Business | Zalando

Fashion forward

One of Europe’s most interesting technology companies sells shoes and threads

A platform for all shoes
|BERLIN and Mönchengladbach

PAST the rolling hills, grazing ponies and sleepy villages of North Rhine-Westphalia, in west Germany, a convoy of trucks converges on Mönchengladbach. Here a hangar the size of 13 football fields encloses the logistics centre of Zalando, Europe’s biggest online vendor of clothing and footwear. Inside, people pack boxes with shoes, jeans and handbags; and thousands of parcels progress at fairground speed up and down a 14km conveyor belt where they are weighed, labelled, scanned and sorted before tumbling down slides into trucks bound for 15 countries. Last year Zalando shipped 55m orders, over 100 per minute, from three such warehouses.

The firm’s founders, David Schneider and Robert Gentz, started by selling flip-flops online from their Berlin flat in 2008. They found that Europe’s market for shoes and clothing was fragmented, inefficient and offline. Soon, they were backed by Germany’s Samwer brothers, whose habit of imitating American online businesses earned them a reputation as the copycat kings of Europe. They noted that whereas Zappos, a firm later bought by Amazon, an American online retailer, was selling shoes online in the United States, nobody was doing so in Europe.

Backed by the Samwers’ firm, Rocket Internet, Zalando has grown into a giant. Spending on fashion in bricks-and-mortar outlets is stagnant in Europe, but online sales are increasing by around 15% a year in the countries where Zalando operates. Its sales—of €3 billion ($3.3 billion) in 2015—are rising by around 30% a year (even after taking into account returns of items to the firm). When a series of Dutch shoe stores went bankrupt last year, many pointed to “the Zalando effect”, echoing the impact that Amazon has had on bookshops.

Selling fashion in lots of markets is not easy. Half of what Zalando sells (by value) comes back to it in the form of returns, because of problems with fit or style. It tolerates all manner of customer whims. They can order as much as they like and are allowed 100 days to send back items at no cost. In places where people aren’t used to buying fashion online, such as Italy and Poland, they can pay the postman in cash. In towns and cities, the company is experimenting with collecting returns directly from customers’ homes and offices. All this has yielded 18m shoppers a year (who buy at least one item). Workers may not be as well treated: two years ago conditions for employees in one of its warehouses came in for criticism, as they have at Amazon. Zalando claims to have improved them.

Early on it was difficult to get meetings with fashion brands. Christoph Lange, the company’s chief product officer, had to lie and say that Zalando had a physical store just to get in the door. Makers of clothing thought internet selling was evil, he says. Representatives of Topshop, a British mid-market brand, walked out of the two firms’ first meeting. Now it gives Zalando exclusive rights to sell its ranges in Europe. Zalando has relationships with 1,500 brands that supply 150,000 articles. It sells mostly well-known labels. Another online fashion retailer, ASOS, sells only 850 brands of clothing and shoes and relies heavily on its own label. A lure for retailers and brands is that Zalando saves them from having to invest in e-commerce themselves.

It also saves them from having to get to grips with an unfamiliar office culture. Zalando has a Silicon Valley-inspired work environment, holding “fuck-up nights” to celebrate failure and “hack weeks” to cook up new ideas. It encourages its employees to abandon hierarchy and structure for what it calls “radical agility”. It has a 1,350-strong, and rapidly growing, technology team. Among its other assets are its software, which it built itself, and its user-friendly apps (two-thirds of all traffic goes through mobile phones). Other, older German companies, such as Otto and Lidl, are trying to mimic Zalando’s startup feel, notes Thomas Slide of Mintel, a market-research firm.

Big data, in style

Zalando pays close attention to data. It gleans a wealth of numbers from the more-than-5m daily visits to its site, and some brands and retailers of the bricks-and-mortar sort give it access to their stock counts. Both sets of figures help improve the firm’s forecasting of fickle fashion trends, its use of targeted ads and the speed of its responses to shifts in weather patterns or fashion tastes. Through data-mining it can spot the trendsetters among its customers and stock up on what they buy. In future it wants to sell its insights to the rest of the industry. “We want to keep tabs on every fashion item in the world,” says Rubin Ritter, Zalando’s chief financial officer.

Its success has not gone unnoticed, however. Investors in Zalando have done well recently—its shares have risen by 19% over the past three months, compared with 8% for the DAX, Germany’s main share index—but the main worry is that Zalando could be overrun by Amazon, which plans to expand in fashion, or by Alibaba, a Chinese e-commerce juggernaut that is expanding in Europe. Mr Ritter’s argument that Amazon and Zalando can comfortably co-exist rests chiefly on the fact that Amazon is pursuing the more price-conscious shopper, whereas Zalando is after a higher-value, more brand-conscious segment. The company believes that for such customers, shopping for clothes, shoes and accessories is an emotional activity; shopping on Amazon is just a transaction. “Amazon lists prices, we give advice,” sums up Mr Lange.

Not everyone is convinced by that, but many agree that Zalando has a head start. Amazon can copy it, but it would be hard to outperform the German company to the point where people start switching enmasse, says Max Erich of ING, a bank. Eventually, though, Amazon will build a strong offering, and consumers will be called upon to decide: do they want a one-stop-shop for everything, from electric toothbrushes to Jimmy Choo shoes? Zalando’s hope is that there is still something special about shopping for fashion, even if it’s done while waiting for the bus.

This article appeared in the Business section of the print edition under the headline "Fashion forward"

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