finest things always come at a premium. “There is always a risk to the integrity of your brand whenever you discount,” said Milton Pedraza, CEO of the Luxury Institute, a research and marketing group. “What you’re telling consumers is ‘We’re really kidding, it’s not really as valuable as we told you it was.’ ”