Zulily, a mom-focused website specializing in discounts that expire after a limited time, filed its papers to go public last week. The section in which it discusses risks to its business includes one very specific development that its concerned about: the new Gmail.
Google recently altered its e-mail service to helpfully sift the inbox wheat from the chaff. The company now separates e-mails into different tabs, potentially banishing e-commerce messages into a tab that is less likely to be checked regularly. That’s nice for Gmail users—and not great if you run a company based on sending digital chaff to thousands of customers.
The problem has other companies nervous as well; Gilt Groupe and Groupon, for instance, have been telling customers how to get the messages to show up among the e-mails ranked with higher importance by Gmail. It could be particularly bad for flash-sale sites, since a promotion could expire before a user gets around to checking out the least-used tabs.
Zulily gets three quarters of its web traffic from e-mails or other forms of unpaid advertising. But it warns that other e-mail providers or social media services could follow suit, or that the kind of messages it sends could be caught up in anti-spam legislation at some point in the future. What’s more, it’s not clear that Zulily can even afford to keep doing what it’s doing now. The company has to hire photographers, copywriters, and the like to pitch itself to harried mothers who are likely getting tired of seeing its e-mails every day, while also paying for other forms of marketing. Zulily reported $272 million in sales for in the first six months of this year, more than twice the level from the year before. But Zulily also had to double what it was spending to generate those sales.
If the company is ever going to be profitable, its sales obviously have to outpace its costs. Zulily has managed to bring down its marketing budget from 27 percent of sales to just over 10 percent. Any restrictions on spammy e-mails and social-media activity are going to drive it into much more expensive alternatives.
Even without e-mail crackdowns, the math on flash sales is questionable. Sure, people like buying heavily-discounted stuff online, but that doesn’t make running those sales a good business. Groupon’s comeuppance has been well documented. Fab, which rode the same wave towards some eye-popping love from investors, recently said it was cutting a third of its staff. “We acknowledge that flash sales is a flawed business model,” Fab CEO Jason Goldberg said in an e-mail to AllThingsD.
Zulily knows that investors have reason to be wary. In its filing, the company describes itself as having “a short operating history in a rapidly evolving industry that may not develop as expected, if at all.” Let’s see if Wall Street gets that message.
