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How Zalando Is Fighting Off Amazon and Building the Spotify of Fashion

Ten years ago, Robert Gentz and David Schneider founded what has become Europe’s biggest fashion e-commerce player. Now, Amazon is targeting their turf, but the duo has bigger plans: an operating system for fashion.
Zalando logistics centre | Source: Courtesy
By
  • Vikram Alexei Kansara
BoF PROFESSIONAL

BERLIN, Germany — While the US and China have birthed technology tech goliaths like Google, Facebook, Apple, Amazon, Alibaba and Tencent, Europe has produced only a handful of major internet success stories. Against the odds, German university friends Robert Gentz and David Schneider teamed up with Berlin-based start-up incubator Rocket Internet to launch Zalando, which, ten years later, has become one of the world's largest fashion e-tailers with 2017 revenues of €4.5 billion ($5.3 billion), more than double the sales at Yoox Net-a-Porter.

Gentz and Schneider first began working together, not in Europe but in Latin America, where they founded a social network for universities in Mexico, Argentina and Chile. The venture failed and the two — so broke they couldn't afford plane tickets back to Germany — accepted an offer from Rocket Internet's Oliver Samwer to work off the cost of the flights at his price comparison portal Tarifas24. But soon they were ready to launch another venture of their own.

Taking liberal inspiration from American e-commerce player Zappos, they partnered with Rocket — a specialist in taking proven business models and adapting them to new geographies — to launch a clone selling shoes online in Europe, where the complexities of a market fragmented by local taste and logistics were a deterrent to US competitors.

Leveraging a proven model enabled the founders to bring a laser-like focus to execution, much like other Rocket-backed firms. But Zalando surpassed its peers, growing rapidly and adding apparel and new markets to its strategy. In 2014, Zalando went public on the Frankfurt stock exchange in Germany’s largest tech flotation since the listing of Deutsche Telekom in 2000.

Today, Zalando has a market capitalisation of $11.85 billion and is building an “operating system for fashion,” providing logistics, technology and marketing solutions to brand partners alongside its wholesale business. But Gentz and Schneider are facing their toughest test yet. American e-commerce behemoth Amazon is targeting Zalando’s turf.

BoF’s Vikram Alexei Kansara spoke with Robert Gentz and David Schneider to discuss Zalando’s journey from start-up to one of Europe’s biggest internet success stories, the evolution of its business model from wholesale pipe to technology platform and how the company is defending against Amazon in a battle for Europe.

BoF: Let’s start at the beginning. What were you doing before Zalando?

David Schneider: Robert and I met at university. The first thing we came up with was a social network in South America. You had Facebook in the US, and you had local versions in Europe, but there was no great solution there, so we collected capital here in Germany and went over Mexico to build this. It was an experience. Start-ups are always a bit chaotic, but if you are doing a start-up as a German in South America, it’s even more chaotic. It didn’t work. But we definitely wanted to do something digital, and with e-commerce there was a huge wave coming.

What was the specific opportunity that you saw?

DS: How did two non-fashion guys start selling shoes online? E-commerce had so much room for growth. But at the time it was mostly need-based things like books and washing machines. There was a lot of space to create different experiences for emotional products. At the time, the fashion industry was barely digitised. Shoes was a logical starting point. There was the smallest offering online, so we thought we could quite easily add value. It was a lot of trial and error. We started with a very basic website and shoe boxes stacked in our basement.

You also started with a business model that was proven. What did you learn from Zappos and how did you apply that to the complexities of Europe?

DS: Yes, of course, we looked at Zappos. I think it always helps — especially if you need to convince someone to invest money — to have a proof point somewhere else. But we soon realised that Europe was very different. It’s basically one big market on one hand, and on the other hand a puzzle of many different individual markets. And, in each market, you have different tastes, trends, brands. In fashion, you already have quite a long longtail, then there are around 30 different payment methods across Europe. There are different delivery methods and places like Switzerland where you have customs. When you compare all of these things to the US market, where you pay with a credit card and there is UPS, Europe is more complex. We understood the importance of building a strong tech and operations backbone to solve this. I guess someone else could’ve cracked it. But when you come from the US or China, it probably takes quite a while to actually understand how to implement this adaptation.

Zalando is one of Europe’s biggest internet success stories. What did you do right?

Robert Gentz: It was actually very, very helpful that we didn't understand the shoe industry. We just understood what people searched for and provided the appropriate assortment. We didn't build a traditional assortment. Data-driven, fact-based decision making very early on was very important.

The other thing was understanding the importance of convenience; how important it is to be very focused on a great experience in terms of delivery and the opportunity to return and call customer service. In 2010, I actually said we need to own the logistics, the experience. And I think in retrospect it was a very, very important decision.

Zalando co-founder David Schneider | Source: Courtesy

Then, there was the bravery to go from shoes into fashion: to test it out, look at the data and then scale it. And then to test out the value proposition as a European one or just a German one. We tested this in 2010. The Netherlands worked and then we went within 24 months to 15 markets in Europe.

DS: At the beginning of 2010, we also said: let’s go for TV commercials. It was a bit crazy because, back then, we had €6 million in revenues, but we went to an investor and said: “We’re going to scale this up to €150 million.” Everyone told us it wasn’t going to work, but we decided to go bold and launch TV commercials. We didn’t even have the product inventory to really do that and our office looked like a trading floor. Everyone was calling up brands to see if we could get more inventory. We hit the number almost exactly in the end.

We also invested heavily in tech from the very beginning — and I think it was the right decision. Consumers are going online, but they are going mobile as well and with mobile you have special characteristics. The market consolidates around certain entry points and people are looking for those entry points. I mean, how many apps do you have on your phone?

If I want to listen to music I go to Spotify. Fashion is going in that direction as well.

It’s a very interesting question. There’s essentially one app for transport (Uber) and there’s one app for music (Spotify). Will we see the same dynamic for fashion?

DS: Yes. I am not saying there is only one winner and nothing else. Of course, there will always be specific niches. Also, individual brands will always have their fan pools. But whenever you think of fashion, you will go somewhere — just like with music. If I want to listen to music I go to Spotify and adjust it to my personal tastes; you can follow people and artists.

Fashion is going in that direction as well. We want to build that one destination which is the entry point for consumers and the most relevant platform for brands. I don’t think you will have one app for shopping. But you might have one app for fashion and that is what we are going for.

RG: In music, not so long ago, you would've never thought that on one platform there would be someone who is very much into rock music and someone who is very much into country music. The rock music fan doesn’t want to see a catalogue full of country music. And the big conviction was that there would be several different interfaces for music. But what you see now is a couple of interfaces that actually have very huge catalogues. And they manage to create a personalised experience, so you are not annoyed about too much irrelevant music on Spotify.

Tell me about Zalando’s evolution from wholesale to platform.

RG: We did a bigger strategy around 2013 to 2014 and one of the basic insights coming out of this was that there will be a major shift in the fashion industry towards total digitisation. We also examined how ecosystems had evolved in different geographies. We specifically looked at China and how well companies such as Alibaba or WeChat developed ecosystems by platforming their assets. We also thought about how, when we only offer a wholesale proposition to fashion brands, they will always try and invest around us in order to gain more control and a better understand of the value chain. We would rather present them with opportunities that solve problems and align our incentives and assets, so we decided to go from being a retail company enabled through technology to a technology company that enabled retail.

DS: We were a retailer that was scaled and worked properly. But there was so much room for further improvement in fashion e-commerce and this was part of the prospectus for our IPO. In fashion, there are still huge inefficiencies. Product development takes a lot of time; there are big bets you need to place; and that’s why there is so much waste. Your inventory — you can get it completely wrong! The retailers, the brands, the warehouses — what if you started connecting inventory and data? This is how we came up with building an operating system for fashion.

Really tear down the barriers for consumers. Make everything accessible and let the consumer decide by taste and not by product availability in a physical store. Personalise it and make it convenient. And on the industry side, help brands to digitise and make this connection. We felt we could make a very strong contribution and not only to our own business.

We decided to go from being a retail company enabled through technology to a technology company that enabled retail.

Wholesale currently still drives the vast majority of Zalando’s revenue.

DS: Yes, the vast majority is still a retail business. We can grow the retail business 20 to 25 percent over the next couple of years and we don’t see any reasons not to scale it further because we see that it works. But the other component, which is getting to double-digit [revenue contributions] now, is our partner business, meaning brands connecting directly and selling directly on the platform, earning commission for us. And then we have additional services like marketing. We have already done around 200 brands now — a thousand campaigns. We’ve leveraged our reach, our media channels, our data.

RG: I sometimes describe it this way: if this was a restaurant, we used to have one meal on the menu and now we have a ton of different ones. There are a lot of different ways of integrating assortment with us. It might be that a brand can actually deliver very well from its own warehouse in one country, but for example, can't do it in Norway or Switzerland. So, it's pretty much like a big menu of different ways of integrating with us. But for sure, wholesale is still a very, very big piece of the business because the complexities that we have here in Europe.

What are the advantages and disadvantages of building Zalando in Europe?

RG: Let’s start with the disadvantages. Firstly, the consumer market in Europe is very fragmented. In order to build a proposition for 350 million Europeans you need to have tons of different cultures, languages, currencies, payment methods. It means that the solutions that we're building must be very much localised. And in order to achieve a certain scale, we need to invest a lot more than a company from the US or China because they have a whole market which is more or less homogeneous with one language.

The second is the missing ecosystem of big technology companies. When it comes to management of tech teams at scale, there are not many people you can hire from other companies and learn how they do it. It is very different from what you have in the US, where Google hires from Facebook, and Facebook hires from Amazon and so on. The learnings that these companies have achieved over time are very fluid between these companies today. Here, we have to put a lot of effort towards getting people from the US and similar environments.

The third big disadvantage is the access to capital. In Europe, you have to earn the right to a big vision but in the US and China it’s different. But these disadvantages you can turn into a big advantage because it's so hard in Europe. Everything that we've built takes more time; it’s more complex. But it is also more sustainable.

Zalando co founder Robert Gentz | Source: Courtesy

Let’s talk about Amazon, which is ramping up its fashion strategy in Europe. How are you defending your turf?

DS: The main point of differentiation is our focus on fashion: we can create a dedicated solution. As I mentioned, why we went into fashion in the first place was to build a solution for emotional products. For both consumers and brands, we can create a specific environment. We also try to create a very relevant brand and, as a result, we can differentiate through assortment. Sometimes you can be surprised how little we overlap with Amazon: about 80 percent of our assortment you cannot find on Amazon today. Then, there’s the recency of product. For us, 90 percent is current season, whereas for Amazon it’s the other way around.

RG: It’s a similar question for Spotify or Netflix, because Amazon and Google do it as well. But I think for the consumer Netflix very clearly stands for entertainment, Spotify stands for music and Zalando stands for fashion. And Amazon stands for everything, but certainly not only for entertainment or music or fashion — it stands for everything and nothing in the end. This is something we really believe in: the power of the brand and power of being top of mind for fashion. Zalando’s focus on fashion means we can also provide a lot of differentiation with the experience. And then there’s our partners: we have very strong alliances with fashion brands.

Ten years later, how do you stay agile and innovative?

DS: To be fair, I think it is one of the biggest challenges, because when you grow — and we have 15,000 employees now — keeping that entrepreneurial culture is a big challenge. We always try to encourage people to do things, to make decisions, to test. It really starts with recruiting the right people. At the beginning it was a necessity: if we wanted to scale, we had to bring in people that we trusted and empower them. If it didn’t work, we would talk about it directly. But trusting people is what we did very implicitly at the beginning and what we are trying to do more explicitly now as the company grows.

Company culture is something we didn’t pay enough attention to at the beginning. We were always so focused on running our business, but I would recommend to other companies to take very explicit care of the culture you build, because if you have the right team and the right attitude, you are able to completely turn around a company. We went from completely desktop to completely mobile and from retail to platform thinking. For these kinds of strong shifts, you need a very agile and entrepreneurial mindset and you can only do it with a certain culture.

Zalando is a different company today than it was in its early years. Why are you still the right people to lead the company?

DS: It is a totally valid question and we’ve raised it ourselves. We are always open to these things. As a founder, you can more credibly say, this is what we all aim for and let’s all go in this direction. If you bring in a professional manager, it’s not impossible either, but it’s harder to say, look, we are in this retail space, but we want to develop this great platform, let’s go for it. And motivation-wise, even after 10 years we are still at a couple percent of what we think we can do. As long as we can translate that motivation to the company, we are good.

This interview has been edited and condensed.

Disclosure: Vikram Alexei Kansara travelled to Berlin as a guest of Zalando.

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