In 2011, I mentioned that two hottest new retail formats were Gilt (flash sales) and Groupon (group deals)—and that both were, essentially, discounters.

A few years later, we are seeing dark portents for both. Groupon’s woes have been well-documented. And now, flash sales may also face a time of reckoning:

Another prominent VC we spoke with was ready to write off the whole flash-sale sector as the financial equivalent of a slowly lifting hangover. “It’s a horrible business, the margins are horrible, it’s bad for the brands, and they’ll all be either done or relegated to some backwater in the next couple of years,” he told The Verge. “It’s a classic case of investors and entrepreneurs not really understanding how an industry operates.”

Across the board, smaller companies seem to be buying into the doom-saying and shifting away from flash sales entirely.

While both have different business models, the two formats share some similarities, and when people talk about their problems, they tend to overlap: 

– The field got too crowded. When Groupon and Gilt first came on the scene, they were both fresh ideas and offered some truly great deals. Now, with inboxes filling up with a seemingly endless amount of new offers, it all doesn’t feel so novel anymore. And with so much competition, the deals don’t seem as good. 

– We’re in better economic times. It’s not that consumers don’t still want great bargains; it’s that businesses no longer feel as compelled to offer them. In the height of the recession, many companies, from large (big fashion brands) to small (local jewelers), were willing to try anything to clear out dead inventory or get people in the door, even if meant selling at a substantial discount.

Now, they feel less compelled—and some now look at these sites as middlemen. Why run a 50-percent-off coupon through Groupon, and take a 75 percent hit on your profits (since Groupon gets a cut) when you can just run the 50 percent sale yourself, and keep more of the money? The same goes with the brands that put stock on Gilt and the like. And now leading retailers are running flash sales—giving manufacturers fewer reasons to run to Gilt and upset their customers. 

– The sites were a better deal for consumers—and for the sites—than for those who sold on them.

Both formats always claimed what they primarily offered was access to new customers, and that selling on them shouldn’t be looked at as a profitable business in and of itself, but an attempt to get your name out:

[Rue La La’s Renee Klein] notes, “The biggest plus of working with us for many members is our marketing and exposure. A lot of shoppers who grew up on the Internet do not shop at fine jewelry stores. These brands are not in the forefront of a 25-year-old mind. This lets them expose their brands to this audience. 

“We have brands that were only distributed to a handful of vendors,” she continues. “As soon as they had a sale with us, they had tremendous click-through to their homepages, and other retailers ended up picking up the brand. That happens pretty regularly, especially when we are working with an up-and-coming designer.” 

But now businesses are wondering: If those sites do attract customers, will they expect discounts every time? And once people sample the wares, will they come back? So far, the evidence appears mixed.

For all the problems I’m discussing, many jewelers—and jewelry companies—did quite well appearing on Groupon, LivingSocial, Gilt, Rue La La, and the like. (See here for examples.) In such a tradition-bound business, I don’t want to be dissuading anyone from trying something new.

But all this does raise the question: Will other deal-based retail formats also fall victim to over-saturation and a failure to deliver actual bargains? Could this happen to the big brick-and-mortar retail format of the moment: Outlet malls? Or Walmart—whose February sales were recently called a “disaster”?

The age of bargain hunting and choosy consumers is not going away. But consumers are not only choosier, they’re getting savvier—and better at distinguishing real bargains from fake ones.

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