Gilt Groupe Shenanigans?

February 16, 2010

(Update 2/16)

Some surprising and upsetting news buried in page five of this piece from New York Magazine about Gilt Groupe and its business model:

Gilt Groupe is using much the same model to expand its inventory of clothing, commissioning designers to make clothes just for the site. This year, Lyne says, 35 to 40 percent of Gilt’s women’s apparel will be acquired through this channel. For designers, cutting clothes specifically for Gilt can be lucrative, because it offers a way to repurpose intellectual property, such as popular looks that may be a couple of years old. A designer may reduce production costs by using less-expensive materials, say wool from Scotland instead of Italy, or by using a little less stitching in the places buyers don’t see. More than one fashion executive told me that they had used flash sales as an opportunity to dust off some leftover fabric, turning a sunk cost into a substantial profit.

But neither Gilt nor the designers have any interest in letting customers know which items were made specifically for the site. “Gilt doesn’t tell you, as a shopper, that it’s ‘exclusive for us,’ ” admits one designer. “I think they want the shopper to think it is part of the regular collection.” The “discount” advertised on Gilt’s site is based on what the designer calculates a department store could have charged, even though the item was never intended to sell retail.

There’s some logic to this sleight of hand: Gilt operates at much lower costs than traditional retailers, and can pass its savings along to the customer. But Gilt has to be careful. It can’t afford to have its customers questioning whether that “retail” price is bogus; the allure of its sales is all about making its buyers feel like they’re smart enough, inside enough, to get in on a steal. Devoted shoppers and fashion bloggers watch the site closely, alert to any whiff of manipulation. On at least one occasion, reported in a January Wall Street Journal column, their vigilance exposed what Gilt described as a pricing mix-up. It involved a scarf, listed on Gilt as a $300 value before its discount, nearly identical to one a blogger discovered to be selling at retail at Neiman Marcus for $195.

If an item is created specifically to be sold at Gilt Groupe, it’s dishonest and (IANAL) potentially illegal to list a retail price other than the one being charged by Gilt.  It also undercuts the legitimacy of the Gilt model – and certainly undercuts my interest in shopping at Gilt.

I’ve used Gilt Groupe extensively, and have been very happy with the service and products I’ve received.  I’ve also recommended it here.  That said – I know some folks who were upset to discover that when they bought John Varvatos footwear on the site, they received product from a diffusion line made to lower standards specifically for sale on Gilt.

If I walk into a Brooks Brothers outlet, I know that 80% of the contents of that store are made for the outlet.  They’re also, however, marked as such – I know that their “346” line is only for outlets.  Not only that, but in a situation like Gilt, where the product cannot be handled, and the brand is our only real assurance of quality, it’s particularly heinous.  If Gilt is selling clothes made for Gilt, they need to disclose that fact.  Not doing so is a horrible lapse in ethics.

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