Middlesex University Dubai

MKT3130/3132
International Marketing

Zalando Case Study

Professor Vijay Pujari

Due Date: 16th February 2018

Name: Mubashir Mirza

MISIS: M00584343

Word count: 2841

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TABLE OF CONTENTS:

Introduction…………………………………………………3

Main body………………………………………………….....3

Answer to question 1…………………………….…………….4

Advantages to retailers….……………………………………4

Advantages to customers……………………………………….5

Zalando’s key competitive advantages………………………5

ASOS’ key competitive advantages……………………………..7

Threats that ASOS and Zalando might face…………………….8

Answer to question 2……………………………………………….9

Market number 1…………………………………………………….10

Market number 2……………………………………………………..11

Market number 3…………………………………………………......12

Answer to question 3………………………………………………….13

Pros…………………………………………………………………….13

Cons…………………………………………………………………….…14

Conclusion………………………………………………………………14

References………………………………………………………………….16

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INTRODUCTION

Established in Germany in 2008 by Robert Gentz and David Schneider, Zalando

GmBH is an internet retailer of branded clothing and footwear for men, women and

children that operates in the standard and premium markets. This is a report based

on Zalando and aims to answer three questions through further research and the

application of some models or theories. The questions that will hopefully be

answered by the end of this report are;

i) “Compare and evaluate Zalando’s and ASOS’ key competitive advantages

and strategies in the world online apparel market”

ii) “Discuss and evaluate the criteria that you would use for Zalando’s

selection of new markets outside its current 14 countries. End up with a

ranking list of the three most attractive countries.” And,

iii) “Discuss and evaluate the pros and cons for Anders Holch Povlsen and

Bestseller, regarding the investments in Zalando and ASOS.”

MAIN BODY

ASOS is one of many competitors that Zalando has in the online retail sector. ASOS

(which stands for As Seen on Screen) sells cheap clothes in the style of celebrities

and hence, has a young and loyal customer base. Since Zalando and ASOS both

started out as online only retailers and operate in the same industry, they share quite

a few advantages and disadvantages associated with the world of online apparel

retailing.

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Answer to Question 1:

If we were to compare store-based retailers and online only retailers, we find that

more and more people are choosing to shop online. Some of the reasons as to why

internet retailing is on the rise are as follows;

 (Advantages to retailers / supply side)

To be as successful as Zalando and ASOS have been in the online apparel

industry, they had to differentiate themselves from their competition and implement

some unique business strategies. By starting up as an online only fashion retailer,

they circumvented the large investments needed by traditional brick and mortar

stores. Along with avoiding those costs, online only retailers also enjoy tax

loopholes. As the internet is still a relatively new thing, a lot of countries have not

changed or altered their laws significantly to encompass the new markets brought

forth by the internet revolution. Therefore, companies like Zalando and ASOS enjoy

not paying sales tax and such, in many countries, unlike their store-based

counterparts. (Hollsen S., 2017)

Furthermore, the data and analytics that online retailers gain access to are

invaluable to them. These tools help online retailers gain knowledge of who is visiting

their websites, for how long, and where they go next. This information is simply not

available to store-based retailers.

(Continued)

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  (Advantages to customers / demand side)

For the customers, the ability to shop online at any time of day is a convenience

that traditional stores just don’t offer. Couple that with the fact that customers can

compare prices and read user reviews for the products online, online retailing is

super helpful to people leading busy lives due to longer working hours. (Hollsen S.,

2017)

Zalando’s key competitive advantages:

The previous paragraphs were advantages that all online only retailers share with

each other. However, to become one of Europe’s leading online fashion platform,

Zalando has some key competitive advantages over other retailers.

 If we consider online fashion and apparel retail – the most popular

ecommerce category – the need for individual consultation, unsurprisingly, is

high. (Sebald and Jacob, 2018). This has always been a problem for online

only retailers as store-based retailers can educate their employees to help

pick and choose outfits for their customers. This one-on-one between

employees and customers is one of the reasons that around 90% of total retail

sales in 2017 (across all industries) were generated at brick-and-mortar

stores. (Statista, 2018). However, online retailing is continuously rising with e-

commerce expected to have a 15.5% share of global retail sales by 2021.

(Statista, 2018). One of the reasons as to why e-commerce sales are

expected to rise, is the fact that online retailers are coming up with new and

inventive way to either provide the same services as store-based retailers, or

implement completely new services that give them a competitive advantage.

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 In this case, Zalando came up with a curated retailing division for their

customers called ‘Zalon’. Zalon mimics the one-on-one interactions between

customers and employees of store-based retailers by “…support[ing]

consumers in their shopping process by preselecting products tailor-made to

their individual preferences.” (Sebald and Jacob, 2018). Sebald and Jacob

(2018) continue by saying that, despite the popularity of curated retailing,

such retailers are often not yet profitable because their customers’ average

shopping basket values and order frequencies are still too low. However, even

though it might not be profitable for Zalando, it is still a competitive advantage

for them over other retailers as customers nowadays expect their brands to

connect with them on a personal level (Klien, 2017).

 Zalando has a comprehensive returns and exchange policy which is a leg up

over their competition because, “…within normally 30 days (100 days in

Germany), anything can be exchanged or returned free of charge, no

questions asked.” (Hollsen, 2017). Zalando delivered 70 million orders in 2016

(Goodman.com, 2018), and to implement this returns and exchange policy

over that volume of orders is a monumental task. Therefore, an efficient

logistics centre is a distinct competitive advantage for Zalando. Zalando has

the largest e-commerce facilities in Europe (Hollsen, 2017). Located in Erfurt,

Monchengladbach, and Lahr (black forest) inside Germany, these enormous

130,000 sqm main logistics centres enable Zalando to deliver on their promise

of free returns and exchange to their over 20 million customers across

Europe. (Goodman.com, 2018)

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  One of Zalando’s biggest competitive advantage is their relationship with

brands (Ricadela, 2016). Zalando was the first and is now one of the biggest

online fashion retailer in Europe. Since they were the first movers in the

market, they have loyalties across many major brands. They’re also looking at

ways to enable their partnered retailers to sell directly through their site. “If

brands like Adidas handle the inventory themselves, leaving Zalando to just

process the payments,“that’s less capital and higher margin” for Zalando.”

(Ricadela, 2016). Furthermore, aggressive investments to increase the size

and quality of their IT department help make sure that Zalando always has an

edge over their competition. Rubin Ritter, who is one of the people who runs

the German group, gave reasons for the investments, “The idea behind it is

that we think technology will continue to disrupt the way people shop for

fashion. Desktop has been a big disruption, mobile is now the next ongoing

disruption, and there will be many more to follow.” (Shotter, 2015)

ASOS’ key competitive advantages:

ASOS is another key player in the online apparel industry. As, mentioned before,

ASOS and Zalando share a lot of advantages by being in the same industry.

However, ASOS still has a few competitive advantages over the rest.

 ASOS’ core competency is ‘fast fashion’. Their goal is to be the number one

fashion retail destination for 20-somethings in the world and they plan to

achieve that by offering “...customers the greatest, most relevant choice of

fashion at the right price whatever their shape, size or style.” (Asosplc.com,

2018). ASOS continuously keeps their products moving with the changes in

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 trends. They add a staggering, 5000 new products every week with as much

as 85,000 products for sale at any given time. 60% of those products are

exclusively sold through ASOS and 41% of all sales are ASOS’ own brand

sales. (Asosplc.com, 2018). Having an in-house brand which accounts for

41% of all sales gives ASOS better margins than its competitors. ASOS has

also overtaken H&M and Marks & Spencer’s to become one of the leading

online retailers in Europe (Wood, 2017), and this trend is expected to steadily

grow.

Threats that ASOS and Zalando might face:

Now that we talked about the advantages of online fashion retailers and the specific

competitive advantages that Zalando and ASOS possess in the industry, let’s briefly

mention the threats that they might face.

“Product returns are an aggravation for most retailers and customers, with

worldwide retail returns at a staggering 8% of sales: US$642.6 billion worth of

merchandise that entered the reverse supply chain in 2015.” (Röllecke,

Huchzermeier and Schröder, 2017). Because Zalando offers free returns and

exchanges for a long time after purchase, this holds especially true for them. Infact,

industry speculation suggests that Zalando has fugures of as high as 70% in

returned merchandise. One of the reasons for the ridiculously high return rate might

be that customers take advantage of the returns policy. They might order the same

shoe in 2-3 different sizes and only to buy the one that fits them best. Or they might

just ‘buy’ a pair of shoes for a single evenings wear and return them later. (Hollsen,

2017).

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 Another disadvantage that ASOS and Zalando share is warehouse costs.

Keeping 85,000 products (for example) in stock requires the use of immense storage

facilities, a large number of staff, and a very well thought out logistics department.

And finally, ASOS and Zalando both face threats from already established store-

based retailers going into e-commerce. Zara and H&M and have both started selling

their clothes online and directly eat into Zalando’s and ASOS’ growth in the industry.

Amazon also wants a piece of the European online fashion retailing pie. “Amazon

now has 5.7 percent of the $42 billion online shoe and apparel market in Western

Europe.” (Ricadela, 2016). For now, Zalando is still ahead of Amazon with 6.1% of

the market share.

Answer to question 2:

The world is ever changing and that is especially true for the world of online

shopping. More and more people have access to the internet with each passing

year, the standards of living are rising as a whole, and so are the disposable

incomes. Furthermore, expanding into new markets has been made so much easier,

especially for online only retailers. They can use already existing channels of

distribution to gain entry into new markets.

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 (Continued)

New markets will be chosen for Zalando based on the strategies used by the

Boston Consulting Group which determines a country’s attractiveness by the current

situation of these measure:

 Market size

 Market Growth

 Competitive conditions and,

 Market uncontrollables

Market number 1:

The most attractive market for Zalando to enter right now seems to be China.

China has the highest number of internet users in the world, with more than 738

million (Statista.com, 2017) of its people connected to the internet. The Asia pacific

region as a whole accounted for 12.5% of the total global e-commerce retail sales in

2016. In that 12.5%, China spent 125.8 billion US dollars on online fashion retailers.

From 2016-2021, China’s retail e-commerce sales are expected to have a CAGR

(compound annual growth rate) of 17.4%. (Statista.com, 2016)

China has stiff competition in its markets but with the right strategies and

planning, Zalando might be able to get a chunk of the market. “Chinese shoppers

account for nearly half of the global luxury market, providing invaluable demand to

brands in every segment.” (Horton, 2016). This fits right in with Zalando’s market

strategy of selling high end fashion brands. Finally, in terms of the political

landscape, China is different from most other countries. They are highly socialistic ad

distrustful of anything that doesn’t originate in china. Because of this, Zalando must

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be really careful to avoid causing offence or make the Chinese market distrust them

in any way.

Market number 2:

The United States seems to be another market which can be very useful to

Zalando. The US has the third highest number of internet users in the world with

more than 238 million people having internet access. (Statista.com, 2017). The US’s

e-commerce retail sales are expected to grow from 384 billion dollars in 2016, to 584

billion dollars in 2019. From that 384 billion in 2016, more than 72 billion dollars in

revenue was generated by online apparel sales. These sales are projected to reach

99 billion dollars by 2019. (Statista.com, 2017)

In the US, the competition will be tough for Zalando from already well-established

brands. They will also be fighting one of the biggest companies in the world;

Amazon. However, with the rising of disposable incomes and the want to spend on

luxury products rising as well, this booming market seems to be a good choice to

enter for Zalando. If we talk about the political climate in the country, as we all know,

President Trump’s insistence to only buy ‘American’ and to provide companies who

manufacture in the USA, various tax breaks and grants, is turning away a lot of

foreign manufacturing companies away from entering the market. However, as

Zalando is an online only retailer selling other brands through their website, and with

very few products of their own, they might be able to enter the market without many

problems.

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 (Continued)

Market number 3:

The Asia Pacific markets as whole present great growth opportunities for foreign

businesses. However, out of those countries, (after China) India seems to be the one

that presents the biggest opportunity. India has the second highest number of

internet users with 452 million people having internet access. (Statista.com, 2017).

Although India has lower than average spending in ecommerce, the CAGR for retail

e-commerce sales in India is expected to be 23% between 2016 and 2021.

According to Google India, “By 2020, India is expected to generate $100 billion

online retail revenue out of which $35 billion will be through fashion e-commerce.

Online apparel sales are set to grow four times in coming years.” (livemint.com,

2015).

Zalando won’t face much competition in the Indian market as there aren’t really

any well-established, online only apparel stores. However, if Zalando is clever in the

way they approach this market, they can have the first movers advantage and

capture the majority of this rapidly growing market. If we talk about market

uncontrollables, Zalando has to be really sensitive towards the different religions in

India as it is a very religious and conservative nation.

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 (Continued)

Answer to question 3:

Anders Holch Povlsen holds a stake of 27.5% in ASOS and a 10% stake in Zalando

GmbH. He is also the sole owner of ‘Bestseller A/S’, a Danish fashion brand. These

investments come as Anders decides to secure a future in the online fashion retail

sector. “We’ve been supplying the company with Bestseller goods since early 2010,”

co-Chief Executive Officer of Zalando, Ruben Ritter said. “We have a similar view of

where we want to take the business. It’s not about a fundamental change in the

strategy, but about taking someone on board who brings a lot of experience and

knowledge to the table.” (Cruz, 2013). Anders’ investment in both these companies

comes with pros and cons, some of which are listed below.

Pros:

 Since all three of these companies (Bestseller, ASOS, and Zalando) are

fashion retailors, their combined industry experience would be very beneficial

when the group enters new markets, or the existing markets go through an

unstable period, etc.

 Zalando and ASOS are both one of the biggest online fashion retailers within

Europe. ASOS has the highest market share in the UK, which is one of the

highest spending countries in e-commerce in the world (Statista.com, 2016),

and Zalando, which is the one of the largest online fashion retialers all over

Europe. This makes them relative safe investments compared to other

companies in the market, with a high possible ROI.

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 (Continued)

Cons:

 Zalando’s business strategy has been maximising growth over profit since its

inception and hence, Zalando has yet to make a profit. Even though Zalando

might have brand awareness figures as high as 70% in its home country of

Germany (Hollsen, 2017), this is a very risky business model and only time

will tell how sustainable this model actually is.

 Investing in two of the most competitive companies in the European online

retailing sector might actually end up being counterproductive for Anders’.

Both ASOS and Zalando directly compete with each other in many markets

and there is a chance of cannibalization to occur, where one company ends

up taking the market share of the other.

CONCLUSION

In conclusion, throughout this report, we talked about Zalando and ASOS, their

different business models, how they operate etc. To answer question one, the

advantages for online retailers were discussed over their store-based counterparts.

Then the key competitive advantages and for Zalando and ASOS were discussed,

how they created Zalon for curated retailing, how they have enormous and enviable

logistics centres capable of keeping Zalando’s promise of free returns and

exchanges, and how their relationship with brands gives them a leg up over their

competitors. In the answer for question 2, we discussed the 3 most attractive

countries for Zalando to expand in and came up with i) China, ii) USA, and iii) India.

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And finally, by discussing the pros and cons of Ander Holch Povlsen investing in

both ASOS and Zalando, hopefully all three questions have been satisfactorily

answered.

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