Gilt Groupe: Will the Lux-for-Less Obsession Last?

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In the words of fashion designer Zac Posen: “The media is constantly redefining what luxury is. Luxury can be a dirty sock if dressed up in the right way.” Such is the secret behind Gilt Groupe, the discount luxury flash-sales site that hasn’t yet turned a profit but just convinced investors to throw another $138 million into its chic online sales machine. The company,  valued around $1 billion, now counts itself among a sexy group of crowd-sourcers (Groupon, Ideeli, HauteLook, to name a few) whose market valuations have skyrocketed far beyond the revenue they actually pull in.

Investors say they’re not worried about Gilt’s lack of profit, because they’re looking for growth first. But growth won’t be as easy for Gilt as it has been for lower-brow web businesses like Skype and Groupon. Why? Gilt Groupe, for those unfamiliar, thrives on exclusivity. You can’t just go to the site and start buying Sergio Rossi and Alberta Ferretti on the cheap. You have to be part of the club. Only other Gilt “members” can invite you to partake. That’s what gives luxe retailers license to sprinkle their high-end wares onto the mid-end masses. Without the faux firewall, luxury retailers may start to feel they’re compromising their high-end brands. Unlike luxury downstreamers like Coach and Louis Vuitton, most of the brands featured on Gilt are still aiming for boutique allure.

Gilt and its flash-sale competitors face other challenges. Flash-sales thrive on creating a sense of urgency among customers. When the price-tag says 50% off, there’s only one left, and you have 30 minutes to buy, you buy. You don’t think. But when those designer tops ship home, of course they don’t look as good as they did online. Why? A lot of Gilt’s goods are excess supply from luxury retailers…in other words, the stuff real luxury buyers don’t want. It’s unclear whether customers will continue to put up with that kind of hit-or-miss buying as their pocketbooks recover from the recession.

According to Gilt’s CEO, the company’s growth potential is based on its ability to be a full-fledged luxury retailer that features more full-priced goods. But when Gilt starts pushing the same inventory and prices online as what you can actually try on at your local retailer, buying its $$$ wares may not seem so urgent, or so cheap.

The good news for Gilt and other online lux-for-lessers is it’s all a matter of perception. A study by Kelton Research found that more than three in five Americans prefer to get discounted fashion online rather than in the store. Maybe that’s because Gilt’s website makes luxury’s leftovers look fabulous. And getting the right size in one click beats rummaging around unruly sales racks. For now, Gilt’s attraction for investors is that it’s growing faster than other e-commerce companies (its revenues more than doubled last year). The trick to keeping that up will be finding more and more customers who believe that dressed up “dirty socks” are worth it. And luxury brands that agree.