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http://www.businessweek.com/articles/2013-10-14/how-your-newly-uncluttered-inbox-could-doom-zulilys-ipo

Going Public

How Your Newly Uncluttered In-Box Could Doom Zulily’s IPO


How Your Newly Uncluttered In-Box Could Doom Zulily’s IPO

Photograph by Raimund Koch/Getty Images

Zulily, a mom-focused website specializing in offering discounts that expire after a limited time, last week filed its papers to go public. The section in which it discusses risks to its business includes one very specific development its concerned about: the new Gmail.

Google (GOOG) recently altered its e-mail service to help users sift the in-box wheat from the chaff. The company now separates e-mails into different tabs, potentially banishing e-commerce messages into a tab that’s less likely to be checked regularly. That’s nice for Gmail users—and not great if you run a company based on sending digital refuse to thousands of customers.

The problem has other companies nervous as well: Gilt Groupe and Groupon (GRPN), for instance, have been telling customers how to get their messages to show up among the e-mails of higher importance as ranked by Gmail. It could be particularly bad for flash-sale sites, since a promotion could expire before a user gets around to checking out their 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 at some point be caught up in anti-spam legislation.

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 the service’s e-mails every day, while also paying for other forms of marketing. Zulily reported $272 million in sales for the first six months of this year, more than twice as much as a year earlier. 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 a little more than 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 toward 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,” Chief Executive Officer Jason Goldberg said in an e-mail to AllThingsD.

Zulily knows 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.

Brustein is a writer for Businessweek.com in New York.

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