Vente-privee.com Refashions Closeouts

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Two dozen such sites have sprung up elsewhere in Europe. Still, Vente-privee.com claims to be more than 30 times larger than its nearest rival. "Its first-mover advantage is really huge," says Summit's Strain.

That's not stopping a few well-funded rivals from trying to catch up. British venture capital firm 3i (III.L), which was spurned in an earlier effort to invest in Vente-privee.com, has sunk $8.3 million into a rival called BuyVIP. The Madrid company readily admits it's mimicking Vente-privee.com's model but says it aims to win by expanding faster into other European markets.

Overstock is Unavoidable

Meanwhile, in the U.S., two entrepreneurs have founded a New York rival called Gilt Groupe that launched in November. Alexis Maybank, a former eBay (EBAY) and AOL (TWX) executive, and Alexandra Wilkis Wilson, who worked previously at LVMH and Bulgari (BULG.MI), got seed funding from Kevin Ryan, a founder and former chief executive of online advertising giant DoubleClick, and raised $5 million from venture capital firm Matrix Partners. "Anyone who follows e-commerce is familiar with Vente-privee," says Maybank.

How does it work? Overstock is unavoidable in manufactured goods, thanks to everything from fashion misses to production planning mistakes to unexpected weather. On average, it amounts to between 5% and 10% of all merchandise—and sales of inventory closeouts top $30 billion annually in the U.S. alone.

"A Revolution for Branded Products"

Today most such merchandise is sold via invitation-only ventes privées or sample sales, or through factory outlets and liquidation stores open to the public. Some is dumped through so-called jobbers, or wholesalers who buy overstock and then resell it at retail. But top brands hate the resulting low margins and tarnished image, says Xavier Court, who runs marketing for Vente-privee.com and is one of its eight founders.

"The way we are dealing with overstock is a revolution for branded products," Court says. "It is extremely efficient, protects the image of the brand, and brings in new customers on- and off-line." Court and six of the other founders came from the apparel wholesaling world before starting Vente-privee.com, while one had an Internet background.

Located in a renovated newspaper printing plant in the gritty Parisian suburb of La Plaine St. Denis, Vente-privee.com now has 750 employees and says it has been profitable from the beginning, though it doesn't disclose earnings. About two-thirds of the employees work at the former printing plant, where contemporary office furniture mixes with racks of merchandise and an eclectic art collection including portraits of Mao Tse Tung and Marilyn Monroe. The rest of the staff work at warehouses in Lyon and north of Paris.

Self-Contained Merchandising Machine

Every day, beginning at 7 a.m., one manufacturer puts leftover stock on sale for up to 72 hours. Vente-privee.com's 4.5 million customers are notified a few days in advance of upcoming sales, and early birds have more to choose from. To reduce financial risk, the company doesn't take possession of any closeout inventory. It's just a middleman, passing along orders to the original seller and retaining a profit margin of anywhere from 20% to 40% per item. Discretion is also the name of the game: Only members are aware of the sales, and there is no record of an operation after it has been shut down.

Perhaps the most unusual aspect of Vente-privee.com is its merchandising program. The company hires models, make-up artists, hairdressers, and photographers to produce daily fashion shoots depicting leftover merchandise in the best possible light. The company also employs a team of journalists to put out its own glossy fashion magazine, called Rosebuzz, that goes out to 50,000 top customers. The headquarters even houses a recording studio where original music for advertising trailers is created. The songs have proven so popular that Vente-privee.com now sells a CD of 15 of the tracks on its site.

The unique combination of exclusivity, selection, price, and value-added merchandising is paying off handsomely for Vente-privee.com—and provoking an unusual amount of attention on the other side of the Atlantic. "This is the first time in recent memory that American companies are copying an Internet economic model that was first created in Europe," says Philippe Collombel, a Paris-based partner at venture capital firm Partech International, which is not an investor in Vente-privee.com.

Can competitors catch up? Vente-privee.com CEO Jacques Antoine Granjon, a pop art fan who sports shoulder-length hair, isn't worried by the copycats. Vente-privee.com's managers have built up strong relationships with brands during the many years they bought overstock products in the off-line world. "Nobody knows the wholesale business in Europe better than we do," he says.

Schenker is a BusinessWeek correspondent in Paris.