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Nordstrom is used to being the retailer where shopping sprees happen. But sometimes it’s more fun to go on one of your own.

Yesterday, the high-end retailer announced that it is acquiring flash sale site HauteLook for $180m in stock, with an additional $90m in stock subject to a three-year earn-out.

The deal marks one of the largest acquisitions yet in one of the internet's hottest markets: flash sale websites which offer consumers deep discounts on products ranging from handbags and dresses to houseware and furniture.

Major players in the space, such as France's Ventee-Privee and New York-based Gilt Groupe, have raised substantial amounts of money from investors, and have been the subject of big-money acquisition rumors.

That Nordstrom, a brand synonymous with high-end fashion retail, would spend up to a quarter-billion dollars purchasing a flash sale company that launched less than five years ago speaks volumes about the market's rise.

But despite the excitement Nordstrom’s purchase will create, the flash sale space is facing a growing number of challenges. Sites like HauteLook boomed as the economy tanked. This was primarily the result of two things: newfound frugality amongst consumers, and boatloads of excess inventory that retailers and manufacturers needed to offload.

Now, inventories have been brought back into line with demand, so there's less excess inventory floating around, and more competition for it. That makes being a fashion-only play in this space tougher, so more and more of these sites are expanding into new markets, such as travel.

Another challenge: consumer sophistication. Everyone loves a bargain, but 'bargains' are a dime a dozen these days. Subscribe to any of the mailing lists for popular flash sales sites, and you're apt to notice that the same products frequently resurface, or that the deala aren't as attractive as they first appear, since most retails are selling the products offered at less than list price as well.

Finally, inflation in the cost of raw materials is expected to result in rising clothing prices, which will impact the entire fashion food chain, including flash sale sites.

Does any of this mean that Nordstrom's purchase of HauteLook is a bad one? Not at all. As a standalone sales channel, the flash sale is of questionable viability long-term. But the flash sale can be a valuable tool for multichannel retailers.

In acquiring HauteLook, Nordstrom not only acquires a large base of customers, many of whom may not be shopping at Nordstrom stores, it also gets the brand, which will remain as it plans to operate the acquired company as a wholly-owned subsidiary independent from the main brand.

This may prove to be the key to the deal: with HauteLook, it can cater to cost-conscious shoppers online without having to make the flash sale an integral part of the upscale Nordstrom brand.

With this approach in mind, it would not be surprising to see further M&A in this space over the next year, as well-known retailers find that it makes more sense to acquire a flash sale brand than to build one in-house under their existing brands.

Photo credit: prayitno via Flickr.

Patricio Robles

Published 18 February, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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