Q&A With Gilt Groupe CEO and Founder Kevin Ryan

The Robin Report - Gilt GroupeLuxury fashion flash sale phenomenon Gilt Groupe has only been in existence for four years, but already has annual sales of over $500 million and a valuation of a billion dollars. We spent an hour recently with CEO and Founder Kevin Ryan, who shared some of his thoughts about e-commerce, future plans for Gilt, and the state of the luxury business.

Q. Kevin, the cat’s out of the bag: You’re now known as the “Billion Dollar Man of Silicon Alley.” Could you give us the flash version, so to speak, of what you’ve done, and the companies or businesses you’ve launched, bought and sold?

A. My Internet career started in 1995 working for E.W. Scripps, when I launched the Dilbert website. By the beginning of 1996, I had built up an e-commerce-enabled, advertising-supported website. I concluded then that the Internet would be unbelievably big. I went to the parent company and suggested they fund it and make it big, but they were cautious. So I said, well, I’m going to go out and start an Internet company. As part of my due diligence I ran across a company called Doubleclick (an online advertising firm) that was doing kind of what I wanted to do. They had 15 people, and were a couple of months old. The two guys who started it were both engineers, very technical and incredibly brilliant. I walked out of the meeting and thought, I don’t even know how to do this, the software development part. I was 32 and had never developed a software product.

So I joined them, became President, then CEO. Four years later we had 2,000 employees, had gone public, and made a bunch of acquisitions. The Internet collapsed, and we went down to 1,000 people through 7 rounds of layoffs. At the end of that process we had an enormously profitable company with 60% of the world’s market, and eventually sold it to Google for $3 billion in 2007. Dwight Merriman (CTO of Doubleclick) and I then decided that we wouldn’t invest in other people’s companies, we’d start our own companies based on our own ideas, have them all in one location. We started five companies, but thought very few would survive. We sold Panther (Panther Express, web content provider) and ShopWiki (Internet shopping search engine), which were doing okay, but not great. Turns out the rest of them survived, and we’re still in our original space. Dwight was particularly passionate about 10Gen, our database company, which is the preeminent database for startups. Saks, eBay, AOL, Craigslist, plus tens of thousands of others, are on it. Gilt was getting really big, and I was spending 60% of my time on it, it was really changing the industry, and it was really fun. So now Dwight runs 10Gen, I run Gilt, and Henry Blodgett runs the third company, Business Insider.

Q. Given your experience in technology, the hottest area in business today, why on earth would you come into the retailing business?

The Robin Report - Gilt GroupeA. I think there are huge opportunities. It’s e-commerce, and there’s a lot of technology to be brought to e-commerce. On the targeting and technology, it’s a fantastic consumer proposition. It’s an actually less competitive space than most other spaces. There are many areas where there are 50 competitors. A year ago, it I had asked you what was the biggest men’s online department store? There were none. It’s not a small area, and there’s still a lot of opportunity.

Q. Why was Gilt so instantaneously successful?

A. A couple of things. Everything in life gets down to execution. Everyone thinks we were first, when in fact Ideeli launched a few months before we did. We grew much faster, and are now the same size as the other three flash businesses put together. It’s because of execution – hiring the great people quickly, raising money effectively, getting great brands, great technology – there’s no one thing. It’s all down to the product, broadly defined – the brands, checkout experience, brand of the company overall, the design of the site.

Q. Now there’s a lot of competition. In fact, the epiphany you had – the inspiration for Gilt, French company Vente Privee, is coming to this country. Are they going to go head-to-head with you? And what about Amazon’s MyHabit?

A. In the daily deals space, there are 300 companies. However, in the women’s and men’s space, still the biggest part of our business, almost no new players have entered in the past four years. The same four players are there, but we don’t overlap on product very much. Our top 200 vendors almost never work with Rue La La. Regarding Vente Privee, most of what they’re selling we’ve already sold, so we’ll see if they bring something different. They haven’t had a lot of success outside France. Amazon brings a lot to the table. They have everyone’s credit card, great distribution, and they are a pretty accomplished Internet company. I find the MyHabit product better than Vente Privee.

Q. How are you able to get the top 10-20 vendors that your nearest competitors are not?

A. Early on, we had the relationships and the site – our site looked like a luxury site, which is when it got defined. And we were in NY – NY was actually fundamental. Credibility, relationships, we’re not just flying in, we’re at weddings, we’re having lunches, there are tons and tons of relationships. We’re out there all the time.

Q. You said that only 35% of your business is in the overstock business. Is that because excess inventory is drying up?

A. No, our excess end-of-season inventory business is significantly bigger than it was two years ago, but as a share of our total business it’s gone down. It’s just that other parts of the business have expanded. We have vendors make product for us. Other parts of the business – Travel, City – have no inventory. That totals about $150-$200 million. Gourmet is drop-shipped, so there’s no inventory. Half of home is drop-shipped. As you get bigger, and to get the right size and color distribution, a higher part of the product has to be made for you. If you need 20,000 suits – no one has that quantity left over.

Q. Is the pricing and margin equation for you under pressure because of that?

A. Our gross margin today is higher than it’s ever been. We have more scale, we have better pricing – what we buy it at, purchasing power is better. It’s not just purely numbers. The brand component is really important. Why do people sell on Gilt? Not to make money. They could probably make more money selling it elsewhere. This is better for the brand. We’re promoting their brand. We have people coming to us and giving us merchandise. Millions of people who, for example, never heard of Zac Posen. We’re giving vendors a tremendous benefit – their product is in a beautiful environment, on models, it sells out, creates scarcity. Not like in an outlet mall. There’s control over the selling environment. That’s why margins are going up.

When car companies come to us, they will offer us hundreds of thousands of dollars to put cars on the site, before we even sell anything. We don’t do car sales that often, but we have 750 thousand people coming to look at the site, talking about the car, thinking about the car. Compare that to flipping through a magazine. It’s much more involving. We had 50,000 people on the wait list. Plus, the company got the people from the wait list to buy cars.

Q. What individual business categories are you in, full-price and off-price, and where do you see it going in the next five years?

The Robin Report - Gilt GroupeA. The businesses are women’s, men’s, home, kids, local (City), travel (Jetsetter) and gourmet foods (Gilt Taste). Gourmet food is only full price. I’m not convinced that you can do food on sale all the time, we have one sale a day, but 95% is full price. Travel and home we have both full price and discount. Men’s are two separate sites. Men’s fashion brands like to keep it separate. Next year we’ll do $100 million of full-price business, compared to zero last year. That was the big bet. Consumers were asking for it. I’m in most of the categories that I want to be in. We may want to go into bridal in a bigger way. Pets is an area where we do some sales, but I still don’t think we want to open a whole pet business. Electronics is in home, but it’s a very low margin business, so I don’t see an attractive way to do that. To enter a new business, I want to make sure that in two years we’re going to be in a $50 million run rate. Park & Bond and Gilt Taste are growing fastest in percentage terms, because they’re new. Women’s is our biggest business. Home might catch it. Our share of the men’s market is higher.

Q. How much of business 5 years from now will be international, and where are you expanding?

A. We have a full Gilt in Japan, with 75 employees, full categories – it’s like the U.S. but smaller. I’ve just launched international shipping, 10% of revenues several years from now. Jetsetter has just opened in London, but it’s an inherently international business, you don’t have shipping problems, you stay in the same hotel as people from Paris do when you travel to London, so 10% of that business is international before you even open a London office. Our competitive advantage there is the product, we don’t put a hotel on there until we see it ourselves. You have to like the product. There’s a trust element there. People are passionate about Jetsetter. There are 700,000 people who’ve signed up for Jetsetter who weren’t even on Gilt, who maybe aren’t into fashion but love travel. It’s replacing their travel magazine.

Q. At one point you felt that one of your competitive advantages was that you focus exclusively on luxury high-end positioning, which is true across the board. Now that you’re into full price on certain things, rather than just flash sales, do you think you might be losing a little focus?

A. That’s always a risk. There are always advantages to doing the most narrow and focused thing possible. You have to balance that against the fact that our target customer would rather get one email from Gilt, which has great coverage across the board, than 7 emails each day for different categories from different sites. Plus, customer acquisition costs go down, distribution costs are lower. You have to figure out if that outweighs the idea that we’re not focused.

Q. Can you tell us about the marrying of commerce and content, and what you’re doing in that area?

A. We don’t consider ourself a content company; we’re an e-commerce company. We use content generally to help people make decisions in buying. We encroach in some areas that people think is editorial, but of the 950 employees we have today, only 15 are in editorial. It’s more important in some areas than others. In taste, a lot of it is the story. Knowing that this guy is the 3rd generation sausage guy from Ohio and they’ve won a lot of awards, well that’s important. Now I want to try that sausage. It also enhances the experience of shopping.

Q. What company would you like most to acquire?

A. We’ve not been that acquisitive. What we’ve acquired has been the list, not the company. We’ll do more deals next year. We’re open to anyone in our verticals. The e-commerce lists, relationships, the expertise – let’s say we wanted to go into art. How do we get the expertise? We have one constraint which it nexus. If I have one employee in New Jersey, every consumer in NJ will pay sales tax. One person in CA? That’s $5 million in taxes our consumers will pay.

Q. Are you planning to open brick and mortar stores?

A. Pop ups. The reason for that is press, other people will sponsor with us, there will be foot traffic without the long-term commitment of a lease. I would not exclude us entering the offline world – stores, magazines, books, TV shows. We’re looking at all those.

Q. Whom do you most admire in business?

A. Jeff Bezos. He has the most difficult business model and has the longest term vision of anyone. Much more impressive even that what Google has done. He has an enormous technology business that they’ve built up, separately, worth billions of dollars. There’s hardly a company in NY that doesn’t rely on their technology infrastructure.

Q. What about an IPO? What if Amazon finds that My Habit fits within their business model, and they want to acquire Gilt?

A. An IPO is a possibility – not in the next 9 months, but maybe in 2013. I think it’s always a possibility that a large player wants to acquire Gilt. Many times what Amazon has done in the past is to launch a competitor, test the market, and then wind up acquiring a player, like Zappos or Diapers. Do you know what the second most valuable e-commerce company in the US is? Gilt. What that really shows is that nobody’s been able to emerge past a $billion valuation because Amazon always ends up buying them. They’re very clever.

Q. Is the luxury business healthy? Are those consumers trading down, getting more value conscious?

A. Yes, very healthy, and they’re absolutely not trading down. Look at Louis Vuitton sales, BMW sales. They’re all doing great. Look around. There’s no recession among the wealthy people in NY. Try to get a reservation at Le Bernardin. You can’t.

Robin Lewis About Robin Lewis

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.