31. July 2012–
Gruenderszene's Joel Kaczmarek gets an insider's tips on what's in store for top German retail site Zalando...
Vast growth, a huge turnover and an expansive reach: these facts mean online shopping giant Zalando has gained recognition as one of the top German internet companies. Surrounding these spectacular results is the speculation on what kind of an exit strategy is likely for Zalando. Will Amazon – after already purchasing Zappo – be onboard to buy the Rocket e-commerce battleship? Or is the temptation to float the company on the stock exchange too great for the company to be sold to a buyer? If the insider information Joel Kaczmarek heard is true, Oliver Samwer will be making huge profits through a clever business model.
Not just shoes: Zalando’s 250 techies, 12 territories and €500 million turnover
In the past year, the four-year-old company made a whooping €510 million euros in net revenue and rumor has it that these sales figures are likely to come close to being tripled this year (the internal source reported a likely €750 million in revenue).
Zalando is also increasingly seeing its sources of revenue changing. More than half of Zalando’s profits are made in categories other than shoes and achieved in markets outside Germany. The online giant has forayed into 12 markets in Europe alone, while its global branches are evidence of its growth and staying power.
Zalando’s astonishing web presence, which sees 100 million page views per week, is maintained by a dedicated workforce of close to 10,000 employees, 250 in the IT department alone. If you are inclined to believe The Frankfurter Allgemeinen Zeitung, Zalando could have up to 3,000 jobs available by the end of the year. With these numbers, Zalando would be employing a similar amount of staff that other shopping giants are letting go.
Rapid expansion and expenditure
The excess capital is being put to good use by Zalando, the company building three large holding and shipping centers in Erfurt, Brieseland and Grossbeeren, all for the (small!) cost of over €100 million. A new technology hub is also being established in Dortmund to support the growth.
Considering the remarkable growth and huge expenditure of the company, you can’t help but question how sustainable Zalando really is. I set about wrapping up Zalando’s biggest cost drivers to help answer this question:
- Pre-financing: Just like other trading companies, Zalando needs to pre finance all its products. The Berlin company mass orders stock from a variety of brands to pack their warehouses. If the items prove to be unpopular amongst the fashionistas, the shelves are soon full of unwanted products. It's not without reason that Zalando opened the Zalando Lounge to create their own shopping club and boost sales.
- Warehouse costs: When buying products there is always the issue of where they will be housed. With three huge logistical centers, you can imagine the complexity of Zalando’s undertakings.
- Postage costs: As Zalando covers the costs of both postage and returns of items the shopping giant has high costs that are most likely reflected in the product prices. The work force required to dispatch vast quantities of products means that Zalando requires a workforce for three different shifts to ensure the work continues overnight. This is a costly procedure!
- Returns: An unfortunate fact within the fashion business and particularly online shops is that people tend to change their minds and some clothes are best left for models to wear. The standard percentage of returns in the fashion industry is up to 40% of products. However, insiders rumor that returns to Zalando are known to be up to 80%, where returning items is convenient and a free service for customers.
- Marketing: From advertising on Kaisers receipts to spots on Germany’s Next Top Model, expensive SEO and SEM campaigns and online marketing, Zalando is sparing no cost in publicising its products. On the plus side, this advertising saturation has resulted in 60% of Germany’s population recognizing the brand. On the other hand, the expenses are enormous.
Exit Boost: Zalando wants to establish its own brand
Bearing in mind the costs of Zalando, the question remains: how on earth could Zalando be sold? One rumor links the exit strategy to a model used by Chinese fashion company Vancl. A geographically closer example is Barcelona-based fashion-trading company Inditex, the creator of globally ubiquitous label Zara. The Spanish company is able to accomplish the astonishing feat of creating and distributing a fashion line in two weeks. If Zalando uses a similar business model its profits will increase significantly.
External brands sold on Zalando result in a guesstimated profit of 30-60%. The profit margin could be significantly higher with an in-house brand, possibly between 60 and 80 percent. For retailers like Zalando it is common to have a sale of about 1.3 times the net yearly turn over.
This means that Zalando is potentially worth €663 million (1.3 x €510 million). If its profit margin increases it’s possible that a multiple of between 2.6 and three is realistic. Taking into account the likelihood that the profit margins of their own brand will be higher and the dispatchment giant could be worth a staggering €2.25 billion euros (3 x €750 million).
Zalando: soon to be the newest member on the stock exchange?
To promote their own products, Zalando has already begun aggressive advertising, placing the Zalando-Collection in an attractive position on the homepage and the Zalando brand is already in play with Zign.
Zalando already has such a high buying volume that it is among the most important retailers in the fashion industry. This status will only be raised when Zalando establishes its own brand, as the retailer will have more attractive and competitively priced products to offer its customers. Unlike Zara, Zalando will have the added benefit of not needing to build any shops to house its products.
The question of how Zalando plans on converting their assets in cash remains. Both huge retail corporation Otto and e-commerce giant Amazon, who has already bought Zappos, spring to mind as potential buyers. However, I personally believe (particularly after chatting with inside contacts) that it's far more likely that Zalando will be floated on the market. Within the next three years we could see Zalando on the stock exchange, and, with 60% of Germany recognising the brand, this move looks good for the online giant. If the growth and international expansion continues as they have been it may be the investors that are “screaming for joy” rather than the customers.
The lesson is clear: Zalando’s potential strategy is aggressive and effective
If you believe the insider information that I received, the strategy will be long-sighted and well researched, which would match Oliver Samwer’s aggressive tactics. Zalando will start by engaging a high cost marketing offensive on all channels, establishing Zalando as the go to place for all things fashion, and will pursue their own brand presence precipitating a likely move on to the stock exchange.