by Brandon Pemberton -- July 16, 2014

Since achieving broad acceptance in the late 1990’s, e-commerce has empowered consumers to quickly research, compare products and ultimately find the best deal. Flash sale e-commerce, which offers a fresh and highly curated sale for a finite period of time to members, offers the consumer a shopping experience that feels exciting and leads to a great deal on great brands, albeit with more limited transparency.

For Many, the Party was Short
Like many trends in the modern world of e-tailing, the rise of Flash sale e-commerce was meteoric and quickly captured the attention of investors, manufacturers and consumers. However, it fizzled just as fast and hundreds of millions of investment dollars simply evaporated. 

The channel grew out of the conditions fostered by the recession of 2009. Manufacturers looking to reduce excess inventories were attracted to the new opportunity to attract increasingly cost-conscious consumers. On the upside, barriers to entry were low. However, as is commonly the case when upstarts attack mature industries, barriers to growth were high. Many players ultimately lacked the resources and business vision to address customer acquisition and inventory planning. Fab.com abandoned its flash model and reduced headcount to a skeletal staff in early 2014 after achieving a $1B valuation during fundraising in 2013. Mini Social, Little Luxe and countless other small flash retailers shuttered their doors in 2013.  Despite staggering growth, Groupon has failed to deliver profits. The cost of customer acquisition and post-sale distribution are simply too high for many deal and flash sale e-tailers.

For a Few, Things are Just Getting Started 
There is some good news. Some flash sale e-tailers have grown large and profitable. For these companies, the key to success seems to lie in the ability to build a sufficient customer base to scale acquisition costs. Zulily is expected to reach $1B in annual revenue during its fifth year of operation, following a successful IPO in November 2013. Amazon’s My Habit continues to grow, aided by the technology and financial backing of its $75B parent.  Gilt Groupe is eying nearly one billion dollars in revenue and a public offering later in 2014. Solid growth strategies, investments in infrastructure that keep pace with growth, and effective customer acquisition and post-acquisition marketing are all factors that have contributed to the success of these e-tailers.

There is Still Work to be Done
Some fundamentals remain unresolved. Flash sale e-tailers have yet to address the inventory planning model. They average ship times that are twice as long as store-based retailers. This is in large part due to the fact that the majority of flash sale inventory is held by vendors and offered on a consignment basis. In addition, flash sites lack infrastructure to accept returns and, as a result, are poorly focused on post-sale customer service. To continue to grow, these retailers will need to evolve their model to one that looks more traditional in order to improve delivery service.

Long Term Success May Require a Return to Retail Fundamentals
A consignment model and deep relationships with a broad array of vendors gives successful flash e-retailers a fresh offering at prices that traditional retail cannot match. Investment in proprietary fulfilment has allowed some large flash retailers to reduce ship times by as much as 35%. Ultimately, the true test of long-term success will lie in the ability of flash e-tailers to differentiate through curated and fresh deals, while at the same time acting like a traditional retailer. This will likely require taking some inventory risk to improve ship times. Rue La La has successfully launched its own brand of products. Zulily has done the same while partnering with key vendors to develop exclusive offerings for the Zulily platform. Over time, these efforts might become transparent from a product perspective, but should lead to a better fulfilment experience for consumers and lower operating costs for investors.