Online “flash sales” pose threat to smaller operators

Retail giants’ use of ‘flash sales’ to improve their online offers and clear slow-moving stock looks set to pose a threat to smaller online operators.

 Flash sales offer high discounts for a limited time, enabling retailers to sell surplus stock very quickly.

Last week, US department store Nordstrom paid $US180 million in equity for HauteLook, an invitation-only site selling designer goods at discounts of up to 80% within two to three days.

Nordstrom has more than 100 full-line stores in addition to 86 Nordstrom Rack stores and one clearance outlet. The HauteLook acquisition will provide Nordstrom with another option for clearing stock.

Analysts believe local retail giants David Jones and Myer may consider local private sale sites as part of their eCommerce strategies.

According to Citigroup analyst Craig Woolford, private sale sites such as brandsExclusive and Ozsale are the fast growing online retailers in Australia, describing them as the “virtual equivalents” of traditional clearance outlets.

“Clearance outlets have been successful for retailers because they enable them to separate discounted product and new product – these flash sites do likewise,” Woolford says.

“Ozsale and brandsExclusive… seem to be winning share of those customers who are looking for clearance products.”

Daniel Jarosch, managing director of brandsExclusive, told The Australian Financial Review private shopping clubs have been able to create clear value propositions for both brands and consumers.

Last week, the Federal Government hosted an online retail forum to encourage Australian retailers to establish or expand their online presence.

The forum prompted established online retailers to argue the case of smaller operators, claiming dominant retailers can restrict access to popular products.

According to the Australian Bureau of Statistics, small businesses generated online sales of $123 billion in the year to June 2009 – an increase of 52% on the previous year – but local entrepreneurs have highlighted the challenges associated with setting up.

Mike Knapp, co-founder of online footwear retailer Shoes of Prey, says his business relies solely on online payment system PayPal, yet 60% of its products are sold to clients overseas.

“We want more competition in payments processing. We have to acquire funds from foreign credit cards, and there is only one bank in Australia that will do that,” Knapp says.

“The banks are lagging behind the US in terms of payment innovation and that really hurts small online businesses looking to sell overseas.”

Cameron Poolman, managing director of GraysOnline, says local retailers setting up online struggle to balance infrastructure costs with Australia’s small population, creating a need to sell overseas.

“On the internet, you have to be the cheapest to be able to sell your products. As a result, most of the successful websites in Australia are working in the discount area or in specialist areas that don’t cut across the stronger retailers,” he says.

Poolman believes the national broadband network will be a “game changer” as retailers will be able to deliver richer content such as video.

This article first appeared on StartupSmart, Australia’s top site for start-up entrepreneurs.