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Luxury retailers used to trash their unsold clothes; Here's why that changed

Labor Day and the Labor Day sales are a thing of the past. Back-to-school is in the rear-view mirror. Summer styles have vanished from the racks. Replaced with sweaters, wool pants, and coats.

Where did all the summer leftovers go?

For a long time, what didn’t sell in stores ended up cut up or in the trash heap, at least when it came to certain luxury brands. That's why off-price and discount stores for many years were full of designer items with labels cut out, slashed through or marked up with a pen.

It was a practice that ended in the late 1990's and early 2000's but was employed by many luxury retailers that didn't have their own outlet structure, says Jessica Bornn, senior analyst at Merchant Forecast, which provides retail and consumer research for institutional investors. These retailers would routinely “destroy clothing [and] cut labels out of clothing out of fear that…that could make their brand seem less luxurious to their high net worth customers,” says Bornn.  At this same time and for the same reason, many luxury brands were hesitant to sell online as well.

But over the last decade, that’s changed, and flash sale sites have played a major role in that. Sites like Gilt, Rue La La and HauteLook—all launched in 2007-- quickly became avenues for luxury brands, particularly smaller ones, to sell their leftover inventory “without fear of diminishing the luxury status of their brand,” says Bornn who worked as a buyer at Salvatore Ferragamo, Versace and Barneys before becoming a retail analyst.

It’s a good move for the brands; shopping habits have changed as consumers have become more comfortable with shopping for high-end goods online. A report from McKinsey & Company predicts that over the next three years, global digital sales for women’s luxury fashion will balloon. Online sales make up just 3% of the total market today but that figure is expected to jump to 17%, for a total of $12 billion.

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Gilt Groupe saw explosive growth soon after its launch, just as mobile shopping was on the rise and the economy fell apart. More cost-conscious shoppers wanted luxury goods but at bargain prices. And they wanted convenience.  Gilt along with Rue La La and HauteLook hit the mark. The sites were all designed to virtually emulate the high-end boutique shopping experience. The design was highly curated and the highest of high-end retailers approved.

Rue La La CEO Steve Davis says for his company, it’s all about creating a total shopping experience. “We focus every single day on must-see shopping,” Davis told Yahoo Finance this spring. “We’ve got a programming department like every television station has a programming department.”

It's appointment viewing for shoppers, and users got hooked. “The flash sale, actually by design, is really intoxicating,” says consumer psychologist Kit Yarrow, author of Decoding the New Consumer Mind. Consumers, Yarrow says, get “this sense that they are in this kind of club where they get something [worth] lots more for less.”

Nordstrom (JWN) was one of the first brick-and-mortar retailers to take notice of the flash sale phenomenon and snapped up HauteLook in 2011. The price tag: $270 million. It’s paid off, says Bornn.

“Nordstrom made a wise acquisition with HauteLook,” she says as the online site has given Nordstrom’s bottom line a boost. “What they’ve been able to do is incorporate their inventory from their Nordstrom retail locations, their Nordstrom Rack locations which is their off-price channel and actually feed the website…It’s a really smart marriage for them,” says Bornn. She thinks many other department stores will try to emulate Nordstrom.

Other flash sale sites may need to follow the HauteLook path as many of the players face new challengers in the marketplace. Rumors of a Gilt Groupe IPO have vanished and there's been a management shake-up. Steve Davis of Rue La La told Yahoo Finance this spring that his company is not for sale despite buzz for many months. Zulily (ZU), another flash sale site focusing mainly on kids and casual women’s clothing, is being acquired by QVC parent company Liberty Interactive (QVCA) after hitting the financial skids. 

“These online retailers have really changed the way luxury consumers access goods,” Bornn says. “And I think it’s important to have a brick-and-mortar presence as a showroom, but I think the consumer is very content to shop online for those goods.”

Gilt took one fashionable step in the brick-and-mortar direction this week opening Gilt by Appointment in New York, a showroom where shoppers can check out offerings in-person. Gilt also announced a new web app which is accessible via AppleTV.