From the beginning, the company’s key challenge was persuading designers to supply the site with inventory. At the time, 2007, it wasn’t an easy sell. That was the year of the hedge fund, when the world’s population of millionaires peaked. Designers could afford to turn up their noses, and many did.
Of course, most designers sell at affordable price points when it suits their interests. It’s called “going mass.” Designers discovered long ago that they could make decent margins in the discount market, and to drive up profits further, some began manufacturing cheaper-quality clothing meant specifically for sale at outlet malls. But nobody publicizes this. “They need to be secretive,” says John Mincarelli, a professor of fashion-merchandising management at the Fashion Institute of Technology. “The last thing the fashion industry wants is for the consumer to understand how the industry operates.”
Gilt Groupe’s solution to luring high-end designers was to project selectivity and taste. It launched with just 15,000 members, many of whom came through Maybank’s and Wilson’s own friendship networks—the right kind of people. If you’re not a member and you go to gilt.com, you’re met by a log-in page explaining that you must apply for one of a “limited” number of memberships (although in reality, everyone who asks for an invitation gets one). Once past the virtual doorman, the site has high production values and a muted look that eschews loud colors or flashing “sale” signs. Gilt Groupe executives say they take pains to make it appear as if everything on offer has been carefully culled and curated.
“The last thing the fashion industry wants is for the consumer to understand how the industry operates.”
Putting the site behind a wall also means that merchandise doesn’t pop up on search engines. Gilt’s sales last just 36 hours, and afterward, items are removed from the site. It is all meant to look very discreet. (That’s a word Gilt executives use a lot.) Most attractive from the designer’s financial standpoint, Gilt offers to purchase inventory outright, paying substantially less than the wholesale price but assuming all the risk. If something doesn’t sell on the site, the company promises that it will eat the loss—re-posting the merchandise a few times, and finally conducting an internal employee fire sale—rather than pass the clothes along to a chintzier outlet like Daffy’s. Still, Wilson admits that designers like Marc Jacobs and Tory Burch were wary at first. “They initially wanted to watch from afar and see what we were doing,” she says, “before they could become comfortable trusting us with their most prized possessions.”
The first designers to work with Gilt came through personal connections. As business-school students, Wilson and Maybank had done a field-study project for the designer Zac Posen. In November 2007, when Gilt Groupe launched, it was with a Posen sale. “I did it, at that moment, purely out of loyalty,” says Susan Posen, who runs her son’s company, adding that she had to overcome “a little bit of concern about, was I risking our brand?” But in the end, the sale “just blew out,” she says, and Gilt Groupe was on its way.
Within months, Gilt Groupe’s membership had multiplied sevenfold. One morning, the site was mentioned briefly on The View, and Gilt was deluged with 60,000 invitation requests. It soon became clear that the company’s greatest challenge was going to be expanding its supply to keep up with demand. At a department store, a designer’s sell-through rates—the proportion of inventory that is actually purchased—might be around 65 percent over a twelve-week season, but on Gilt, several designers told me, sell-through rates can top 90 percent. Its customers buy everything.
Still, so long as the global market for luxury goods stayed hot, growing at an average annual rate of 8 percent a year, Gilt was likely to remain a niche business. “It’s not that hard to sell things when you put them at 50 or 70 percent off,” says Sucharita Mulpuru, an online-retail analyst at Forrester Research. “The challenge is to get merchandise at this sale level.”
But then Gilt got lucky. The world economy blew up. With shocking suddenness, $11 trillion of American wealth dematerialized, leaving the country awash in unwanted extravagances. Between the autumns of 2008 and 2009, according to Bain Capital, as little as 25 percent of all luxury goods moved at full price, and nearly half of all items didn’t sell all season. Some department stores canceled orders from designers, or refused to pay for shipped merchandise. Quite a few smaller retailers went out of business entirely. That was when Gilt stepped forward with its checkbook, and said good-bye to its supply problem.
“They came about at an interesting time,” says Robert Tagliapietra, half of the critically acclaimed design team Costello Tagliapietra. “A lot of young designers had a lot of extra product sitting around.” Labels like Armani or Prada are frontispieces for multinational corporations, which have warehouses, factory outlets, and reserve funds, but a substantial number of high-fashion designers operate as small businesses and live from season to season. Some, like Christian Lacroix, haven’t made it through the recession, while others, like Zac Posen. , are enduring public financial struggles. Facing double-digit sales declines, Posen told the Times recently that his company is in “survival mode.”
In hard times, maintaining appearances begins to seem less important. For designers, Gilt Groupe and the other flash-sale sites offered a quick and seamless way to cut glut and restore some cash flow. “You sell out,” Tagliapietra says, “within an hour.”