I am blessed with very smart partners who are really great investors. Unfortunately, as another flash sale site gets acquired, they probably don’t feel the same about me. For the past few years, I pretty much laid down on the tracks in front of every investment opportunity in one of these companies that came our way. In fact, just last night, I was giving my usual rant about why flash sale sites are business models based on stupidity to the class I teach at NYU. The point I was trying to make to my students was that the business model for these flash sale sites assume either that:
1) brands are stupid and will continue to over-produce goods that they will have to dump on the market at a huge discount at the end of the season or
2) once the brands stop being stupid and over-producing, they will make cheaper goods specifically designed for this channel hoping that the end customer will be stupid and not realize that all she is getting is a crappy version of the brand (just like the slop you get in the Polo outlet stores).
However, after another flash sale acquisition was announced, Hautelook by Nordstroms for up to $270MM, my partners Rick, Amish and Jerry are probably thinking that they have a partner who has an investment strategy based on stupidity!
So yes, based on this evidence and as of today, I have been very wrong on this space. I was wrong to pass on all these flash sale sites that have come through our office. All 180 of them. Maybe more. I was wrong because people are making money in them and for us, moral victories of being right in the long term don’t count. Monetary ones do! So I owe my partners and my investors a sincere apology that we did not jump on this bandwagon of discounting and brand destruction because I was too stupid to realize that, in fact, business models based on stupidity (unlike investment strategies!) are potentially good investments. Kudos to Rue la la, Hautelook and the others that have been acquired for lots of money.
But, I still think I’m right. There is no doubt that the retail industry will change more in the next 5 years than it has in the last 100. I am going to write about some of the changes that I see and I will try to predict what will happen in some future postings. Suffice it to say that these changes that are coming will alter the landscape of this industry completely and there will be lots of winners but lots of very big losers. What is not in my vision of the future for this industry is the continued growth of flash sale sites. There is a definite but limited role and only one or two will be successful.
You’re right -I am so deep in the hole on this one, why the Hell should I stop digging, right? Right! But, I truly believe that these flash sale sites do irreparable damage to brands by cheapening and diluting them, by breaking the bond of trust between a brand and its consumer, devaluing the essence of what is wonderful and exciting about fashion and shopping and by training their customers to shop on discount. Sure, the flash sale sites will say that they are a launch vehicle for brands and brand extensions by leveraging massive lists of potential customers and putting the brand in front of them (they also say don’t call them flash sales because that is not a nice word anymore). But if you are launching a new brand, is that really the first message you want to send as you establish that relationship: “come try me – I’m cheap and easy”? Don’t these brands understand this? I think the smart ones do and I think the new brands that will rise up will as well.
I’ve heard all the stories about how the flash sale sites aren’t really about flash sales, but I don’t buy it. I might buy it for Gilt, because they (in my mind which has obviously been wrong so far) are the best positioned with the best and most lucrative customer base. They also have enormous opportunity in other spaces. And TJ Maxx is killing it in the brick and mortar world. In the end, though, they are what they are and what is really happening is that all of these flash sales sites are selling crack to these brands who are now addicted to the easy money and are willing to mortgage their future for fast near term gain.
So as I go down in flames on my original investment thesis of how unsustainable these companies are, I might as well grab a couple of gallons of gasoline for the ride! I think I’m going to be right in the long term, but as a wise person once said, in the long term, we’re all dead…
PS. I am going to short Nordstrom tomorrow morning!