Photographer: Joseph Valenti/Bloomberg
Photographer: Joseph Valenti/Bloomberg

As Groupon Inc.’s business model flagged, the company took some of its hard-won capital and used it to expand into other areas such as flash deals on high-end merchandise -- time-limited sales popularized by sites like Ideeli Inc. for fashion (which Groupon bought) and Fab.com for design. The idea behind these sites is that consumers get access to high-end goods at a deep discount but only for a few days. Meanwhile, the luxury brands didn’t need to worry about these sites cannibalizing their full-price sales because they were only selling a limited number of goods for a short time. It’s a high-end form of price discrimination.

But are these sorts of merchandise deals a better business model than coupons that let you get $40 worth of tapas for $20? Fab.com had to pivot away from flash deals after it became clear that they weren't sustainable. And now the company has announced major layoffs:

Anxiety gripped Fab employees on Wednesday after receiving an email, which was reviewed by BuzzFeed, from the company’s human resources department department not to come into the office on Thursday and to await further instructions for one-on-one-meetings.

. . . Fab is planning on laying off between 80 and 90 employees -- or about one third of the company’s staff -- in meetings tomorrow, according to a company spokesperson. The reductions are only for Fab’s New York staff, which will receive interview training and one-on-one resume coaching as part of the separation in the form of a job fair next month.

The flash model does seem to work better in fashion -- an industry that, after all, has long relied on sales to move merchandise. But even there, I confess to a modicum of skepticism.

Look at what happened to places like Loehmann’s, which in the 1980s was a great place to find actual high-end designer fashion at amazing discounts, provided you were willing to put in your time pawing through the racks. Or outlet malls, where, in the 1990s, I scored some fantastic deals on high-end clothing and accessories. These places and their successors now sell products specially made for the discounters, with lower quality and styling. In other words, they are no longer such great deals. Oh, sure, if you’re lucky enough to live in rural Mississippi, you may be able to score some actual high-end stuff at your local T.J. Maxx. But in general, you’re buying cheap stuff at cheap prices.

It’s not that that can’t be a good business -- Walmart has done a great job at it, and TJX Cos. Inc., which owns T.J. Maxx and Marshalls, is doing splendidly. But it’s a tough business. You’re always fighting for margin against other people who sell very cheap stuff to consumers who will not pay a dime more than they have to.

But the flash business is just too small for anyone to stay in for very long -- and getting smaller. As manufacturing lead times shrink, excess inventory naturally also shrinks, because retailers have a much better sense of the market conditions, and restocking is a lot faster. Meanwhile, the Internet makes it harder and harder to make money on the stock you do get, because you have to sell it at the lowest price out there or customers will just go somewhere else.

Ultimately, this was the problem with Groupon’s core business model: The market didn’t actually have a huge excess supply of massages and restaurant meals that could be sold at below cost. And the consumers who went after those deals were relentlessly value-oriented; all they cared about was the lowest possible price. The result was that the coupon sites had to start selling deals that weren’t so great -- and the value hawks stopped buying.

The good news, for those of us who would like to buy nice stuff as cheaply as possible, is that these flash sites don’t work in part because we’re already getting such great deals. The lean manufacturing revolution may have made it hard to get Prada at 80 percent off -- but it’s also enabled the “fast fashion” that overflows our closets. And the fact that we can compare prices instantly on the Internet makes it hard for retailers to squeeze extra money out of us on our bigger-ticket purchases. The old inefficiencies may have made it possible for the determined or lucky to get some truly amazing finds, but the new economy lets all of us enjoy low prices every day.

To contact the writer of this article: Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article: Brooke Sample at bsample1@bloomberg.net.