August 29, 2012

Zalando – Germany’s online "shoe-ting" star

photo: sf-zalando Still looking to make a profit
This company may sound like a white rabbit with long ears which the magician pulls from a top hat at the circus. In reality, it is the wonder boy of German e-commerce.

In less than four years, online shoe and fashion retailer Zalando has developed from a tiny start-up operation to a major category killer.

The Berlin-based operation more than tripled net revenues to €510m in 2011, and the €1bn-sales mark could be hit this year.

This stunning growth has been fired by massive investment in colourful TV spots and catchy online banners.

Nielsen computes that Zalando spent around €90m gross in advertising last year, giving the brand a 95 per cent recognition rate among German consumers.

Meanwhile, Zalando has rapidly expanded into new markets and categories. The internet “shoe-ting” star is now active in twelve European countries.

International web shops

Web shops have recently been opened in Denmark, Finland and Belgium; and Poland is to follow soon.

“Half our annual sales already come from outside Germany,” says Rubin Ritter, CEO of the limited company.

Another growth engine has been the extension of Zalando’s core shoe offer to include new categories such as clothing and household accessories as well as own label and designer brands.

“This enables Zalando to cross-merchandise and to up-trade, which increases sales per customer,” says Dirk Morschett, e-commerce expert at the University of Fribourg in Switzerland.

The company states that non-footwear already accounts for more than half of annual revenues.

Big sales, more logistics, high costs

In the online business big sales often mean high costs. Insofar Zalando is a victim of its own success.

Marketing and expansion, free delivery as well as inventory, IT & logistics costs have all weighed heavily on Zalando’s bottom line.

Following the opening of a third fulfilment centre in Erfurt on August 1, the company feels, however, that it now has the logistics capacity to meet growing requirements.

With 78,000m² of floor space, the Erfurt site will be up to full capacity by the end of 2013.

To date, Zalando has invested just under €60m in developing its logistics infrastructure. €50m of this went to equipping the fulfilment centre in Erfurt.

“The bigger we get, the more we see logistics as a core competence,” says David Schröder, MD of service subsidiary MyBrandsZalando. “It’s a key point of contact with the customer.”

Returns — an Achilles heel

The company’s 100-day policy on returns doesn’t just pose a logistical challenge. It is also a costly promise to make to customers when online shoe return rates are so particularly high.

Some experts estimate them at nearly 70 per cent, but Ritter calls this figure “much too high” and stresses that returns are an “essential part of our business model".

In 2010, Zalando posted losses of €20m, and trade observers believe that these increased last year.

“But you have to see this within the context of some tremendous growth,” says Ritter.

Gerrit Heinemann, online retail expert at Niederrhein technical university, sees such losses as inevitable. “As a rule it takes six or seven years before e-commerce start-ups begin to make a profit.”

Heinemann also feels that Zalando’s losses are “insignificant compared with the huge sales volume they’ve built up,” particularly as the company is adequately capitalised.

Investment story

Investors also clearly believe in Zalando’s future. These include Karl-Erivan Haub, partner at Tengelmann Group, which holds an 8 per cent stake in the company.

Further backers include Rocket Internet (44 per cent), Kinnevik (16 percent) Holtzbrinck (13 per cent), DST (9 per cent), J.P. Morgan Asset Management (1.3 per cent) and Quadrant Capital Advisors (0.9 per cent). Company management holds a further 8 per cent.

Obviously, they all want to make money. People who know the trade think it probable that there will be an exit in the coming three years.

Ritter, however, stays vague: “No one invests in long-term projects such as our fulfilment centres, if they’re only looking for a quick buck or two.”

Related article in German:
Lebensmittel Zeitung, no. 33, 17.08.2012, by Silvia Flier & Elisabeth Kapell


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