Gilt Groupe: Big IPO Looms for the Amazon of Luxury

Susan Lyne at Gilt offices Andrew Hetherington for Newsweek

Susan Lyne thought she knew what it was to have fans. She’s had decades of being buttonholed in airports and at parties by people telling her how much they love her work; she was, after all, one of the ABC executives who helped give birth to Desperate Housewives, and Martha Stewart tapped her to run her design empire when she went to prison for insider trading.

But nothing prepared Lyne for what would happen when in 2008 she took the reins at the Gilt Groupe, the e-commerce company that many on Wall Street are expecting to be 2013’s most hotly anticipated initial public offering. “People tag me by the sleeve and tell me it’s changed their lives,” she says. “They tell me their stories of how at 12:01 p.m. every day life just stops for them. It’s like a religion, that deep. I’ve never seen anything like this.”

What happens at 12:01 p.m. Eastern Time daily is this: thousands of people, mostly women, in offices (and cars and cafés and at their kitchen tables) across the country sign in to, where for a few tense, adrenaline-pumping moments they vie for a selection of discounted designer merchandise, just a piece or two in each size, from a Marni blouse to a pair of Casadei stilettos. Within 60 seconds, much of it is snatched up in the “flash sale,” leaving those who “win” exhilarated, the losers bereft—and everyone plotting the next day’s strategy.

“It’s magical,” says Dawn Olmstead, a Hollywood producer who first heard of Gilt from someone at Endeavor, the talent agency that represents her, in 2007—just months after the site launched (back then, to become a member, you had to be recommended by a fashion insider; the requirement was dropped years ago). These days Olmstead logs on from her phone app; on the West Coast, the sales start at 9:01 a.m., while she is driving the kids to school. Sometimes she pulls over. It reminds her of when she lived in New York and shopped at sample sales, the insider-only seasonal events (that inspired the creation of Gilt) where fashionistas line up to pick through leftover designer goodies.

“When you win, it’s fantastic, and even when you lose, the site is your guidepost. You see what went fast, and you know that’s what’s hot. It’s better than Vogue. It’s better than anything.” She may even read By Invitation Only: How We Built Gilt and Changed the Way Millions Shop, an inspirational business tome released this month by Alexandra Wilkis Wilson and Alexis Maybank, two Harvard Business School pals whom Kevin Ryan, the founding partner and CEO, recruited early on to create the look and feel of the site and be the demographically perfect public faces.

Lyne, a wry, elegant 61-year-old blonde, shakes her head with a bit of disbelief as she picks through a fruit plate at breakfast in a Manhattan hotel restaurant. “When you have that kind of engagement with your customers, when they think they can’t live without you, you can go anywhere.”

And Gilt is going there fast. From its start with five founders at two long tables in a sublet office, it now has nearly 900 employees and a sleek loft on lower Park Avenue, as well as a market value of more than $1 billion. That makes it the second-most-valuable e-commerce company with its own inventory in the world, after the much-larger Amazon. It has more than 5 million members, ships more than 10,000 packages a day, and has expanded with “verticals” including Gilt Kids, Gilt Home, Park & Bond (for men), the travel site Jetsetter, Gilt Taste for gourmet foods, and Gilt City, a competitor to Groupon. You can get more than a cute new pair of Missoni beach sandals on Gilt these days; there are $175 cuts of sushi-grade yellowtail, four private training sessions with Gwyneth Paltrow’s trainer, and trips to Balinese eco-resorts. And unlike many hyped digital operations hurling headlong toward a stock offering, Gilt is expected to break even by the end of the year.

“I think that Gilt is Susan’s perfect platform,” says Charles Koppelman, who was executive chairman of Martha Stewart Living Omnimedia when Lyne was CEO. Unlike Stewart’s company, which was already a well-defined brand when Lyne arrived, Gilt has given her a chance to sculpt a wholly new entity. “It’s creative, fast moving, and innovative, which describes her perfectly,” Koppelman adds.

To Paco Underhill, the environmental psychologist who is the author of Why We Buy: The Science of Shopping, the success of the flash sale is obvious. “The concept of brands has penetrated everywhere from the favelas of Brazil to the streets of Brooklyn. And we’ve created an aspirational population obsessed with getting things at discount. In our culture, where we are pressed for time and hungry for excitement, it’s tasty, convenient, and satisfying all at once.”

For the company, the flash-sale model has advantages over brick and mortar that Bloomingdale’s can only dream of. Members who lose out on a sale put their names on a wait list, sometimes hundreds of names long, which means that if the item is returned, as 20 percent are, the package is shipped out automatically to the next person on the list. That means that Gilt is rarely stuck with merchandise, the bane of the department-store business.

gilt-group-fe02-hass-2ndary Stella McCartney runway sandals original price: $1,195, on Gilt: $198, left, Hermes vintage crocodile Birkin bag originally: $56,000, on Gilt: $56,000

As addictive as the flash-sale model is, however, bringing it and Gilt into a new decade as an IPO looms has not been without challenges. Online flash sales hit their stride during the recession, because they were a godsend for designers who produced more than they wound up selling to retailers. The sales were a “safe” place to wring profit from unsold items; far better to sell discreetly over the Internet than to consign your label to the dreary fluorescent-lit outlet floor.

But now, with the economy on an upswing, some critics worry there won’t be enough excess merchandise. Competitors have sprung up, of course, and while Gilt has mostly beat them back—the next biggest is one quarter of its size—plenty of rivals are vying for choice items. As the IPO looms, critics wonder if Gilt will soar like Facebook is expected to later this year or fall to earth as Groupon has.

Even Ryan, the company’s CEO and founder, concedes it is harder these days to get pieces from edgy designers. “It’s been a long time since we’ve had a sale of Christian Louboutin shoes, it’s true,” says the bespectacled, Yale-educated Ryan, 47, a tech veteran who cut his teeth as CEO of DoubleClick, the online ad behemoth Google bought for $3.1 billion. Instead, these days Gilt sales are more likely to include “accessible luxury” brands like Kate Spade and Cynthia Rowley than wares from the likes of Balenciaga or Narciso Rodriguez.

Some fashion-industry observers believe that Gilt has, like many outlet stores, lately taken inferior goods manufactured specifically for the site, a strategy that can backfire. (The company denies the practice.) “It isn’t good if they lose the kind of customer who made them, if that customer stops coming back because the thrill is gone,” says a former top Gilt executive who now is a partner in an e-commerce startup that does not compete with Gilt. “If it feels like a bait and switch, there can be a real backlash.” As Underhill cautions, “A brand that’s cool and can’t maintain that is just one stumble from destruction.” The fashion blogosphere lit up in January when Gilt laid off 90 employees—a tenth of its workforce (executives said they shed the jobs only to make the balance sheet look better as the IPO date approached).

In light of the challenges, Lyne’s job has been to help transform the company into more than just the epicenter of the flash sale. She is yin to Ryan’s high-tech yang, a well-connected insider with ties to both coasts who understands fashion and consumer psychology and is known for her empathy and instincts about people (when she ran Martha Stewart’s company, the joke inside was that Stewart played the earth mother, but Lyne really was one). She helped extend Stewart’s reach with a Sirius radio component as well as a partnership with KB Home to build Martha Stewart communities. “She brings a real stability to the table,” says Koppelman. “And she exudes confidence and makes everyone—from investors to employees—feel good.” And having someone of Lyne’s stature will no doubt help assure Wall Street that this is a mature company with a deep management bench.

While the company insists it is fully focused on keeping great merchandise flowing for flash sales, the bigger goal is creating a luxury-marketing platform, a place for companies to debut their sexiest models. And not just clothes. Last month Infiniti sold a single crossover on Gilt at half the sticker price. It went in 2.5 seconds, with another 10,000 names on the waiting list—and an avalanche of free publicity.

Becoming the place to be seen by a monied audience will help solve the problem of having enough inventory, says Ryan: “A brand like Valentino, which wants to become more attractive to a younger customer, can give us a few pieces,” he says, “and we’ll photograph them mixed with some other things by younger designers. They’re getting exposure with the right audience, and that’s really valuable for them.”

The company is also slowly moving toward—shh!—full price. “We want to be looked at mainly for curation,” Ryan says, “for direction and taste, not just a bargain.” Eighteen months ago, 100 percent of the company’s revenue came from discounted goods; that percentage is now below 90 and falling fast. While the womenswear that constitutes 40 percent of sales is still operated on an entirely discounted flash-sale model, Park & Bond is all full price. Men, it seems, are less interested in running to their computers at 12:01 p.m. to score the perfect James Perse sweater in persimmon.

Gilt Taste, under the editorial direction of former Gourmet editor Ruth Reichl, sells “value added” food “experiences.” And Jetsetter is now 40 percent full price; several hundred freelancers report on the resorts it features, and the photography is lush.

Olmstead, the Hollywood producer, is sold. After she’s scored the perfect cashmere tank top, she and her sister play what they call “Jetsetter roulette,” to decide where to take a weekend together away from the kids. “Will it be Anguilla or Tahoe?” she says, “We see what looks good. I listen to what they tell me. I let them let me feel smart.”