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These businesses burst onto the fashion scene during the recession to try to move a mountain of unsold clothes. Now there is less luxury inventory and flash sales sites are bigger. That has forced these companies to pay more or find other ways to get their products. It has also led to questions about whether they can turn growth into profits. "The original flash sales model for the U.S. exploded during a time when there was this huge abundance of excess inventory," said Steven Dennis, founder of SageBerry Consulting and a former executive at retailer Neiman Marcus. "There's not nearly so much of this merchandise around now." Flash-sales websites offer steeply discounted products for a limited time. The model was started by Vente Privee in France a decade ago and focused on luxury apparel and accessories. Vente Privee grew fast and profitably in Europe and that spawned similar businesses in the United States. Gilt, which started in 2007, is the largest flash sales business in the United States, followed by Rue La La, HauteLook and Ideeli, according to GreenCrest Capital analyst Anupam Palit. None of the U.S. sites makes money, Palit said. Soon after these companies started, the financial crisis ravaged markets and deflated the fortunes of many newly wealthy people. Luxury goods inventory rose to about 10 times its normal level, said Dennis, giving companies "adequate supply, good pricing and brands willing to talk to them." This lasted well into 2009, allowing flash sales sites to offer top brands at discounts of 70 percent or more, which attracted lots of new customers. By September 2009, Gilt had 325,000 unique monthly visitors to its website, while HauteLook had 433,000. Ideeli had 312,000 and Rue La La had 206,000. A year later, unique visitors to these four websites had more than doubled, according to ComScore data. (r.reuters.com/huv44s) While that growth was happening, retailers and manufacturers cut production by 10 percent to 15 percent. By early 2010, there was a lot less inventory, Dennis said. As companies grow, they can usually reduce costs by buying more in bulk. But as flash sales sites expand, they must get products from a shrinking supply, which raises costs. Their price discounts have fallen this year, partly because companies are competing for inventory and paying higher prices, said Greencrest's Palit. Gilt discounts used to be 70 percent, but 40 percent to 50 percent is more common now, Palit added. SCARCITY Ideeli moved away from top brands to take advantage of lower-priced items because there is more inventory. "With high-end retail, there's only so much inventory to work with. Scarcity is part of the high-end fashion brands' strategy," said Chief Executive Paul Hurley. "I'm not the most popular guy at parties in New York because all our friends are after high-end brands. But the opportunity is much larger elsewhere." Gilt has branched out into travel, home decor, food, wine and daily deals. Rue La La has expanded in a similar way. "I keep expanding the things I can sell to the same people," said Gilt Groupe CEO Kevin Ryan. "Customers like shopping on Gilt, so I should offer more." Gilt is not having problems sourcing inventory, Ryan added. But Dennis said Gilt offers fewer top luxury brands now. "In Gilt emails I've seen recently, there were nine brands featured, but I'd only heard of two of them," he said. Gilt's website on October 14 featured these women's brands: Zac Posen, Alanna Bess Jewelry, Sergio Rossi, Faconnable, Coat Rack, Myla lingerie, La Victoire handbags and MCL by Matthew Campbell Laurenza. In terms of luxury brand recognition, only Zac Posen qualified, Dennis said. "BAD EVOLUTION" "There's been a bad evolution in the flash sales business," said Mike Steib, CEO of vente-privee USA, a joint venture between Vente Privee and American Express, which is launching a flash sales site in the United States. "People are worried about the luxury buyer going down market." The U.S. site will offer high-end products at discounts of 60 percent to 65 percent on average, Steib said. He declined to name what brands will be sold. Amazon.com, the world's largest Internet retailer, launched its flash sales website MyHabit.com, in May. Saks Inc has a flash sales site called FASHIONfix. Nordstrom Inc bought HauteLook in February. One way to tackle an inventory shortage is to have products made for you. Some FASHIONfix merchandise is excess inventory, but the site also asks vendors to make products for it from excess material. BeachMint, a startup run by MySpace co-Founder Josh Berman and Diego Berdakin, is designing its own brands with help from celebrities, then having the products manufactured. "Getting 50 pairs of Prada shoes on discount is doable, but getting 5000 is impossible," Berman said. "We own our own brands, trademarks and designs and can mass produce them," he added. "The model is more scalable." (Reporting by Alistair Barr. Editing by Robert MacMillan) Technology Media Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (0) Be the first to comment on reuters.com. Add yours using the box above. Social Stream (What's this?) 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