Weak Profit Zalando's Achilles Heel

Zalando, Europe's largest online shoe retailer, has grown into a multi-billion dollar sales machine in just six years. But, as partner Rubin Ritter admits, profits are proving elusive.
Fashion webmaster: Rubin Ritter.

Seen as Germany’s answer to Amazon, online fashion retailer Zalando has gone from strength to strength since starting up in 2008. The Berlin-based company went public last October and employs 700 people who are committed to fast sales growth.

Yet Zalando is only barely breaking even. Handelsblatt spoke to 32-year-old Rubin Ritter, a member of Zalando’s management team, about last year's IPO and pressure from new shareholders on the retailer to make money.

 

Mr. Ritter, on the day Zalando went public, did you shout for joy?

Inside I did! At university I dreamt about getting a company on the stock market. Now it has happened. To start after six years with a market value of €6 billion, it’s like doing pioneer work.

But there are a lot of start-ups in Berlin.

But unfortunately, unlike in the U.S., only few start-ups later go public. Americans are amazed at what we have accomplished. They think things like that only happen in Silicon Valley.

What was your lucky break when you went public?

The timing. We wanted to go public in 2014. But with all the ups and downs in the market, it was never clear when the window was open. But in the end it was a milestone for Zalando, even if the price was quite under pressure at the start.

The price had to be supported, for example by Morgan Stanley.

The week following the flotation was turbulent. We learned right at the start to accept the moods of the market. It doesn’t matter if it is going up or down – we don’t look at the price on a daily basis.

What are you going to do with the €500 million ($565.9 million) from the IPO?

Massively invest in technologies, that’s where the key lies. Hire new people, eventually also buy companies. We want to grow, now more than ever. We want to understand our customers better and supply them with better support on all devices. We still have work to do in personalizing recommendations. That is technically demanding. For the first time, at Christmas more than 50 percent of our visitors came by way of mobile devices. That is exactly where our future lies.

 

 

What will be the next change?

In the future, Zalando will no longer act only as a retailer. We are strategically setting ourselves up as a platform. We want to host well-known brands that have a large sales potential in Europe but don’t want to open their own stores. They can present themselves in their own shop with Zalando – as Topshop is doing and Gap will be doing from May. With us, the brands have access to 15 markets, 400 million potential customers, and the whole of the infrastructure. Around 90 percent of Germans know Zalando. That’s a hard act to follow.

What does that mean for Zalando as a company?

In order to better pursue our goals, we are now rearranging our management board. David Schneider will be promoting partnerships, Robert Gentz will be concentrating on our investments in the field of technology, and I am responsible for the daily business of operations and finance.

You three are Zalando’s equal partners. Do you want to start offering new ranges of products?

We’ll stay in the lifestyle sector because we still have room to grow there. Examples are fashion for pregnant women, lingerie and swimwear, as well as home textiles.

What companies will you look to acquire?

We have often thought about buying online dealers but have always come to the conclusion we can do it just as well ourselves. The systems, the brands, the customers – we have those, too. That’s why I believe that possible acquisitions in the future will be more about an ability or technology that we don’t have.

You are doing it like Jeff Bezos’ Amazon. The stakeholders demand dividends and the company says, “Sorry, we have still a lot to do and need the money.”

Amazon is pretty successful with this strategy, to have the courage to reinvest and grow - and by doing so create value.

What growth are you planning?

The fashion market in the 15 countries we are already in is worth more than €400 billion. Zalando now has a turnover of around €2 billion, that is a market share of 0.5 percent. Why can’t that be 2 or 3 percent someday?

 

Quelle: dpa
Zalando partners David Scheider, Robert Gentz and Rubin Ritter.
(Source: dpa)

 

How much does the cry to stay in the black get on your nerves?

Basically it is right that at some point a company has to make money. We took an important step in 2014 and are expecting to close the year with a slight profit. However, we still see a lot of opportunity in the market and don’t want to stop investing too soon. Increasing the margin isn’t a priority in the coming years.

What does that mean for the business figures? 

We believe we can achieve a growth of 20 to 25 percent in the future by investing potential profits. We strongly believe in the potential for further growth.

You are planning to offer personal shopping advice. What does that look like?

The customers tell us their preferences and will then have a personal fashion expert at their side who puts together packages of outfits to suit their tastes.

That means you will learn more about your customers.

Naturally, part of it is also about generating data. This information helps us to offer the customer an even better shopping experience.

Every second Zalando package is returned. How are you going to train people who like sending stuff back?

In a test, we once made it harder for a group of customers to return items; they had to print out the return receipt themselves. There was a big drop in the rate of returns but also in the rate of repeat purchases. So we don’t want to lower the rate of return at any cost.

 

Hans-Jürgen Jakobs is Handelsblatt's editor in chief, Kirsten Ludowig is an editor specializing in trade. To contact the authors: [email protected], [email protected]