Habib Kairouz Talks Totsy, Flash Sales, and Expectations for E-commerce

While some critics grumble about the future of e-commerce, Habib Kairouz sees prospects for prudent growth for companies that change with consumers’ tastes.

Kairouz, a managing partner with Rho Capital Partners and Rho Ventures in New York, backs Totsy, a New York-based e-commerce site for deals and flash sales on wares for infants and parents, particularly mothers-to-be.  E-commerce sites with flash sales aimed at moms are becoming more competitive, with rivals such as Zulily scaling up fast.

Granted that Kairouz has a horse in this race, he offers a tempered perspective on flash sales as one of several marketing strategies e-commerce businesses can use. And he has some penetrating insights into the future of the field. “It’s all about merchandising and efficient retailing,” he says. Flash sales typically offer discounts on select items during set times, which may last hours or days. Kairouz believes Totsy can grow not only through flash sales but by offering other ways to make purchases, such as a subscription service for products people already have expressed interest in. “It’s a more efficient and smarter way to market to consumers,” he says.

There is ongoing work behind the scenes at Totsy, he says, to keep operations growing in tandem with sales to help prevent getting caught with inventory that does not move or warehouses that cannot be managed. The company is also investing in third-party fulfillment, Kairouz says, to help manage such logistic issues as split shipments for orders intended to arrive on different dates.

Kairouz says part of what attracted Rho to Totsy was the company’s mix of products from specialty brands—merchandise that might not otherwise get broad attention. “There’s an opportunity to expose those brands to everybody who doesn’t have access to specialty retailers,” he says.

Finding the right balance between hard-to-find items and competitive pricing, Kairouz says, is crucial for longevity in this sector. E-tailers who built strategies around flash sales grew rapidly from 2008 to 2010, and he says they must now adapt to survive. “In the recession environment, a lot of luxury merchandise was available and companies were able to get their hands on it for very cheap,” he says.

Once-expensive items flooded the Web at low prices and helped grow revenue fast for some flash-sale players; however, Kairouz says not everyone paid attention to the scale of their backend operations. As the economy creeps back to recovery, low prices for luxury wares become harder to find and shrink margins for e-tailers. “That’s no longer sustainable,” he says. Compounding the issue, many consumers have grown accustomed to searching for products via Google to find the lowest prices and might skip browsing e-tailing sites.

In spite of his concerns, Kairouz refrained from slapping the “bubble” label on the current market. He reiterated his belief that valuation adjustments will continue, though he also foresees e-commerce growing over the next 15 to 20 years. “Today we’re only seeing five to seven percent of [retail] transactions happening online,” he says.

Naturally, some e-commerce companies will not last. Me-too players, Kairouz says, will struggle while companies such as Fab.com and Etsy that differentiate themselves through their product mix should continue to do very well. The fight to scale up may also lead to more acquisitions among peers in this sector. “We’re going to see substantial consolidation in e-commerce,” he says. Companies with revenue in the $20 million to $100 million range are likely candidates for mergers and buyouts if they struggle to raise capital to get them to the next level, he says.

Large, publicly-traded incumbents in e-tailing such as Amazon and eBay might also look for companies to acquire, though only if the deals have the potential to significantly affect their operations. “I wouldn’t expect them to buy companies in the $10 million to $20 million range,” Kairouz says.

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