What's Gilt Groupe's secret weapon?March 5, 2012: 12:08 PM ET
The company's most valuable asset might not be its ability to convince consumers to buy tons of fancy retail, but rather its ability to watch how they do it.
FORTUNE -- It would take a secret weapon to start a successful print publication from scratch right now. That's why the partnership announced last week between high-end online retailer Gilt Groupe and a new luxury magazine called Du Jour has raised many an eyebrow.
What, exactly, is in this for Gilt, especially given the turbulent status of the magazine business? On the flip side, how would a partnership with an online sales site benefit a magazine?
Gilt Groupe is known for selling luxury items -- some of them at a discount, some not -- via a method called flash sales. Online flash sales offer select inventory at a certain time daily, and items often run out quickly. It has enabled Gilt to use the strengths of the web to sell products to that coveted slice of consumers with the budget to view a $2,000 dress, down from $4,000, as a steal.
But there is more to Gilt than capitalizing off of flash sales, CEO Kevin Ryan insists. In fact, the company's most valuable asset might not be its ability to convince consumers to buy tons of fancy retail, but rather its ability to know precisely who is purchasing and how.
The flash sale model was fueled by an excess of inventory at luxury retailers who were hit by a slowdown in consumer spending during the recession. Gilt helped pick up the slack, offering high-end items at a discount on an attractive platform. But luxury retailers have gotten better at streamlining their inventory, cutting into the glut of high-end items to push to sites such as Gilt.
Gilt and similar online retailers have recently restructured. This past January, the company says it laid off 80-90 workers, one of which was the head of Gilt's full-priced men's clothing site Park & Bond. Other online retailers targeting elite shoppers have also recently cut their staff. Invite-only site RueLaLa laid off over 60 employees this past January. Flash sale site Ideeli has reportedly started to make moves to attract a less elite customer base.
But Gilt CEO Ryan isn't troubled by the threat of a shift in available inventory. People will continue to buy more products online, he says, and Gilt Groupe will take up a healthy piece of that spending pie.
Yes, the company originally lured high-end consumers to buy off discounted glut with its flash sales, but it has another hot commodity below the surface. According to Jason Binn, the founder of luxury magazine publisher Niche Media, who is launching Du Jour, Gilt Groupe has some impressive consumer data that will help the magazine reach its target audience of people with an average net worth of $5 million. "It's an amazing opportunity to forge an alliance with a company that affords our consumers, readers, and advertisers such a powerful, targeted audience."
Gilt Groupe will not sell its data about these customers' shopping behavior, but it will model it, Ryan says. That allows Gilt to match its content to its shoppers. For example, the company sends out 2,000 different versions of its daily newsletter to its more than 3 million members, Ryan says, based on their preferences. Its data modeling also provides Gilt with a kind of Holy Grail in advertising: quantitative data on the spending patterns of loyal, wealthy, nearly recession-proof consumers.
"Now when I'm with a brand, I say, 'Look, I have a lot of options for you. You could reach millions of customers or I'll only show your ad to 50,000 men who have only purchased men's suits online, and they've purchased suits from your competitors,'" Ryan says.
Other department stores looking to reach out to buyers can't access these big-spending customers the same way, Ryan says. "A Saks or a Macy's can't do this because they don't have a membership-only model. The only people who can do this are flash sales types and Facebook."
But Gilt's data is more valuable than Facebook's for this particular breed of advertisers, because Gilt.com doesn't have to guess what people's spending patterns are. They have that information already.
Du Jour, in its print form, could be a boon to Gilt as well. Despite the uncertain future of print, the one population that is still likely to read in hard copy is the super rich, says Lorenzo Benazzo, CEO of luxury web development firm HyphenLab. And Binn believes that now is actually the best time to enter the market with a novel model. "Looking at what's taken place over the last four years and with a glance into the future, it makes this an exciting launch."
Even with all of its numbers, Du Jour will have to provide compelling content to survive. But if the collaboration works, it will mark a new model -- a publication built on the allure of advertising stats from an online sales site. And if Gilt really can keep the best tabs on how the super-rich click, that might get them more cache with ever-elusive advertisers than a pretty picture of a half-priced Valentino ever could.