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Amid slump in flash-sales sector, Rue La La is hit hard

Rue La La said its access to products “has never been stronger,” but analysts suspect it could be bought soon.

Rue La La said its access to products “has never been stronger,” but analysts suspect it could be bought soon.

Twice a day, online retailer Rue La La sends out e-mails luring subscribers to its flash sale of the moment, such as $500 off designer Fendi bags or Juicy Couture dresses at half price.

Now the Boston company is sending a different kind of alert, this to potential investors. Rue La La has hired JPMorgan Chase & Co. to help raise capital to finance growth. Meanwhile, analysts say that the company has been looking for a buyer for more than year and that competitor Gilt Groupe Inc. has emerged as a potential suitor.

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Revenue at the flash-sales site rose to $440 million in 2013, according to Internet Retailer, an e-commerce publication, but its growth rate of 10 percent over the previous year trails the average of 17 percent for the e-commerce industry in the US.

Rue La La had 1.3 million unique visitors to its site in June — the lowest amount in more than a year — according to digital analytics firm comScore.

The e-tailer said it has “experienced tremendous growth” since it was bought by current parent Kynetic in 2011. The company declined to comment further on its business plans, but its fund-raising efforts come amid broad changes in the industry — not all favorable to the flash-sale business model.

Flash-sale sites, which typically put high-fashion clothes and accessories on deep discount for a few days or even hours at a time, came of age during the recession, when designers and manufacturers needed to quickly unload surplus inventory. But now that the economy is in recovery, piles of unsold designer duds are harder to find. And the once-white-hot growth rate that marked so many flash retailers has cooled considerably.

“The tides have turned for this entire sector,” said Sucharita Mulpuru, an e-commerce analyst with Forrester Research. “These guys thought they had something special and thought the business would grow forever and ever. Now they are realizing how hard it is to gain access over time.”

Earlier this year, flash site ideeli.com was acquired by Groupon Inc. for $43 million, less than half the amount the company had raised in venture capital funding.

One additional challenge for flash sites is that many high-end clothes makers learned a tough lesson from the recession and now produce smaller runs so they don't get stuck again with so much unsold inventory. Moreover, to avoid devaluing their brands, some designers are reluctant to work with flash websites, where their goods can sell for hundreds of dollars less than at a traditional retailer.

“There is concern over cannibalization,” said Nikki Baird, managing partner at Retail Systems Research of Miami. “You don’t want to be a high-end designer who is trying to convince people to buy your stuff for $800 at Saks and then you’re selling it at Rue La La for $100.”

Rue La La said in a statement that its access to products “has never been stronger.” Meanwhile, Gilt Groupe, which operates the flash clothing site gilt.com, did not respond to requests for comment.

Not only are flash sites competing for a more limited pool of goods, they are also being outmuscled by off-price giants that can order in greater bulk, such as TJX Cos., the Framingham parent company of T.J. Maxx and Marshalls.

Mulpuru said some flash sites have resorted to buying up inventory to ensure they have enough to sell online. That however, leaves them vulnerable to becoming stuck with “a bunch of junk that people didn’t want the first time,” Mulpuru said. At some sites, she added, it isn’t unusual to see the same products featured again and again.

Instead of buying “distressed” merchandise that was never sold in traditional retail stores, some flash-sale companies are asking designers and manufacturers to create lower-quality clothing for them, said Steven Dennis, founder of SageBerry Consulting and a former executive at Neiman Marcus. Others are selling goods from lesser-known or “no-name” brands.

“A lot of the product now is merchandise made specifically for those channels,” Dennis said. “That gives them a much more reliable source of product, but it doesn’t have the cachet of the desirable brands.”

Some analysts say it makes sense for flash sites to consolidate and lessen the competition for goods. Others say it would be smart for a traditional retailer to purchase a flash retailer and then funnel its own extra inventory to customers through the site at discounted prices. The retailer Nordstrom Inc. bought flash-sale site HauteLook Inc. in 2011.

Even a veteran of the retail industry such as Dennis isn’t sure whether any of these strategies will turn the flash business around.

“Flash sales are a clever gimmick to create urgency and leverage scarcity,” Dennis said. “But there are only so many customers that think that’s a great thing. For the broader customer, there are a lot of choices both offline and online.”

Taryn Luna can be reached at taryn.luna@globe.com. Follow her on Twitter @TarynLuna.
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