SÃO PAULO, Brazil — When former management consultant Malte Huffmann teamed up with Philipp Povel, Thibaud Lecuyer and Malte Horeyseck to launch Dafiti, Brazil was riding a wave of growth that put new spending power and digital connectivity in the hands of the country’s expanding middle class. But as disposable income and Internet adoption grew, e-commerce remained a small slice of the overall fashion retail market in this South American giant, presenting what they saw as a significant growth opportunity.
With backing from German start-up accelerator Rocket Internet, the founders turned Dafiti, which began by selling shoes, into the largest fashion e-commerce player in Brazil, taking a proven business model and successfully adapting it to create a so-called ‘clone’ optimised for the context of the local market, overcoming trust issues and logistical hurdles.
The advantage of taking a proven business model to new markets is that you can really focus on the execution. Execution is the most essential part.
Dafiti has since expanded beyond Brazil into the next largest markets in Latin America — Argentina, Chile, Colombia and Mexico — becoming what is often dubbed “the Latin American Zappos.” In 2014, the company generated revenue of 190 million euros and was folded into the newly formed Global Fashion Group (GFG), comprised of five Rocket Internet-backed, emerging market e-commerce players: Dafiti (Latin America), Jabong (India), Lamoda (Russia and CIS), Namshi (Middle East) and Zalora (Southeast Asia and Australia).
Yet Dafiti’s biggest market remains Brazil, where the economy has faltered. Indeed, economists surveyed by the country’s central bank expect Brazil’s gross domestic product to shrink by 1.5 percent in 2015, the nation’s worst economic contraction since 1990. But this has not deterred Dafiti from expanding its presence in the market. At the beginning of July, GFG announced the acquisition of two additional Rocket Internet-backed Brazilian e-commerce players — sports and outdoor e-tailer Kanui, which is largely focused on the surf and skate lifestyle verticals, and kids and baby e-commerce business Tricae — both of which will be integrated into Dafiti.
BoF's Vikram Alexei Kansara spoke to Malte Huffmann, managing director and co-founder of Dafiti, to discuss the advantages of building a ‘clone,’ the power of execution, the current economic situation in Brazil and the evolution of the business.
BoF: Let’s go back to the beginning. What were you doing before Dafiti?
MH: I'm German. I studied in Germany. After university, I worked in management consulting at the Boston Consulting Group in Berlin for two and half years. Then I decided to get out of consulting and became an entrepreneur. Along with my current partner, Philipp Povel, I started an online store called MyBrands, which was later bought by Zalando [a former Rocket Internet company which went public last year]. After the sale, my partner was already exploring the online market in Brazil, resulting in Dafiti. We started working on the company at the end of 2010 and quite quickly launched the website in 2011. We had a great learning experience with MyBrands in terms of how to manage an e-commerce venture and develop the business model which, at that time, was just being initiated in Brazil. What we learned from our first business allowed us to take the risk to implement this in another country.
BoF: Why fashion e-commerce in Brazil? What were the fundamentals driving the space?
MH: We based the original decision largely on the burgeoning economic climate that Brazil was experiencing at the time. It was an incredibly promising environment in terms of growth potential and we had the opportunity to be the first on the scene. Plus, when we did our initial research, it was clear that, for fashion and e-commerce, there would be a lot to come. That's where we saw a unique opportunity. And it was correct, right? Out of all the e-commerce categories, fashion became the one with the most going for it. Here in Brazil, there wasn’t another e-commerce business dedicated to offering fashion completely online. By focusing on this niche in the market, it allowed us to carve out a position alongside the country’s major fashion retailers.
BoF: Of course, Brazil’s economy has since faltered. New numbers from the country’s central bank indicate that GDP will shrink by 1.5 percent in 2015, the worst contraction since 1990. How has this impacted Dafiti?
Dafiti keeps growing and investing in Brazil. The scenario is quite optimistic for e-commerce, which continues to grow despite the current economic situation in the country. According to McKinsey, fashion e-commerce is one of the only segments expected to grow by more than 30 percent per year. In addition, e-commerce, more generally, is also growing continuously across Latin America.
BoF: Dafiti has become the leader in fashion e-commerce in Brazil and elsewhere in Latin America. What did you do right?
MH: I think in the very beginning, our biggest advantage was that we were able to build up a very comprehensive portfolio of products in a very short time. We aggregated what the market wanted and provided it under one umbrella. Today, Dafiti is the largest e-commerce player in Latin America. We offer a complete online portfolio of clothes, shoes, accessories, beauty products and home, as well as sporting goods. Our consolidated operations in five countries — Brazil, Mexico, Argentina, Chile and Colombia — offer more than 125,000 products and 2,000 national and international brands. Our second pillar was our focus on infrastructure and the convenience of free shipping and free returns. We also got here due to the trust and credibility that the company provided consumers.
BoF: How have you adapted your approach to fit Argentina, Chile, Colombia and Mexico?
MH: There are key differences in each of the countries where we work due to the purchasing habits and culture of each country. One difference, for example, is that buying processes vary in each country. The credit-installment option is more common in Brazil and Chile, as those are countries with a high penetration of credit cards. In Mexico, the vast majority of people choose debit as payment. Preferences with regards to product type and brands are also different in each country.
BoF: What support did you have from Rocket Internet?
As you know, Rocket Internet is a start-up incubator and they help in the starting stages to launch companies quickly, to help them take the first steps. Rocket Internet has backed Dafiti since we first created the business. Few investors believed that fashion e-commerce in Brazil could work. Obviously they have some expertise in being able to launch websites very quickly, but you know, the incubator helps you through the incubator stage and then you have to start walking on your own two feet without help.
Today, Dafiti is developed, but the idea of Rocket has always been to continue to learn from [the other companies in the portfolio] and use the knowledge that is generated there to be able to execute faster and make less mistakes. I think now that Dafiti has become part of GFG (Global Fashion Group), joining several other promising e-commerce businesses in emerging countries, that’s something that we also want to keep doing: sharing knowledge and benchmarking across geographies and trying to negotiate together and looking at synergies.
BoF: Rocket Internet has been called a “clone factory.” And, in the Rocket mould, Dafiti took a proven business model and adapted it for a new market, building what is often described as “the Latin American Zappos.” What are the advantages of building a so-called clone?
MH: Zappos is a specialised American e-commerce store, which has been successful in the market by adopting a strategy to grow fast and build efficient processes. Likewise, Dafiti is a specialised e-commerce company with a similar strategy of using large external investment to achieve extremely fast growth and business execution. People are not so different from one country to another. But you have to find the right way of executing. The advantage of taking a proven business model to new markets is that you can really focus on the execution. Execution is the most essential part. We saw high potential in the Latin American market and invested in the implementation of a proven business model. Dafiti is now the largest fashion e-commerce player in Brazil.
BoF: What has been most difficult about building Dafiti?
MH: At the beginning, it was really about building customer confidence about being able to shop online. But the biggest problem in Brazil is logistics: how you deliver to all the different cities in a country that is more like a continent. You have cities that are very different in terms of the quality of the infrastructure and ensuring the product reaches the consumer — regardless of region — is a major challenge. How can your customer count on shipping on time? How can you innovate on shipping methods like same day or next day? All of these are challenges when it's such a big country.
BoF: Is Dafiti profitable? When do you expect to break even?
Today, it is not profitable. I cannot unfortunately comment on the future, but it generally takes online shopping companies, which have to invest heavily in technology infrastructure and logistics, seven years to achieve breakeven. In terms of our business strategy and expansion, Dafiti continues to invest in its infrastructure and technologies to improve the consumer experience.
BoF: What advice do you have for entrepreneurs aiming to build a fashion e-commerce business in emerging markets today?
MH: In order to build this type of business you need a clear plan and deep knowledge of where you want to deploy. Furthermore, good implementation is necessary. A good idea is no longer enough. You must know how to perform.
This interview has been edited and condensed.