e-commerce

Zalando's fashion empire

zalando executives
From left: David Schneider, Robert Gentz and Rubin Ritter. Source: Daniel Hofer

Company founders love to tell stories about their early bootstrapping days. Robert Gentz, one of Zalando’s founders, likes to tell the story of how he once personally delivered a pair of boots to an anxious customer who happened to live near his home. That was Christmas 2008, the year Zalando was founded, long before it became Europe’s fastest-growing company ever. Before it achieved revenues of €4.5 billion ($5.5 billion). Before its market capitalization hit €11 billion.

Back then, new employees had to assemble their own Ikea desks. Today, the fashion empire employs 14,000 people in 15 countries; 5,000 of them work in its Berlin headquarters alone. Every season, Zalando offers up 300,000 new items for sale from 2,000 different brands, including 16 in-house labels, and it plans to enter the beauty market in March. And it plans to keep on growing: It’s on track to yet again double its revenues by 2020.

For all its success, Zalando was initially the product of failure. Mr. Gentz and co-founder David Schneider first tried to start a Facebook competitor in Latin America. When it failed to take off, they were so broke they had to be flown home from Mexico by Berlin-based incubator Rocket Internet. In a last throw of the dice, they used €50,000 of Rocket’s money to start selling flip-flops online, inspired by the success of American shoe retail startup Zappos, which hit the $1 billion sales mark in 2008 before Amazon acquired it in 2009. It was a harrowing time; just two weeks before Zalando’s launch, Lehman Brothers went spectacularly bust.

But it turned out the timing was perfect. The global financial crisis bankrupted traditional mail-order companies in Germany such as Quelle and Neckermann, clearing the field for a nimble startup with big ideas, scalable operations, and popular products. In 2010, a series of iconic TV ads made Zalando a household name, driving revenue growth from €6 million to €150 million that year. In 2014, the company entered the stock market, and today it’s listed on the second-tier MDAX index, knocking on the door of Germany’s blue-chip DAX index.

Critics said the company’s policy of free deliveries and free returns couldn’t work and that its pay-on-delivery system was a recipe for disaster. But in fact, the ideas enabled the company’s dizzying growth, attracting German customers who had been reluctant to buy clothing online. Today, 50 percent of what Zalando sells is returned. That might sound like a problem, but the company loves that figure: “Higher return rates mean people are putting more stuff in their shopping carts,” says Delphine Mousseau, vice president of markets.

Massive expansion meant sizable initial losses. The company is profitable now, although its management doesn’t tend to celebrate the bottom line and keeps the focus on other performance metrics. All along, the company culture has been marked by an extraordinary willingness to experiment and a relentless commitment to speed and innovation. International expansion has been central to its revenue growth, with the firm jumping into one European country after another. Today, Zalando says it can get operations up and running within four weeks of deciding to enter a new market, and it plans to tackle two more European countries this year.

But none of this is easy to manage. As an organization, Zalando has three pillars: the fashion operations, the vast IT operations and the complex logistical operations to ship products to customers and process returns. Executives’ herculean task is to keep them working together, all while continuing exponential growth.

zalando fashion, german ecommerce
Bootstrapping, the Zalando way. Source: Reuters

The public face of Zalando is the online fashion portal, run from the company’s Berlin headquarters. In this quirky, colorful hive of activity, thousands of young staffers make constant adjustments to respond to consumer demand, while also tackling longer-term problems, like the gnarly sizing discrepancies among various brands from various countries.

On one level, Zalando wants to be a dream boutique featuring every imaginable brand in every possible size, without the delays or the snooty sales assistants. But it also strives to be more than just a neat shopping platform. As much as anything, Zalando wants to feel like a happy home for its customers. This wish is driven by hard-headed logic, not sentiment: With competitors just a click away, online customers are fickle creatures. Only happy customers will stay to buy more. Currently, the company has 22.2 million customers, on average coming back 3.8 times a year, spending €62 each order.

Both Frankfurt-listed Zalando and Otto.de, the latter owned by the Otto Group, are hoping to make a dent in the continental success of Amazon, which achieved $177.9 billion in worldwide sales in 2017. In 2016, Amazon.de was the largest online retailer in Germany, with sales of €8.1 billion. Otto.de followed with €2.7 billion, and Zalando took third with €1.1 billion. A more direct competitor for Zalando might be Asos, a British fashion e-commerce company whose sales increased 34 percent in 2017 to £1.9 billion ($2.6 billion).

Data drives Zalando’s accelerated, increasingly specific operations. Technology teams are based in the hubs of Dublin, Lisbon, and Helsinki to work on web design, app development – 60 percent of orders come by smartphone – search engine optimization, machine learning, artificial intelligence and predictive analytics. On Black Friday, a technology team holed up in a situation room, adjusting prices in real time to optimize for demand while managing waited. Swathes of shopper feedback data, captured and analyzed, might reveal that high heels in Spain need to be a few millimeters higher. Three to four weeks later, the new, slightly taller shoes are for sale. But this isn’t good enough for Zalando: “Three weeks is not bad by today’s standards, but we believe in a future where new products can be created in real time,” says Jan Wilmking, head of the company’s in-house brands.

“We believe in a future where new products can be created in real time. ”

Jan Wilmking, head of in-house brands at Zalando

Logistics is the keystone part of operations where products enter the real world. Fashion dreams and algorithmic omniscience are nothing if packages don’t get where they need to go. Half of Zalando’s staff work in its eight logistics centers across Europe. Two more in Italy and Portugal are under construction. The biggest of all is located in Erfurt, in Eastern Germany: Every new Zalando employee must visit Erfurt to see how it all works. The company’s founders are said to come in sometimes to help with packing.

In the logistics center, efficiency looks like chaos. Computer-driven fulfillment doesn’t require orderly shelves, just perfect data about where everything is. For the moment, humans still fill customers’ boxes; “pickers” are sent around the warehouse on computer-generated routes, designed for maximum efficiency.

The challenges are mind-boggling. Their goal of 25 percent annual revenue growth means doubling Zalando’s logistics capacity every three years. Customers are increasingly demanding; they want delivery at specific times, same-day deliveries, packages brought to wherever they are right that moment. So Zalando is working with a new generation of startups to make those requests reality, including Parcify from Belgium and Hoard from Germany.

zalando boxes, fashion ecommerce
Amazon who? Source: DPA

Ten years is a long time in any business, but for startups, it’s an eternity. Zalando has revolutionized Europe’s fashion business, experts say, annihilating many small traders in the process. The number of independent fashion retailers in Germany has sunk by half in the past 10 years.

Last year, the company, wary of becoming too corporate, undertook a total internal reorganization, creating smaller teams and distributing tech staff across every part of the company. There have been reports in the past of poor working conditions for warehouse staff. But German trade unions say the company is doing OK: Their bosses listen and learn, unlike other major online retailers. “Zalando isn’t small fry anymore, but it hasn’t turned into a shark,” one union official says.

Today, Zalando is more than just a fashion retailer, like Google is more than a search engine, and Amazon much more than an online bookseller. Old business models persist but become a means to an even bigger end. Its most precious asset is its ever-growing database, with detailed knowledge of the wishes, desires, and habits of a vast consumer base. Ultimately it could offer an operating system for every fashion brand on earth.

In 10 years, Zalando has gone from selling flip-flops to become a dominant force in European fashion retail. Like those other internet giants, the company is thinking on a huge scale now. The question now is not what Zalando is, but what it might become. It is hard to predict exactly what that will be, not least since the company has not yet had to deal with hard times or shrinking markets. But it is clear that Zalando wants to be more than just a retailer, no matter how big.

Miriam Schröder is based in Berlin and covers the city’s start-up scene. Thomas Tuma is a deputy editor in chief at Handelsblatt. Brían Hanrahan adapted the story for Handelsblatt Global Edition. To contact the authors: m.schroeder@handelsblatt.com, tuma@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!