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Zalando Returns Scrutinized Ahead of IPO

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Free float, free returns?
  • Why it matters

    Why it matters

    Readying its IPO, Zalando must satisfy picky customers while boosting profits.

  • Facts

    Facts

    • Zalando is focusing on customer retention and efficient logistics.
    • Ikea has eliminated time limits usually associated with its returns.
    • Zalando can copy Amazon, but rival online discounters are a threat.
  • Audio

    Audio

  • Pdf

Anyone worrying about the imminent initial public offering of the Berlin-based fashion mail-order company Zalando SE might quote the company’s early advertising slogan: “Shout for joy – or send it back.”

Skeptics say the online retailer threatens to be overwhelmed by the large number of packages returned. With roughly half of all products sent back, they say, sustainable profits are tough to achieve.

Yet the right to return products is not an invention of the Internet. As early as 1950, a German start-up company called Neckermann became one of biggest mail-order retailers in Europe. Advertising imagery showed a postman laden with heavy packages accompanied by the slogan, “Buy without risk! Exchange or money back.”

What the Internet has since changed is the sheer volume of mail-order retailing.  An increasing number of consumers have come to appreciate its convenience and new digital technology that makes mail-order retailing even faster and easier. These developments put pressure on high-end retailers, too, because customers expect exchange service from all retail outlets.

Ikea, the Swedish furniture retailer registered in the Netherlands, is taking the exchange policy to new heights as it releases its eye-catching new catalogue. Ikea is eliminating the time requirement for returns, allowing customers to send back products at any point in the future for no other reason than they no longer like it. Even heavily used and defective furniture, Ikea promises, will be accepted with the purchase price refunded.

Most returns can be resold. Very few items are too damaged for resale.

What sounds like madness is actually a highly promising strategy. Tests in smaller markets such as Denmark found only a small number of customers are exploiting the new returns policy, but a larger number are motivated by the generous policy to buy even more.

Word-of-mouth recommendations are more believable than any commercial. It is no coincidence that stories about defective Apple iPhones being exchanged without question remain a popular topic of conversation at parties.

Contrast that with Opel’s “life-long guarantee,” introduced for a short time four years ago, that failed largely because of the vast number of footnotes and restrictions. The Opel misstep illustrates that only genuine goodwill has a positive effect on business.

Zalando managers devised a simple test for their company that provided them with invaluable insights. They purposely did not enclose a pre-printed product return form in some packages sent to customers. These buyers had to print out the forms on their computers. The company found that while fewer products were returned, the test customers were also less likely to make follow-up orders.

Since winning new customers is the most expensive item in a marketing budget, retention of loyal shoppers is critical. Those who shop at Zalando have direct access to the company’s website without using price search programs, giving the retailer the chance to escape the tough Web-driven price competition. And the company not only includes a return form with every delivery, they also add made-to-order adhesive tape for resealing the package.

This is commercially viable if the exchange processes are efficient. Zalando maintains more locations where products are accepted and, if necessary, cleaned for resale, than it has dispatch centers to send out products. Most returns can be resold. Very few items are too damaged for resale.

A glance at Zalando’s financial statements makes it clear that any weakness in comparison with Stockholm-based Hennes & Mauritz, which operates as H&M, and Nuremberg-based Wöhrl, has nothing to do with logistic costs, but gross profit margins. The distance between the wholesale and the retail price is too small for decent profits, requiring Zalando to avoid price wars. That strategy can work if the company creates enough loyal customers who make a point of buying from Zalando and not from the competition.

It wasn’t product returns that drove the nails into the coffin of the mail order company Neckermann, which fell into bankruptcy in 2012 when the company’s sole investor, Florida-based Sun Capital Partners, was unable to restructure. Returned merchandise came in by the truckloads to Neckermann during the post-Second World War economic boom. Problems arose when the company found itself fighting price wars against new discount stores throughout Germany. The company eventually lost credibility with its customers.

Zalando can do things better by emulating Amazon, the U.S.-based role model for all online retailers. Accepting returns without question is just one element, but an important one. Only retailers who have firm control of their operations can afford such a generous exchange policy.

0905 Zalando

 

 

This article was translated by Bob Breen. Jeff Borden also contributed to this story. To contact the author: kapalschinski@handelsblatt.com 

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