Rocket Internet, the Berlin-based start-up incubator, shocked investors by reporting a half-year loss of well over half a billion euros in an email sent at eight minutes after midnight on Thursday.
Originally, the company had expected to present its results on September 22 for the half year. But with its loss of €617 million, or $689 million, for January to June this year, the company had to warn investors with a mandatory filing.
The shares fell as much as 12.2 percent on Friday and were down 7.6 percent at €17.42 at 5:15 p.m., giving a market value of around €2.7 billion. When the company, founded by three German brothers, listed in Frankfurt in 2014 it sold shares for €42.50 a piece and Rocket was valued at €6.5 billion.
Earnings were hit by write-downs of €383 million on its Global Fashion Group, a collection of clones of its European online fashion retailer Zalando, running online stores around the world, including Dubai, Russia and South East Asia. Rocket also had to write down the value of some other assets but it did not specify these costs.
In Germany, Rocket is best known for Zalando, which was created as a startup in 2008 and listed in October 2014. Since then, it has supplanted Metro as Germany’s biggest online retailer, worth more than €9 billion. The company’s success stems in part from its use of digital solutions, such as apps for mobile devices.
But Global Fashion Group is struggling. It is made up of a set of unmerged and unprofitable online fashion businesses, spanning Dafiti in Latin America, Lamoda in Russia and former Soviet states, and Damshi in the Middle East. Further holdings include Australia’s The Iconic, India’s Jabong and South East Asia’s Zalora.
Zalando created the cluster ahead of going public, aiming to structure its extensive holding in e-commerce businesses.
But in April this year, Rocket and GFG’s other key investor, the Swedish Kinnevik group, announced a €300-million financing boost which was completed in July. At the time, the company was revalued at $1 billion, a cool $2 billion less than previously.
In the first quarter of the year, the fashion group’s revenues rose by 25.7 percent but with every euro the business earned in sales, it lost 23.4 cents.
The trouble is that the clothing business is highly capital-intensive. For an online store to make profits, it needs a lot of customers, and for this, the marketing investments are high. In India, GFG faced multiple competitors, making the necessary marketing efforts costly. In July, it decided to sell its Indian venture Jabong, likely for less than the sum of its investments.
It is smoother sailing in other markets. In the Middle East, where the competitive landscape is less threatening, Namshi was almost profitable in the first quarter of the year. In wealthier regions, people are more willing to buy expensive clothes which boosts margins.
Nonetheless, insiders are upbeat and say the new managers, Romain Voog and Nils Chrestin, have a firmer grip of processes. Communications have improved between the different firms and procurement is bundled. The stores have also raised their proportion of own-brand items: anything the online stores make, rather than buy, helps margins.
But it remains unclear how the competition will develop and, beyond the clothing business, what other write-downs Rocket had to take. The company will present its report on September 22, when more details will be available about its operative business, though this is all going according to plan, says finance chief Peter Kimpel.
Miriam Schröder writes about startups for Handelsblatt. To contact the author: [email protected]