Tuesday, 15 July 2014

Flash Sales Business

What is the flash sales business?
Flash sales are a type of e-commerce transaction that involves the sale of products and services via a website for a temporary period at prices which are generally discounted to the usual selling price.

Eg. Groupon, LivingSocial, MyDEAL.com.my, etc

How Does flash sales business model work?
For products, the business the e-commerce unit will acquire will typically agree with a supplier to sell excess, remnant, obsolete or out of season products through the websites.

The business will then sell the product, often through a flash sale, and the buyer will pay for the product.

Once the sale has completed, the e-commerce unit will aggregate all purchases made by the product buyers, place an order with the product supplier for the volume of products that have been sold and pay for the products using the proceeds received from buyers. The businesses to be acquired by the e-commerce unit typically do not purchase products from suppliers unless they have been pre-sold and therefore do not generally take any inventory risk.

The product supplier will generally then ship the order directly to the e-commerce unit. The e-commerce unit will then sort the order, re-package it, and ship the item to the individual buyers.

The e-commerce unit will receive the margin between the agreed supplier price and the price it can realise selling the product on its websites. The e-commerce unit will generally be under no obligation to acquire the product from the supplier in the event that it is not sold on its website.The e-commerce unit will generally be responsible for bearing the cost and liability of product returns.

For services, the e-commerce unit will typically agree with a service provider to sell a service through a website. It will then sell the service, often through a website, and will remit the agreed portion of the sale value to the service provider once the service has been provided or redeemed by the buyer. In the event that a service is sold and not utilised prior to the expiry of its utilisation period, the e-commerce unit may be entitled to retain the total value of the sale.


The advantages of the flash sales business model
Reduced inventory risk
The e-commerce unit will only generally order products once payment has been received from buyers. Product suppliers will generally agree to reserve a certain volume of products and put them on hold for the duration of the sale period so that the e-commerce unit is able to meet the buyers' orders.

Reduced warehousing costs
The e-commerce unit will not be required to hold large volumes of inventory in warehouses, significantly reducing the fixed costs associated with holding inventory.

Reduced property costs
The e-commerce unit will not typically require 'bricks and mortar' shop fronts to generate sales, eliminating a significant cost of 'traditional' retail businesses.

Efficiency and speed
The short duration of flash sales, combined with the significant buyer database of the businesses that the e-commerce unit will acquire, is expected to enable the company to clear large volumes of products quickly and efficiently. This will typically result in a quicker inventory to cash conversion for the product supplier than traditional off-price retail shopfronts, which increases the appeal of online flash sales to product suppliers.

The Virtuous Cycle
The e-commerce unit key business strategies are designed to create a 'virtuous cycle' - an increased number of buyers, who transact more frequently and spend more money per transaction, generates a greater sales volume which leads to access to better products at more favourable prices. This in turn should lead to a further increase in the number and value of buyers, which is expected to drive the growth of the businesses the e-commerce unit will acquire as the 'virtuous cycle' continues.

Risks
1. Failure of website, system and content integrity
2. Decline in retail and e-commerce sectors
3. Decline in growth rate of internet penetration
4. Relationship with suppliers
5. Increased competition
6. Inadvertent sale of counterfeit goods that may have a material adverse effect on its business reputation and brand name

Source: iBuy IPO prospectus

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