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Online sample sites are suddenly hot, but can it last?
Kate O'Sullivan and Leah TedescoDecember 1, 2010

While traditional retailers anxiously monitor the holiday-shopping season (which is expected to show slight growth from last year, thanks largely to aggressive discounting), one corner of the retail world expects to flourish: a very specific kind of online luxury-goods purveyor.

At first glance, members-only sample-sale Websites, which sell discounted luxury fashion and, in some cases, travel and home products, would seem too niche to notice. Yet they have attracted millions of users and millions of venture-capital dollars in their relatively short lives.

Sites like Gilt Groupe, HauteLook, Ideeli, Rue La La, and Beyond the Rack offer, for limited times and only to members (who usually join for free, and often by referral), the chance to buy high-end merchandise at discount prices. The sites, all of which launched in 2007 or 2008, have benefited from the recession-spawned glut of high-end inventory, not to mention the low costs associated with their viral marketing strategies. In October, Gilt Groupe, the largest player in the market, made its first acquisition, generating additional buzz around the sector.

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“It’s the hottest channel in retail,” says Bob Ross, finance chief at Ideeli, which is based in New York. “I think that the thought of walking into a bricks-and-mortar store to sift through the mounds of stock that are out there is somewhat discouraging to shoppers. But we combine traditional retail products with social media and membership, and there’s a real diversity to the offering.” Designers also appreciate the ability to offload overstock and last season’s goods via a channel that is more discreet and high-end than a traditional off-price outlet, he says.

A sample of sample-sale Websites

But the business model may be proving too popular for its own good, says Sucharita Mulpuru, principal analyst at Forrester Research. “We’ve been talking about a shakeout in the sector for some time,” she says. “All of these businesses are solid, and could run fairly profitably as $50 million to $100 million businesses. The question is whether any of them can be a billion-dollar business.”

Long-term success “will depend on how much inventory they have,” says Mulpuru. With retailers adjusting their inventory levels to account for lower demand, and with a significant rebound in full-price luxury shopping already apparent, maintaining sufficient inventory for the holidays may pose a challenge.

Still, Rue La La finance chief Ted McNamara is confident about the sector’s prospects, thanks to the uniqueness of the approach. “The model itself creates excitement, it creates a theater, it creates a higher level of engagement,” he says. “The fact that you are treated as a member and not as a customer who shops and leaves is very important.”

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