The Coresight Research team attended Zalando’s Capital Markets Day 2018 in Berlin on June 5. Zalando expects to remain a high-growth retailer, and management reiterated its aim to double revenues from 2017 levels by 2020. But this will mean little or no margin expansion, as the company will need to invest for growth—including investment in additional distribution centers and better services such as delivery. Zalando aims to build its expansion on a broad positioning with an “all categories, all brands, all prices, all sizes” strategy.

Outlook: “On Track” to Double Sales by 2020, but No Margin Expansion for Now

The Capital Markets Day was bookended by management presentations that reviewed the outlook for Zalando. In his introductory presentation, Co-CEO Rubin Ritter noted the following prospects for Zalando:

• Doubling revenues: Ritter underscored Zalando’s ambitions to double sales, as measured by gross merchandise volume,between 2017 and 2020. “The message of today is that we are on track and want to reiterate our trajectory,” he said. Ritter does not see the retailer “hitting the ceiling anytime soon.” The company needs to add €1.5 billion in sales each year to achieve this goal and will continue to invest for growth, meaning that margins will not expand in a meaningful way in the next few years.
• Convenience levers: Localized merchandising, better digital experiences and greater convenience will support Zalando’s growth, Ritter said. Speaking about the company’s digital operations, he noted that mobile devices now account for 80% of the site’s traffic and 60% of transactions. When discussing convenience, he pointed to Zalando’s ambitions to be able to reach 25% of the European population with same-day delivery, 80% with next-day delivery and 95% with two-day delivery by 2020.
• Gaining share of wallet: Zalando’s average active customer spends 25% of his or her fashion budget at Zalando. This high share is primarily driven by frequency, and Ritter noted that active shoppers are placing more orders than they used to. He also said that newer cohorts of consumers—those who have started shopping on the site more recently—contribute disproportionately to revenues.

Birgit Haderer, SVP of Finance and Indirect Procurement, concluded the day by outlining the company’s financial perspective:

• Revenue growth: Zalando continues to aim for 20%–25% top-line growth through 2020. It is currently the fifth-biggest fashion player in Europe and could become the third biggest, after Inditex and H&M, in the next three years, Haderer said. Zalando is already the biggest multi brand fashion retailer in Europe, she noted.
• Little margin expansion: Zalando continues to focus on sales growth rather than on margin expansion. Haderer noted that the company had analyzed the margin development of tech companies after they had gone public and found that those firms generally went from high revenue growth at a lower margin, to strong growth and solid profitability, to slower revenue growth at a stronger margin. Zalando is in the second of those three phases, Haderer remarked: it expects to see strong growth and solid profitability in the coming years.
• Gross margins: Haderer noted that positive gross-margin drivers include increased negotiating leverage with brands, pricing algorithms and the company’s Partner Program, which is its marketplace operation for brands. Factors that negatively impact gross margin include lower price points (Zalando has built out its offering in lower-price fashion, including fast fashion); discounting, as Zalando “wants to be in line with the market” on price; and growth in revenues from the lower-margin Rest of Europe region.

Proposition: Offering All Categories, All Brands, All Prices, All Sizes

Ritter underscored Zalando’s broad-appeal positioning: the retailer serves “all fashion use cases” with a “broad but unique” strategy, rather than focusing on a niche. Moritz Hahn, SVP of Supply and Demand, continued on this theme, stating that the company aims to“offer the most desirable and unlimited assortment to [its] customers.” He noted that “unlimited means more data, a more dense delivery network and scale on a basket perspective.” Hahn pointed to a strategy to offer all categories, all brands, all prices and all sizes:

• Categories: Zalando has added beauty products to its offering and it is already selling 142 beauty brands. In fashion, Zalando remains weighted toward the midmarket, meaning there are opportunities to grow both upscale and downscale.
• Brands: Zalando keeps its offering fresh and adds an average of 1,900 new products to its site every day. It has added 350 new brands so far in 2018.
• Sizes: Some 10% of Zalando’s womenswear revenues already come from special sizes, such as plus sizes.

Investments: Offering Greater Convenience and Driving Out Friction

Zalando aims to “bring an unmatched level of convenience to customers, tailored to fashion,” said David Schröder, SVP of Convenience. He noted that this offering will be built on three pillars: customer-centricity, including higher customer-satisfaction levels; sustainable growth with greater capacity; and operational excellence, reflected in the quality of the process. Schröder acknowledged that Zalando’s fulfillment cost per order has increased in recent years, despite underlying productivity metrics “moving in a healthy direction.” He pointed to three upward pressures on fulfillment cost per order:

• More international sales, which incur higher transportation costs.
• More investment in the customer proposition, with better standard delivery plus the rollout of next-day and same-day delivery and the launch of return pickup.
• Continued investment in the logistics network, with distribution centers in Italy and Poland in the next 12 months set to take the total number of centers to 12. Only three of those are operating at full capacity, and this under utilization pushes up the cost per order.

Schröder and Jan Bartels, VP of Customer Fulfillment and Logistics, further discussed some of the innovations that Zalando has made to drive out friction from the shopping process. They pointed to three traditional friction points:

• Checkout and payment: Zalando offers payment options tailored to local demands. More than 60% of orders are now enabled by deferred payments. It “doesn’t make sense to pay up front,” said Schröder. A customer “would never pay [for an item] before entering a fitting room,” he said. In 2017, Zalando launched Try Now, Pay Later in France and the service is now the most-used payment method for Zalando France.
• Delivery: Same-day delivery costs Zalando more, but it increases customer lifetime value, according to Bartels. By automating processes such as bag sorting in its warehouses, the company decreases the time it takes to dispatch an order, he said. Zalando is also keeping customers better informed about when their delivery is likely to arrive by using artificial intelligence that relies on knowledge of warehouse locations and carrier networks.

Returns: “Getting rid of your returns should be as easy as calling a cab,” said Schröder, noting that Zalando offers an Uber-like collection service that picks up items from shoppers within 10–15 minutes of request. Reimbursements makes hoppers nervous, he said, noting that Zalando has tackled that in two ways: it has created more returns centers in order to speed the return of products to the company and it has begun offering direct reimbursement when a parcel is handed over for return (such as at a post office).