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Angling for a share of the higher-margin luxury goods market, several online companies have set up shop to undercut traditional retail competition in this culturally cacheted space. The fat margins on the opulence offered by such companies as Coach (NYSE: COH ) , Tiffany (NYSE: TIF ) , and Luxottica were bound to attract competitors willing to slash prices in order to horn in on big-name luxury retailers.
This new breed of companies involves web-based, members-only outlets that promise huge discounts off retail prices (as high as 75%, and most around 60%) for designer merchandise. Already, they've grown surprisingly large. Gilt, the first entrant to the space in 2007, now boasts 2 million members. Other companies include HauteLook and Rue La La, the latter of which is owned by GSI Commerce (Nasdaq: GSIC ) . The trend is problematic enough that Saks (NYSE: SKS ) is brewing up its own version.
The sites sell high-end clothing for men, women, and children, as well as offering jewelry, watches, and other upscale household gewgaws. As investors in Blue Nile (Nasdaq: NILE ) know, higher-end web-based sales can be tremendously lucrative, even if they undercut competitors. Blue Nile has the gaudy numbers you might expect: a 40% return on capital in the last four quarters.
And recession? What recession? Gilt CEO Susan Lyne echoes that sentiment: "I joined Gilt because it was hypergrowth. The model works no matter what." The company cuts deals with 650 brands and expects $400 million in sales for fiscal 2009, way outdistancing the publicly held Blue Nile's $285 million in trailing revenue.
Exclusivity and snob appeal are the major attractions of the luxury market. To preserve these advantages online, Gilt and similar companies limit their sales on select merchandise to just 36 hours. Some highly desired items are gone in minutes. When the sale ends, members must look to the next round of offerings by other designers, a novelty that keeps customers coming back to shop. And exclusivity is further promoted by long delivery times; in many cases, customers receive their merchandise directly from the designers, another sign that consumers "have arrived." Even Gilt's name plays on shoppers' willingness to feel guilty and decadent about luxury consumption.
The irony and the ecstasy
Yet for all the promotion of exclusivity, there's something of a bait-and-switch going on. In effect, these companies are transforming the notion of product exclusivity, which had been established largely through high price, to a model in which exclusivity is created by the appeal of finding that cheap treasure. In short, it's more about triumphantly snatching up a great deal "that won't last" than shelling out a pile of greenbacks for it.
Another problem for contenders such as Gilt is the Veblen effect, which posits that a good's value to consumers goes up as its price goes up. Get that? For a certain class of consumer, higher price means more value. That's why chains such as Saks have some breathing room from these upstarts. Some people will always derive more value by paying a higher price.
The central irony of luxury products has always been the problem of creating exclusivity in a market-based world that must grow profit ceaselessly. Although these web-only companies sell themselves as exclusive, by allegedly restricting entry to those invited by current members, access can be readily and easily obtained. Luxury must always feel exclusive, even if true success lies in expanding markets.
That irony threatens such online luxury e-tailers, which always have the potential to lose their cachet if they become too mainstream. Whether companies such as Gilt become truly golden or simply gold-plated depends on their ability to navigate this irony. If they fail, they could end up being as bland and ubiquitious in the luxury space as Amazon.com (Nasdaq: AMZN ) or Wal-Mart Stores (NYSE: WMT ) are for less well-to-do shoppers.