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Who Says No One is Shopping?

In just three years, entrepreneurs like Adam Bernhard have created a new retail niche--private sample-sale websites--that has grown into a $1 billion business and changed the way America shops.
August 23, 2010
URL: http://www.entrepreneur.com/article/217179

Adam Bernhard still has the secondhand sofa he was sleeping on when he started his company three years ago--it's right across from his desk in the downtown Los Angeles offices of HauteLook. Downstairs, in a maze of studios, photographers and stylists are shooting the high-end skinny jeans and slouchy handbags that are making Bernhard a fortune.

Improbably, that fortune is in retail. It's no secret that during the past three years, the retail category has tanked--and no part of it more so than luxury. But during this time frame, a new breed of entrepreneurs has sprung up and seized the opportunity: They took the glut of luxury goods and created membership-only, sample-sale websites that bring the excitement of a door-buster sale online, with prices as much as 80 percent off.

To say that these sites have become the hottest area in retail is almost a ridiculous understatement: While second-quarter sales at brick-and-mortar luxury and department stores increased a disappointing 4.5 percent over the year before, HauteLook's sales zoomed up 275 percent. The online private sample-sale category generated $1 billion in revenue last year, and some say it could grow to $8 billion in the next five years.

All of the sites--the first was Gilt Groupe in November 2007, followed closely by HauteLook and Ideeli--target shoppers who crave what they can't afford and love nothing more than bragging rights and exclusivity. The sales are launched daily and usually run just 36 to 48 hours, which turns shopping into an event, and they train customers to check their inboxes every morning for fresh, new merch--and to buy things they didn't even know they wanted. While actual elbows may not be flying, at 9 every morning, hundreds of thousands of shoppers are being whipped into a frenzy over $400 Carolina Herrera dresses or $80 Chloé sunglasses.

Of course, these private sale sites aren't really private; they are open to anyone who signs up. But the illusion of tightly controlled membership protects the image of the brands being sold, including Oscar de la Renta, Vera Wang and Christian Louboutin. The unloading of merchandise at off-price stores could mean that the products languish on the selling floor for months, but on private flash-sale sites, goods are hidden from search engines and appear only to a limited number of people for a limited time.

This niche already has dozens of players, from $500 million companies to startups still in beta testing. Venture capital is flowing in--$112 million in the last six months alone. Clothing and accessories have proved so lucrative that the sites are expanding to include furniture, hotel and cruise packages, gym memberships, gourmet food and wine. But as excess goods become more scarce, some see an inevitable shakeout.

"The idea of a sale is easy," says Sucharita Mulpuru, e-commerce analyst for Forrester Research. "It's getting access to inventory that's the hard part." And the more inventory a site takes on, the more risk. "You become a retailer with goods nobody wanted in the first place."  

Which is why Bernhard is doing things differently at HauteLook: He doesn't buy inventory; he produces sales on behalf of the brands and takes 30 percent of the profits. Like the other private sale sites, HauteLook clears exhaust, but it also offers marketing support, producing a content section with a video about each designer. Bernhard's Dashboard 2.0 software allows brands to follow their sales in real time to see what's selling, where things are selling and what styles are selling in which states. There's also a funnel that lets them see how many people are coming to the sale and a benchmarking capability to compare sales against similar brands.

HauteLook, which has been profitable since March, has 176 employees who produced 205 sales in June, moving hundreds of thousands of items out of warehouses on both coasts. Revenue is expected to top $100 million in 2010.

Bernhard has spent years in the apparel industry, first as a kid hanging out at the California Mart office of his mom, a buyer, and later working the sales floor at Fred Segal in Los Angeles. Back then, he had hair down to his waist. Now, his hair is cut short and gelled into a respectable spiky coif, his uniform a pair of jeans from one of the brands he sells, along with a blazer and a button-down by Dries Van Noten.

Before HauteLook, he had stints in the movie production business, a stake in Mulberry Street Pizza and an executive post at Joie, a contemporary clothing company. In 2004, his entrepreneurial side kicked in, and he created an inventory clearance company called Liquid8, which held sample sales with sororities at UCLA and USC. HauteLook flowed out of that project, but instead of just asking sorority sisters to join, he asked everyone. And so far, he's had 2.7 million takers.

We settled in to hear a little more about the future of retail--but not on Bernhard's old sofa.

Adam BernhardDid you worry about launching in this economy?
Anytime there is a dramatic shift in the way business is being conducted, there is opportunity. Because we were already in the jobbing business, we started to see the amount of inventory piling up. We also knew the zeitgeist was changing. There was a stigma associated with coming home with a lot of shopping bags. Buying things at a discount was becoming a badge of honor. People were talking about how they got a deal on something as opposed to how expensive something was. So we took the opportunity and changed the way people shop.  

What are the advantages of clicks-and-mortar retail?
The main difference is scale--the ability to touch people in diverse geographic regions is phenomenal. The amount of infrastructure you would need to have for as many members as we have would be impossible in brick-and-mortar.

We re-merchandise our site every night, so every day we have eight to 10 new sales. That allows customers this new discovery every morning. They didn't even know they wanted to buy something, but we deliver a show and we just happen to have commerce at the end. You physically couldn't do that in brick-and-mortar.

Intent-based shopping is going on at Amazon.com, where you know you want something, putting in the search term and buying it. I firmly believe the future of online shopping is what we're doing, which is discovery-based.

What's been the hottest merchandise so far?
Everything from premium denim to big designer names to fast fashion. Our kids and home business have grown dramatically. We sold Omaha Steaks. We had California Floral & Home--they are fake flowers, and our customers love them. Furniture. Who would have thought I could sell couches? We sell kitchen, bed and bath, rugs from ABC Carpet & Home.

What works in terms of pricing?
Screaming, "Discount!" The goal when we started was nothing less than 50 percent off. With some of the lower-margin businesses, though, the discount is different. But the customer realizes it's because those items don't go on sale very often. For beauty products, for example, we do 35 percent.

And technology?
We have a new shopping cart that is going to launch with a one-page checkout. A three-page checkout wasn't good.  

How did you get HauteLook off the ground?
A negative working capital model allowed us to grow without having to raise a lot of money. With Liquid8, we already had an infrastructure, very small overhead and a profitable business that didn't have much equity to it. We wanted to leverage those things to build out a new idea inexpensively. But no one had heard of this industry. So I had to convince the brands. We built HauteLook on relationships, and the first year, I booked every sale myself. Now we have 30 people on the brand team, and we have more than 1,000 brand partners.

When did you know it was going to work?
As soon as we had our first couple of sales, we knew we had something special. The first one was Development by Erica Davies. The line isn't around anymore, but that doesn't mean it wasn't a good sale. The second was Rock & Republic, who still work with us today. We brought in Terry Boyle, our COO, in July of '08. He put some infrastructure into place, and in April 2009, we raised our first $10 million. This year, we raised $31 million. We've been up against guys who raised $100 million. It can be done.

How? What appealed to the investors?
They see it as the future. This discovery-based way of shopping has been resonating not only with ready-to-wear but also with all categories from travel to jewelry to home products.

Is there going to be a shakeout or consolidation among the flash-sale sites?
The bigger players who have more goods to sell are going to continue to pull away from the pack. And I believe the multi-category players will survive. If you discover makeup in your inbox everyday, it's not so exciting.

Are you all competing for the same customers?
There is a lot of crossover. But just as people know if their store is Nordstrom, Saks, Bloomingdale's or Macy's, that is starting to happen in the flash-sale space. We stand for California casual. Our customers believe a great pair of jeans can take you anywhere. They are open to a trendy top, a designer handbag and timepiece, a designer shoe or something that resembles a designer shoe. Nordstrom and Bloomingdale's, that's where they put us. Gilt is probably Bergdorf Goodman. I would also love to be Fred Segal. We can sell all the same brands as the other guys out there, but we do it in this casual California-lifestyle way that is more inclusive than exclusive, and that's important to us.

How did you get the message out?
It's been two friends telling two friends and blogs grabbing on and retelling our story. I didn't have a marketing team for 18 months. We were buying Google ad words and spending about $20,000 a month, being frugal, trying to find different ways to get the message out. We owe this business to the blogosphere.

How do you convince top brands that selling on HauteLook won't tarnish their image?
We encourage brands to only do events three or four times a year. And if they can move inventory with us in eight days, it's much better than having it on the floor at an off-price store day after day. Manufacturers are looking at the flash-sale format as a way to protect their brands and reach a diverse customer they didn't reach before. We've found that 75 percent of people who purchase a brand on our website end up going to that brand's website post-sale; 50 percent have bought from that brand post-sale; and 20 percent have bought from that brand at full price post-sale.

Are there any brands that won't partner with you?
Über-luxury guys who are not playing in the space yet. Some of the vertically integrated retailers haven't jumped into the space yet either. I would love to see Victoria's Secret, Abercrombie & Fitch, J. Crew and the Gap brands. Everybody is going to come to this new way of shopping.

When you started, there was a lot of excess inventory. Now, there's less excess.

There's plenty. We have more brands that want to do sales with us than we have spaces.

What's ahead for you?
Food and wine, experiences and services, which will encompass massages, gym memberships, wine tastings and other things that relate to our casual-lifestyle customers.

We are also starting to customize our customer experience with geo-targeted deals.

Any advice for people getting into retail?
Don't!

Seriously?
I'm not bullish on retail right now--the economy is not stable enough to start anything that isn't innovative. But if you have a new twist, go for it. If you have an idea and you are strong-willed, you can make it happen.