Rue La La is declining in ooh la la

Rue La La may come to rue the day it decided the novelty of flash sale sites was enough to create and capture value.

 

 

Rue La La, and other flash sale sites, may have had their moment in the spotlight. These sites hold daily, time-sensitive sales of merchandise at a discount off retail prices. Typically the sites offer more high-end, expensive products from brands as luxurious as Fendi, Valentino, and more. Not all the products are at such a high price point, but the sites aim to attract shoppers who want designer labels at a reduced price. Examples of competitor flash sale sites include Gilt and HauteLook.

The network effects story here is more about indirect network effects. As a user, Rue La La does not become more valuable to me when another user joins. In fact, the value may even go down because now there is more competition for the same merchandise. An increase in the site’s user base, however, has strong indirect network effects. The more users there are, the more willing brands are to sell on Rue La La. If no one is logging into the app to buy, designers have other avenues for off-loading unsold merchandise. The indirect effects continue in a loop, because the more merchandise Rue La La has to offer, the more users it is likely to attract, and so on and so on.

The problem is that flash sale sites like Rue La La no longer create as much value as they once did. Rue La La and its competitors created a lot of value when they first launched during the Great Recession, a time when designers had over-produced given reduced demand and were stuck with large amounts of expensive inventory. Enter Rue La La: fashionistas could find designer items at reduced prices, and brands recovered some of the value of previously unsold goods (albeit at a discount). Today, however, brands are wiser and are more careful about how much they produce. This means there is less for sites like Rue La La to sell. As a user myself, I often have seen the same items advertised across sales on different days. This majorly reduces the “stickiness” of the site, which is a key ingredient in maintaining and growing network effects.

Even if one acknowledges that Rue La La’s ability to create value has not altogether disappeared, it is hard to argue that the company captures much value. The growth of the off-price retail segment, led by the likes of T.J. Maxx, Marshalls, Nordstrom Rack, and OFF 5TH, has been exploding recently. Companies are investing heavily in these banners, and as a result seem to be capturing much of the value. TJX’s and Nordstrom’s stocks have done incredibly well, for example, while the financial performance of Rue La La is less impressive. For example, Rue La La’s 2013 revenue was $440 million, while Nordstrom Rack stores brought in a whopping $2.74 billion.

If I had a crystal ball, I think it would say that flash sale sites are not as sustainable as they once seemed. Rue La La has enjoyed a positive indirect network effects loop in the past, but I can imagine that same loop’s unraveling in a chicken-and-egg story of decreased designer interest, leading to a smaller user base, leading to further reduced designer interest. If I were running Rue La La, I would think about how to create direct network effects. If successful, this could help Rue La La create and capture more of the value to be had in this space. Alternatively, I would figure out how to make the platform “stickier” for both users and brands. If it does not, the site may “rue” the day it decided to rest on its laurels.

Sources:

https://www.bostonglobe.com/business/2014/08/12/rue-searches-for-funding-flash-sales-sector-transition/OS0jWcYXxAh2MhScGIx5yL/story.html

http://marketrealist.com/2015/02/big-plans-nordstrom-rack-stores/

 

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Student comments on Rue La La is declining in ooh la la

  1. Great article!

    I have a friend currently working at Gilt and they are experiencing the same difficulties in maintaining their relevance in the market. As a past avid user myself, I used to wake up every day looking forward to discovering the new products on the site. In addition to the repeat items, I also became discouraged by the terrible delivery services, out of date inventory messages, etc. When I called customer service once, the company simply mentioned that the brand was at fault and didn’t deliver the products to said-eCommerce site on time. This shifting of blame was extremely off-putting. Interestingly, Hautelook has been trying to push its Nordstrom Rack business in light of these off-retail price sites declining.

  2. Interesting article. I remember heavily using these sites as I was fresh out of undergrad, with little disposable income for aspirational goods. While I agree that the downturn a couple years back certainly helped fuel the spike in interest for sites such as Rue La La and Gilt, I wonder if they can fight for relevancy among brick-and-mortar stores that allow customers to actually see and interact with the product before purchase. In making an expensive investment, a typical user might feel the need to validate his/her purchase decision. I would venture to guess that this is even more true among customers not intimately acquainted with high-end luxury brand products–you want to know what you’re getting into before pulling the purchase, even if it is from a verified source. Perhaps such online sites would do well to try to segment their customers–those more familiar with aspirational brands and those who use the site as a gateway to make such purchases; these segments of customers will likely have different incentives.

    It looks like customer service, or expiditd delivery, might be two ways to address user experience pain points. A loyalty program of course seems like a logical move. Might there be a way to combine the convenience of online shopping with the immediate gratification of being able to interact with a product? Perhaps HD graphics of the images, outfit pairings, or other online engagement activities may help drive trust in the product and desire to purchase.

    How to segment customers–those familiar with brands, those who aspire luxury goods, but do not have as much knowledge–

  3. Interesting take and great post! While overall I tend to agree with you that the “hay day” of flash sales that came out of the Great Recession may in fact be over, I do think there are some market trends that could swing in Rue La La’s favor. If you look at the growth in the more “traditional” off price channels (let’s take Nordstrom Rack as an example), the massive growth in their store count is less driven by taking more of the designer merchandise that doesn’t sell, they are actually moving to a model where buyers are placing buys and designing brands specifically for Nordstrom Rack, just like a buyer would place buys for Nordstrom. It makes sense that “made for” and “bought for” products would start to have increasing penetration in the assortment because Nordstrom full line stores simply do not have enough clearance product to fill all of the new Nordstrom Rack stores that are opening. So, in fact, Nordstrom Rack stores start to look a lot more like lower-tier, lower-priced traditional retail stores with only a bit of clearance.

    This trend, I think, ends up helping players like Rue La La. It becomes harder for shoppers to find great designer buys at a lower price when shopping at Nordstrom Rack because so much of the merchandise leans towards made for and bought for product. The Rue La La’s of the world, suddenly start to become the more accessible and more predictable channel to get true designer merchandise at a lower price.

  4. This is a very interesting topic. Of course Rue La La, Gilt etc. are struggling, as is Groupon and other retailers that rely on great deals and excitement.
    They came into being to capitalize on a time-specific market inefficiency, and could have used that moment in the sun to establish a foothold with an attractive client base (sophisticated, deal-hungry, avid, shoppers). Costco started like this, as did Old Navy, and both evolved to continue to serve their initial market, but in a broader way, changing procurement strategies as a result of their size and changes in market conditions.

    Also, Rue and similar sites haven’t done enough to build on the community. They could have done a lot of things. They could have created a community of recommenders, who told the company what they wanted to buy, committed in advance to buying it, sharing pix of themselves styling the items. Or they could have done what traditional retailers do, and really gotten to know the community and then added new kinds of offerings, and established a richer brand than just “expensive stuff on sale”…you can practically do all of your shopping at Costco now, and then also come home with a new down jacket and a laptop…that’s fun…and only works because people are going there as part of their daily habits.

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