Zalando interview: international etail giant with a start-up mentality

16 NOVEMBER, 2015 BY SUZANNE BEARNE

Since being launched from a flat in Berlin seven years ago, fashion etailer Zalando has gone from strength to strength.

Can a European retailer with a market capitalisation of €7.213bn (£5.304bn), 9,000 employees, more than 1,500 brands and 16 million active customers across 15 markets ever keep alive the start-up spirit it established when it was founded seven years ago in a Berlin flatshare?

It may seem impossible, but the team at Zalando is determined to retain this start-up culture, despite the scale it now operates on. Zalando now operates in 15 markets

“We believe it’s important to stay flexible,” says David Schröder, senior vice-president of operations, speaking in Zalando’s office in the trendy Berlin neighbourhood of Friedrichshain, near to the graffitied East Side Gallery section of the Berlin Wall.

“There’s a trial and error culture, we’re allowed to make mistakes,” he says. “We see it as a sign of really pushing boundaries. It entails more risk than other companies would take”

Zalando, founded by David Schneider and Robert Gentz in 2008, also preserves its start-up culture by encouraging staff to spend time working in different parts of the business, listening to customer service calls or helping deliver orders.

On occasion – just like a start-up – everyone has to muck in. Schröder reels off the time when Zalando moved to a new fulfilment centre in 2010 and did not want to shut down operations.

That meant all staff including the management board worked shifts in the warehouse to ensure it opened on time. It helped encourage camaraderie, says Schröder.

“In many ways it helped foster team spirit and meant everyone was aware of what we’re really about – and that’s our customers.”

It probably also helps that its employees are young, with an average age of just 30, and that Zalando is a fashionable tech company.

Trust and freedom

But it is still trying to attract more engineers through its “radical agility” approach, says Daniel Schneider, the etailer’s head of onsite customer journey, who with his sweatshirt, jeans and beard looks like he could be a web developer or an entrepreneur behind one of Berlin’s many start-ups.

Sitting in a meeting room kitted out with an old-style camera, sofa, TV and mini wardrobe on rails (created as a replica of a core Zalando customer’s lounge), he enthusiastically describes this fairly new business model, which is based on autonomy and trust across its 70 developer teams.

In essence, the teams are given the freedom to work on the projects to which they are assigned.

In this and many other ways, Zalando, which reported EBIT of €62m (£46m) in 2014 – the first profit in its history – is far from a typical retailer.

It is determined to be much more than just a buyer and seller of goods.

“When we announced our IPO, people expected us to keep on expanding the retail business and acquire competitors,” says Schneider.

“But actually, while we have a really strong business of buying products and selling them and it’s a working business model, it’s not a very exciting story.

“While we are still a retailer and we do get new brands in and keep growing, we are also saying that there’s so much more in the fashion world that we can do.

“We’re looking at retailers, factories and anyone else connected to fashion from the bottom supply chain up and looking at how we can solve problems they have. Then there’s the consumer story as well.”

Big ambition

When it comes to consumers, Zalando’s mission is that when people think of fashion, they naturally think of Zalando.

In other words, its goal is to become the place for fashion and fashion queries.

For example, in September the etailer launched Zalon Chat, a complimentary service enabling customers to sound out fashion advice such as what to wear to a wedding or what shoes will go with their new jumpsuit by pinging off messages through WhatsApp to one of 150 freelance stylists.

“The goal is to answer every question on fashion,” says Schneider.

In another initiative that launched last summer, the retailer teamed up with mobile app Amaze to launch the equivalent of “Tinder for clothes”.

In a similar way to the dating app, users can swipe left for clothes they like, enabling them to then go ahead and buy the products.

Mobile and personalisation

As mobile shopping grows rapidly – mobile accounted for 57% of traffic to its website in the second quarter of 2015 – it is something Zalando is naturally focused on.

One mobile-led project Zalando has launched gathers some of the most inspiring images using the #zalandostyle or #shareyourstyle from its Instagram community and then selects the best to feature on its site, enabling customers to buy those products or similar items.

Schneider says the project is another means of achieving Zalando’s goal of “getting better at inspiration”.

He explains: “Over the last few months we have shifted the focus away from conversions to how we can make people come back more often, focusing on engagement.”

While the retailer has no interest in exploring the opportunities of virtual reality yet, Schneider believes the retail possibilities of Apple TV have potential: “If you can make that interactive and buy from a TV show, [that would be interesting]. I see that happening very soon.”

Like many other etailers, Zalando sees personalisation as a huge opportunity and is testing it. For instance, Zalando gives Nike or G-Star more exposure on the website if visited by known fans of those brands.

“Some day, customers will see different versions of the site – we’re not that long away from that happening,” Schneider says.

“We can already see it by giving customers different teasers for different brand campaigns.”

He sees an opportunity for further personalisation with mobile. “The phone is much more personal and not shared like a laptop is. We could start working with retailers who have stores, and when a person walks past they could be shown deals in those stores [on the Zalando app].”

What would the revenue stream be from that? “We could take revenue or an ad deal, or it could be none of those. We know we have the app for fashion needs, and whether it’s a sales opportunity or opportunity for brands to present themselves, it’s more about building cool engagement.”

He returns to the crux of how Zalando aims to be much more than a fashion retailer.

“We want to be the solution provider. We are less concerned with the specific revenue source – we could generate brand loyalty, brand awareness, happiness of our customer.”

Rivalling Asos

In a way, Zalando is very much like UK fashion retailer Asos. Both innovate to create new features to win new customers and engage their current crop of fans.

But unlike Asos, which has huge brand awareness and is successful on its home turf, the UK has been a tough market for Zalando to crack – Zalando declined to share specific country sales – and that is probably not helped by the sheer dominance of its biggest rival.

“The UK is not an easy market for us,” admits Schröder. “I consider it to be one of the most evolved fashion ecommerce markets in fashion. There’s a lot of good players with great offers, that’s why it’s been harder for us to establish ourselves there than other markets.

“However, we haven’t been as aggressive, and for a long time the shopping experience wasn’t level in terms of delivery.

“We still have to do our homework but we nevertheless regard it as an interesting market, and if we say we want to be the leading [fashion etailer] in Europe then we need to be strong in the UK as well. We will keep trying, keep investing.”

Zalando has localised offers in 15 markets including the UK, Denmark, Finland and Spain, with free delivery and returns across all markets.

Schröder says that the company sees a lot more opportunity in Europe but does not envisage Zalando expanding beyond it.

“We’ll keep investing in our customer proposition. We’re opening a local warehouse in Italy next year to make deliveries to Italy faster and we have dramatically cut down shipping in the UK from four to five days to two to four.”

Berlin and beyond

Zalando has also opened tech hubs in Dublin and Helsinki this year and, while there might be opportunity to open additional warehouses beyond Italy, there are no plans to launch separate country offices. “Team spirit is better if everyone is in Berlin”, maintains Schröder.

Similarly, Zalando, which has two outlet stores in Berlin and Frankfurt, has no plans to launch full-price stores.

However, Schröder does envisage Zalando striking partnerships with bricks-and-mortar retailers within the next two years to aid the shopping experience.

“We could definitely imagine partnering with an offline retailer, for example getting a parcel delivered to store.

“We don’t see ourselves as competition against offline retailers. There’s a good reason why people like the [bricks and mortar] experience – it’s social.”

Schneider concludes by returning to the early theme: the key challenge is to sustain Zalando’s start-up culture.

“We’re growing bigger and bigger every day, and it’s getting harder the more people we add.

“It’s hard for those people who are not experienced in the early days to become part of that culture.”

Like the stretch of Berlin Wall that stands outside and on which tourists scrawl their name, it may be difficult to preserve – but Zalando stands robust.