Quick Take on Top Flash Sales by FBIC Global Retail Tech ... · 2 ! september 3, 2015...

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September 3, 2015

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

The Zulily Acquisition in

Context: The World’s

Biggest Flash-Sales

Sites

D E B O R A H W E I N S W I G E x e c u t i v e D i r e c t o r – H e a d o f G l o b a l R e t a i l & T e c h n o l o g y F u n g B u s i n e s s I n t e l l i g e n c e C e n t r e d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9 C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

• Flash-‐sales retailing enjoyed strong revenue growth during the global downturn, which was characterized by cash-‐strapped consumers looking for deals and companies with unsold inventory.

• In the post-‐recession period, flash-‐sales retailers lost momentum as the market approached maturity.

• Zulily is the fastest-‐growing flash-‐sales retailer, thanks to aggressive marketing that allows the company to expand its consumer base.

• M-‐commerce and improvement of the customer experience are the strategies companies are counting on for future growth.

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The Zulily Acquisition in Context: The World’s Biggest Flash-Sales Sites Zulily Acquisition Puts the Spotlight on Flash Sales

The recent announcement of QVC owner Liberty Interactive’s intention to acquire flash-‐sales site Zulily pushed the flash-‐sales segment into the limelight. Here, we place the Zulily in context by ranking the world’s biggest flash-‐sales websites.

Flash-‐sales e-‐commerce took off in 2001, when Vente-‐privee and Woot.com were among the first companies to popularize the model of presenting to consumers with limited-‐time, exclusive online offers. The concept saw significant expansion during the downturn that began in 2008 and a number of major players, Zulily included, continue to turn in high rates of growth.

The Proposed Liberty-‐Zulily Acquisition

The Details On Monday, August 17, 2015, Liberty Interactive announced an agreement to acquire Zulily in a deal valued at $2.4 billion, with Liberty buying all outstanding shares of the latter for $18.75 per share. This was a 49% premium on Zulily’s closing price on the preceding Friday, of $12.57.

Liberty Interactive owns TV-‐ and online-‐shopping brand, QVC, which posted $8.8 billion in total revenues, including $6.1 billion in US revenues, in 2014. This is more than seven times that of Zulily’s $1.2 billion revenues in 2014. The acquisition will be attributed to Liberty’s QVC Group.

On the finance side, Liberty noted that this was a “high-‐return deployment” of QVC’s free cash flow, and an opportunity to take advantage of low interest rates to bring QVC to an “attractive” leverage level.

Common Ground There are commonalities between the businesses. Announcing the acquisition, Liberty noted that both brands have a focus on “discovery, customer engagement and experiential shopping,” bringing to their customers brands that are often not widely available. Both are focused on repeat purchasing by loyal shoppers: at QVC, for instance, some 90% of purchases are made by repeat shoppers and 90% also buy from the retailer from one year to the next.

The demographics are, however, different: Liberty said the acquisition would expand QVC’s core demographic, which is currently females aged 35-‐65, to “millennial moms”. Zulily principally targets young mothers, by specializing in apparel for women and children.

Key potential gains for QVC noted by Liberty are:

• It accelerates growth in QVC’s domestic business.

• It diversifies QVC’s multiplatform strategy.

• It adds a complementary business with a “very attractive business model”.

• It enhances QVC’s sizeable e-‐commerce platform.

• It adds a “highly attractive new customer acquisition funnel” for QVC.

The recent acquisition of flash-‐sales site Zulily by QVC owner, Liberty Interactive, pushed the flash-‐sales segment into the limelight.

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Chasing a Younger Shopper and Growing in a Mature Market For QVC Group, we think the two most attractive elements of Zulily are a younger shopper base and rapid top-‐line growth in the US, which is a mature market for QVC.

A sub-‐40, female demographic is certainly complementary to QVC’s 35-‐plus female shopper base, and strengthening QVC’s penetration among “millennial moms” will help prevent an ageing of its customer profile. What is currently less clear is how the “funneling” of younger shoppers from Zulily to QVC will work in practice, given both will continue to operate as separate brands.

Also appealing is the exceptionally rapid growth of Zulily, whose 72.4% revenue increase in 2014 compares to 3.6% growth at QVC US and 14.4% for total US online retail sales.

Liberty isn’t the first big retailer to acquire a flash-‐sales website. As we discuss in more detail later, Nordstrom acquired Hautelook in 2011 and has subsequently cross-‐promoted the fascias and used Hautelook as a springboard to launch nordstromrack.com.

Given this, we see some cross-‐promotion as essential to convert some Zulily shoppers to QVC.

QVC-‐Zulily and the Flash-‐Sales Segment: Our View There are certainly commonalities in the propositions QVC and Zulily give to their customers—such as in the “discovery” approach they take to selling. This means there are almost certainly opportunities for product sourcing and distribution across the two brands as well as cross-‐promoting to convert Zulily shoppers to QVC and vice versa.

Zulily allows QVC Group to follow the likes of Macy’s, Nordstrom and Kohl’s into the flourishing off-‐price segment. This will bolster QVC Group’s performance in its lower-‐growth US market and should help QVC renew its customer base. While QVC should certainly be looking to do this, an acquisition valued at $2.4 billion appears to be a costly route.

Growth in flash-‐sales revenues, including at Zulily, is inevitably slowing as these retailers move closer to maturity—even though the flash-‐sales segment continues to outperform US retail, US e-‐commerce and legacy retailers, including QVC.

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Figure 6. Top Seven Flash-‐Sales Sites: Year-‐over-‐Year Growth (2010–2014, Aggregate)

Year-‐over-‐year revenue growth of the sum of revenue figures for Zulily, Privalia, Gilt Groupe, Rue La La, HauteLook, Vente-‐privee and Showroomprive.com Source: S&P Capital IQ/Internet Retailer Top 500/company reports/FBIC Global Retail & Technology

So Liberty Interactive may need to invest in Zulily if it wants to sustain or even accelerate growth. Liberty has already noted the opportunities for international expansion, new product categories and video commerce, and there certainly seems to be opportunity to enhance Zulily in each of these areas.

Zulily in Context: The Flash-‐Sales Model In recent years, big-‐name flash-‐sales sites have posted strong top-‐line growth. This has been in the context of a surge in off-‐price retailing more generally: we have seen strong growth in retailers such as TJ Maxx; off-‐price Internet retailers, represented by the likes of Amazon Fashion, have grown; and big chains such as Macy’s, Nordstrom and Kohl’s have launched dedicated off-‐price fascias.

This trend was almost certainly accelerated by the downturn, as hard-‐hit shoppers flocked to the idea of buying big brands at discount prices. Flash-‐sales retailing cater to this demand well, allowing customers to purchase items, including apparel, accessories and housewares, at a heavily discounted price for a limited time period (such as 24 to 36 hours). These sites also offer an element of “discovery”—bringing niche or boutique brands to the attention of customers.

Flash-‐sales firms are able to offer discounted prices by sourcing surplus inventory from retailers or lesser-‐known companies that want to engage in flash-‐sales promotions in order to raise consumer awareness of their brands.

Flash sales differ from the “deal of the day” model—that model entails the sale of goods or services such as holidays or restaurant meals at reduced prices with the website acting as an intermediary to vendors. Flash-‐sales sites, by contrast, typically hold the inventory they are selling. Groupon and other daily-‐deals sites are excluded from this analysis.

20%

30%

40%

50%

2010 2011 2012 2013 2014

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Overview of the Flash-‐Sales Segment Zulily is the world’s second-‐largest flash-‐sales site, by revenues, trailing France’s Vente-‐privee. However, the latter had a decade-‐long head start, given it pioneered the flash-‐sales model in 2001.

The regional focus of a number of flash-‐sales sites means some of the big groups compete against each other only slightly or not at all. Vente-‐privee and Zulily, for instance, go head-‐to-‐head only in the UK market; Vente-‐privee closed its US operations in 2014 to refocus on Europe—see our summary profiles later in this report.

Figure 1. Top Flash-‐Sales Sites: Revenues (USD Million)

2009 2010 2011 2012 2013 2014

Vente-‐privee 864 983 1,497 1,681 2,125 2,260

Zulily 10 18 143 331 696 1,200

Privalia 139 224 445 544 699 798

Gilt Groupe 170 420 390 470 600 670

Showroomprive.com 105 185 251 321 465 638

Rue La La 157 236 307 400 440 480

HauteLook* N/A N/A N/A 236 295 360

Total 1,445 2,066 3,033 3,983 5,320 6,248 *Fiscal year ends January 31 Source: S&P Capital IQ/Internet Retailer Top 500/company reports/FBIC Global Retail & Technology

Zulily is the Fastest-‐Growing Site Zulily has achieved second position in five years, posting a compound annual growth rate (CAGR) of 160%.

The company achieved this remarkable performance by investing heavily in marketing and expanding its customer base substantially.

Figure 2. Fastest Growing Flash-‐Sales Sites: 2009–2014 (CAGR)

a) Calculated from reporting currency (euro) b) 2012–2014 CAGR Source: S&P Capital IQ/Internet Retailer Top 500/company reports/FBIC Global Retail & Technology

Total value sales exceeding US$2 billion in 2014

161%

45% 43% 32% 25% 24% 22%

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A Brief History of Flash Sales Looking ahead, we see flash sales sites being bolstered by m-‐commerce and international expansion.

Mobile shopping is a claimed strength at Zulily through its “mobile-‐first” offering. “The use case for our customer is often when she’s standing in line at Starbucks waiting for her drink, or at the kids’ school waiting for the kids to come out,” said Darrell Cavens, President and CEO of Zulily, on the conference call announcing the acquisition.

Figure 3. Milestones in Flash Sales Retailing

2001 2002 2006 2007 2008 2011 2015

Vente-‐privee launches first sales portals in France

Privalia launches in Spain

Downturn provides fertile environment for flash sales business model

Liberty Interactive announces Zulily acquisition; Social media and m-‐commerce could revive flash business model

Showroomprive.com launches in France

Hautelook, Rue La La and Gilt Groupe enter the flash sales market

Nordstrom acquires Hautelook and flash starts reaching maturity and shows slowdown in revenue growth

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In the table below, we discuss the key characteristics of selected leading flash sales sites, followed by profiles of the top seven flash sales companies.

Figure 4. Key Characteristics of Selected Leading Flash-‐Sales Sites

Breadth of Product Line

Geographic Coverage

Upscale/ Downscale

Competitive Advantages

Marketing Strategy

Customer Service

Vente-‐privee

Apparel, accessories, housewares, consumer electronics, wines, travel

France, Spain, Germany, Italy, UK, Belgium, Netherlands, Austria. Short lived operations in US (2011-‐2014)

Upscale, focus on fashion brands

Early entry advantage. Focus on core fashion brand flash sales, carefully selected product range, sharp and creative transactional portal.

Attention to the portal design and selection of products sold. The company does not invest in marketing activities such as search ads and search engine optimization

Delivery at post offices and partner outlets available. Possibility of contacting customer service via app

Zulily Children’s and women’s clothing, accessories, housewares

US, Canada, Australia, UK, Ireland, Mexico, Singapore, Hong Kong.

Mid-‐range/ downscale. Unlike other flash sales retailer, Zulily does not focus on fashion brands

Clear proposition on mid-‐range women’s and children’s clothing which appeal to a well-‐defined consumer’s segment

Intense marketing and advertisement allowed the company to expand rapidly in the US

Long delivery times (Zulily sells to customers before buying from suppliers to save on inventories) No returns accepted.

Privalia Fashion apparel, accessories, housewares

Spain, Italy, Brazil, Mexico and Germany

Upscale brands Leading position in flash sales in the geographies where it operates gained through early entry

Use of email marketing. Personalized emails based on customer’s browsing history

Locally-‐based customer service. Use of social networks (Facebook and Twitter) for customer’s assistance.

Gilt Groupe

Apparel, accessories, housewares, beauty, services (Gilt City Deals)

US, but ships worldwide

Upscale, focus on fashion brands

Focus on core proposition of fashion oriented flash sales portal

Transactional website focused on fashion related content, personalization, Use of Social Marketing, use of theme based sales

Global customer service based in Limerick, Ireland.

Showroomprivee. com

Fashion apparel and accessories

France, Spain, UK, Italy, The Netherlands, Portugal, Belgium, Poland. Worldwide Shipping

Upscale fashion brands

Focus on clear upscale fashion brands proposition

Use of social marketing. Personalized marketing to encourage repeat purchases.

Customer service accessible to the deaf and hearing impaired through online video conversation

Rue La La Apparel, accessories, housewares, travel

US Upscale fashion brand

Focus on clear upscale fashion brands proposition

Attention to transactional site content, structured as a fashion magazine to encourage regular visits

Customer service via phone hotline and emails. Fast access to reps

HauteLook Apparel and accessories

US Upscale fashion brand

Support of larger retailer and brand owner Nordstrom. Focus on clear upscale fashion brands proposition

Use of social media marketing together with traditional media including TV ads

Possibility of returning items to bricks and mortar Nordstrom stores

Source: Company reports/FBIC Global Retail & Technology

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The Top Seven Flash-Sales Sites: Company Profiles Here, we briefly profile the flash-‐sales retailers that made our ranking:

1. Vente-‐privee Launched in 2001, and headquartered in Paris, France, Vente-‐privee pioneered the business model of flash sales by identifying and meeting suppliers’ need to sell excess stock without downgrading their brand image. The company sells a wide range of product categories, including fashion apparel, accessories, housewares, consumer electronics, wines and travel.

Vente-‐privee expanded outside France, in Spain, Germany, Italy, the UK and other European markets, after Summit Partners acquired a 20% stake in it in 2007. In 2011, the company expanded in the US through a joint venture with American Express, but the US operations were short-‐lived, and in 2014, it withdrew from the US market, given that profitability was below expectations. After it exited the US, the company strengthened its focus on its core European market.

Vente-‐privee’s success relies not only on early entry advantage, but also on the attention it pays to its core flash-‐sales proposition. The company has designed an appealing portal and app that leverage sharp design and creativity to encourage consumers to log in regularly.

Vente-‐privee invests in researching what merchandise to sell and how to present it to clients, but it does not invest in marketing (such as search ads or search engine optimization). Instead, it relies on good customer experience, which encourages repeat purchase and word of mouth. The company invested extensively in m-‐commerce, acknowledging that most consumers access their portal on the go (63% of its site visits in 2014 were from mobile devices, according to company reports).

2. Zulily Launched in 2009 and headquartered in Seattle, Zulily focuses on flash sales of mid-‐range children’s and women’s clothing and offers no name brands. The company follows an unusual business model, characterized by selling items to customers before it orders them from suppliers. This results in long delivery times for customers (about two weeks on average), but it allows the company to save on inventory. The company does not accept returns.

Zulily’s revenues grew rapidly, from US$10 million in 2009 to US$1.2 billion in 2014. The company managed to achieve that strong growth by investing heavily in expanding its customer base through intense advertising campaigns that were effective in the short run, but that proved insufficient in ensuring customer loyalty.

As a result, the company is currently shifting its strategy from expanding its customer base to increasing repeat purchases by existing consumers. For instance, it is improving customer service by easing the no-‐returns policy.

Zulily attracted the attention of international investor Alibaba Group, which bought a 9% stake in the company in May 2015. In August 2015, Liberty Interactive announced that it would acquire the company.

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3. Privalia Launched in 2006 and headquartered in Barcelona, Spain, Privalia operates in Spain, Italy, Brazil, Mexico and Germany. It sells mid-‐ to upmarket brands in fashion apparel, accessories and housewares.

In 2014, Privalia achieved respectable 14% year-‐over-‐year revenue growth, but its performance was still below the top seven flash-‐sales retailers’ 20% average growth that year, mainly because of the unfavorable economic conditions of its core markets of Spain, Italy and Brazil. To guarantee future growth, the company is investing in strengthening its m-‐commerce operations.

4. Gilt Groupe Launched in 2007 and headquartered in New York, Gilt Groupe sells mostly fashion-‐oriented apparel, accessories, housewares and beauty products, but only to members. In its first years of operation, the company grew significantly, peaking in 2010, with year-‐over-‐year growth of 147%. Following that success, the company started to expand beyond its core flash-‐sales business to include local deals, gourmet products, and travel and full-‐price menswear divisions.

However, in 2012, the company reverted to its core flash-‐sales business, since revenues from the new divisions were below expectations. Michelle Peluso, appointed as CEO in 2013, returned the company’s focus to offering deals on fashion goods, continued to scale down operations, rationalized costs within operations and supply chain, and focused on marketing and international expansion in a bid to revamp sales. Figures from 2014 show, however, that Gilt Groupe sales underperformed the top seven flash retailers’ average year-‐over-‐year growth of 20%, growing just 12% during the year.

5. Showroomprive.com Launched in 2002 and headquartered in Paris, France, Showroomprive.com grew a staggering 85% year over year in the middle of the recession in 2010. Growth slowed, but the company maintained respectable year-‐over-‐year revenue increases of 37% to 40% from 2012 to 2014.

Showroomprive.com managed to sustain revenue growth by investing in technology to enhance the customer shopping experience. It focused particularly on m-‐commerce, which currently makes up 60% of its traffic, according to company reports. For instance, the company launched a new app called Smart Promo that gives users access to exclusive promotions in brick-‐and-‐mortar stores. This is an innovative concept for a flash-‐sales retailer, as it takes advantage of the potential of multi-‐channel retailing and provides a more personalized shopping experience for each customer. To sustain its growth, Showroomprive.com also expanded globally, and it is now accessible from 167 countries. The company partnered with Adyen, a global payment company, to handle payments outside its core European markets.

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6. Rue La La Launched in 2007 and headquartered in Boston, Rue La La, a subsidiary of Kynetic since 2011, focuses on flash sales of fashionable apparel and accessories, housewares, and travel. Rue La La’s portal is presented as a fashion magazine, with regular articles and style advice for customers. The company also aims to function as a marketing tool for its suppliers, as the portal maintains high standards in item display, allowing suppliers to showcase their excess inventory in a way that is comparable to a fashion boutique.

Following this strategy, the company experienced healthy growth in revenue in the two years following its acquisition by Kynetic, with year-‐over-‐year sales growth at 30%. Nevertheless, in the post-‐recession trading environment, as the sector approached maturity, the company’s revenue growth started to slow down, and it was just 9% in 2014.

7. HauteLook Launched in 2007 and headquartered in Seattle, HauteLook is part of Nordstrom, which operates brick-‐and-‐mortar stores, branded full-‐line online stores and two flash-‐sales stores, HauteLook and Nordstromrack.com. In 2011, Nordstrom acquired HauteLook for $180 million in stock and a three-‐year earn-‐out option of up to $90 million, seeking to develop its e-‐commerce capabilities and capitalize on the expansion of flash-‐sales retailing. Subsequent to the acquisition, marketing initiatives aimed to cross-‐promote the Nordstrom and Hautelook fascias to customers.

Nordstromrack.com was launched in 2014, built on a shared platform with Hautelook; the site offers off-‐price items from Nordstrom’s other retail channels. HauteLook offers mid-‐ to upmarket clothing brands, including Rebecca Minkoff and Ben Sherman.

HauteLook experienced significant, 22% year-‐over-‐year growth in 2014, thanks to expanded merchandise selection and technology investments that enhanced the customer experience. Furthermore, first-‐quarter 2015 results show a 51% sales increase compared to the first quarter of 2014, thanks to the launch of Nordstromrack.com.

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Deborah Weinswig, CPA Executive Director—Head of Global Retail & Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: +852 6119 1779 [email protected] Filippo Battaini [email protected]

Sunny Chan, CFA [email protected]

Marie Driscoll, CFA [email protected]

John Harmon, CFA [email protected]

Aragorn Ho [email protected]

John Mercer [email protected]

Shoshana Pollack [email protected]

Kiril Popov [email protected]

Jing Wang [email protected]

Steven Winnick [email protected]

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Quick Take on Top Flash Sales by FBIC Global Retail Tech ... · 2 ! september 3, 2015...

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