The Private Sale space is taking on a life of its own. The combination of E-commerce, social networking, supply imbalances, and People’s desire for discounts all enable the space. The space can be divided in to 2 main segments: 1) private sales groups like Gilt, Rue LA LA, and HauteLook; and, 1) Group buying sites like Groupon, Living Social, Scoop Street and a host of knock-offs. The Private Sale group is all about building a list of subscribers and offering Brand Name Products art deep discounts at a specific time and for limited quantities. The Group Buying sites are based around offering Metro Area-based services and products (rather than National Brands) to a list of subscribers with a “tipping point” for the coupon or deal to be valid. The main distinctions are National offers to Individuals vs Local Offers to Groups of Subscribers. Both models feature “push” emails and social connections via Twitter and Facebook. Both offer between 40% and 75% discounts and both categories have a time and quality element. The Group Buying sites take no inventory while the Private Sale sites take inventory and handle returns.
The early successes of Gilt and Groupon have spawned loads of copycats and fast followers. The Groupon approach in particular is being ripped-off shamelessly. The barriers to entry are relatively low and the economics are compelling. I have spotted 5 Groupon knock-offs in London alone, 3 in Germany and a dozen in the US. I would not be surprised to see coupon sites and companies in adjacent businesses pile in to space, particularly the Group Buying Space. The question is- how long will the economics remain compelling? My guess is not so long. The margins enjoyed by these companies are sure to shrink. Also, as the economy turns around the excess inventory is likely to shrink cutting into supply.
With competitors piling in it’s likely that margins will shrink. The copycats out there will have a difficult time differentiating their propositions to the merchants and brands. Particularly in the Group Buying space where the barriers to connecting local merchants with local buys are low. That said, there is an opportunity right now to establish leaders in the space and segments the market into several large niches. The keys to success will be the quality of the teams, approaches taken in the market, financing, and an unfair advantage.
Two trends will develop in the Private and Group sale market- 1) they will converge and 2 they will start to break up into niches. Companies such as Gilt have been branching into services and Groupon has experimented with National brands. We have already seen fragmentation as new sites pop up focused on Baby Products, Furniture, etc. The venture community has started to pile into the space with Accel leading a $30mm round in Groupon and Living Social raising an additional $5mm from VCs. Rue La La was having its leg humped by PE firms as it sold out to GSI for $350mm. Several other Sites are in the process of being funded.
The space will be fun to watch and consumers will benefit from the growing choice of discounts. Whether a new distribution channel is being created is unclear at this time. If I were a betting man, and I am, I would predict several winners in the space and lots of train wrecks. The copycats and doppelgangers of the space, you know who you are, will have a tough time. The innovators and companies capable of establishing an unfair advantage and carving out their own space will have a fighting chance at a good exit. What is an unfair advantage you ask? It’s what differentiates a leader from an “also ran”. Enough on that for now. Advice for Investors- Caveat Emptor.
