Global womens e-tailer Modnique acquires TOTSY to expand into kids

By Michael Carney , written on July 5, 2013

From The News Desk

For most ecommerce companies, international expansion is an afterthought until well into establishing a successful business. Prevailing wisdom is that it’s imperative to achieve product-market fit – which for those in the fashion category means building a compelling brand, honing merchandising, and developing a sustainable business model – before attempting to duplicate this success across multiple markets. Apparently, not everyone agrees. Los Angeles-based Modnique took the complete opposite approach, launching from day one in multiple countries, and yet, somehow, created what looks to be a successful business in the process. The company’s name is even international, as a play off “modnik,” the Russian word for fashionista.

Modnique launched its first flash sale “event” in February 2010 and has since grown to host more than 400 events per month. The site's unique value proposition, which CEO Einaras Gravrock credits with its success and which dictates its international strategy, is connecting shoppers with international styles and brands that they wouldn’t otherwise encounter – oh, and deep discounts. On Modnique, a shopper in Brazil or Australia can get access to brands from across Europe and the US, and visa versa. And whether the products cost $50 or $500, they’re available at substantial discounts.

It's a bold strategy that hasn't been attempted by many companies for good reason. Going global exponentially increases the risks associated with ecommerce. Delivering a cohesive brand message and product offering that appeals to consumers in different markets is no easy task. And the challenge of overcoming issues of fulfillment, payment processing, and personnel management in multiple countries has sunk more than its fare share of businesses. Not to mention that flash sales has proven a pretty poor way to build a big company – there's a reason both Gilt and Fab have moved away from the model.

“When we first looked at the market, we realized that no one was really selling to multiple geographic markets,” Gravrock says. “And since we already had the international vendor relationships and fulfillment infrastructure, we were confident that we were in a position to offer something unique and attractive.”

These existing relationships and infrastructure stem from Modnique’s one-time parent company, which began in 1999 as an eBay alternative focused exclusively on luxury jewelry, handbag, and eyewear auctions. The once public company was taken private in a management buyout in May 2012. Bidz continues to operate, but has been outpaced by the more successful, and arguably more compelling Modnique.

Modnique’s revenue grew more than 90 percent over the last 12 months, according to its CEO, although he declined to share specific financial figures. The combined company, which has 300 global employees, 180 of which are located in Redondo Beach, California, is entirely management funded and operates just shy of breakeven. The quality of the company’s revenue is what makes the business so compelling, Gravrock says, pointing to the fact that between 70 to 80 percent of its business is repeat business.

One reason the company is less well known than many of its competitors among US consumers and investors is that 75 percent of its sales come from international buyers. Russia and Mexico are its two fastest growing markets, while the company has seen significant traction in Australia, Canada, and across the Middle East, Latin America, and Europe. The company plans to increase its focus on the US market in the second half of the year.

In Q4 2012, Modnique moved beyond pure flash sales, launching “Shops” which are organized by product category rather than by brand and which have no finite expiration date, with each item instead available until all inventory is sold.

The typical Modnique shopper is a “high-low” consumer, according to Modnique VP of Marketing & Mobile Ivka Adam. “We have women that buy buy both $20 tanktops and thousand dollar handbags on Modnique – and probably pair them together,” Adam says. The company’s core demographic is between 28 to 33 years old, and prioritizes style and value – in that order – according to Adam. The company’s average order is more than $150 and includes 2.4 items.

Modnique is not content with just offering about women’s apparel, accessories, and beauty products. About 20 percent of the products listed on the site are for men. The company is also expanding into the kids category. At first, this was a slow and organic expansion, but last week, Modnique announced an acquisition of the remaining assets of failed children’s discount etailer TOTSY. The TOTSY brand won’t survive the merger and nearly all of its employees had been laid off prior to the asset liquidation, but the company’s database of more than 4 million names and email addresses – itself assembled through multiple acquisitions – will form the foundation of Modnique Kids which is due to launch at the end of July.

As part of the deal, Modnique decided to donate the remainder of TOTSY’s inventory, which has a wholesale value of $2 million, to international kids charity K.I.D.S. (Kids In Distressed Situations). The decision was driven by the cost of transporting these goods from their current location in New York to Modnique’s California fulfillment center, and by the fact that the merchandise itself didn’t align with the new site’s planned aesthetic.

Modnique is also unique among its competitors for its decision to handle global fulfillment from a single location in California. Most large ecommerce retailers prefer shipping hubs like Kentucky or Tennessee in the US, and Munich or London in Europe. Modnique doesn’t even go as far as to move its California fulfillment center to Riverside or another inland market more friendly in terms of real estate and labor pricing. Instead, the company’s warehouse is attached to its Redondo Beach executive offices, less than 3 miles from the beach. CEO Einaras Gravrock claims that the company’s operating costs are lower than one would expect, given the location, and that margins are healthy. And given that there’s no VC funding to burn through, keeping costs in line is a major priority for the CEO. Nonetheless, it's hard to imagine that he couldn't reduce expenses with a more traditional fulfillment infrastructure.

The next step for Modnique, beyond its expansion into the kids category, is the launch of an upcoming redesign, the fifth in its three year history. The new Web product, which will feature fully-responsive design and customization for each visitor, was due to launch in June, but was delayed to accommodate the TOTSY integration. Expect to see it within the next month. The company will also launch its first ever native mobile product in the coming months, a long overdue step given that 30 percent of its current traffic and sales come on mobile devices.

Flash sales and off-price ecommerce is a difficult business, and operating globally is no picnic either. Given the attrition rate among those companies that enter the category, it’s hard to question Modnique for trying something different. We have limited data from which to judge the company’s performance, but just the fact that it’s been around for three years and, without outside funding, is still in position to employ 300 people and make category-expanding acquisitions is a feat in and of itself. This is especially rare in an era when Fab has raised $321 million to date without even sniffing profitability.

Modnique is betting its success on the value of connecting consumers across the world with unique international merchandise at discount prices. This strategy necessitates some unusual company building methods, that may pay off or may come back to bite them. But startup success is nothing if not binary. We'll know soon whether going global was the right move.