The unnatural outside-in success of Zalando

From the outset, German-based retailer Zalando’s founders defined success in terms of long-term growth and customer value creation. They believed in prioritising these over short-term sales, profits and share-price. Unified by an ambition to create something meaningful from the opportunities in the market, the founders’ burningness gave them the energy and momentum to create a new kind of European online retailer. In its first decade, Zalando surpassed the likes of Amazon and ASOS to become Europe’s largest online fashion retailer, with 2018 revenues of €5.39 billion, profits of €119 million and a market capitalisation of €11.5 billion.

Launched in 2008 and inspired by, among others, Zappos, the successful US online shoe store that offered free shipping and free returns to customers, Zalando’s founders saw a future for a European online retailer that invested in service and was led by free delivery and returns. The concept of free shipping and free returns is commonplace today, but as Filip Dames, Zalando’s former chief business development officer and co-founder of its highly popular shopping club Zalando-Lounge points out, it was revolutionary in 2008. Especially the idea that customers could return goods after 100 days - an eternity in the fashion industry.

The юо-day return policy doesn’t economically make sense, if you look at the fashion industry in terms of seasonality, stock and turnover. You buy something and then three months later you can return it.

It created a lot of trust for the customer.44

This was a breakthrough Moment of Belief for Zalando. Such a bold move illustrated to all employees, as well as to customers, that Zalando was putting the customer first. Customers could try on their purchases and if they weren’t happy, they could send them all back, for free, no questions asked.

Despite the risk, Zalando wasn’t caught out, said Dames:

Most returns came back within the first two weeks. Only a single digit percentage of sales were being returned after month one, two or three. Internally and externally the юо-day return was a very strong signal about what kind of business we were and how we planned to succeed.45

Dames called out an early bold marketing strategy as a second Moment of Belief that imbued Zalando with confidence in its home market Germany. The founders wanted to capitalise on the daily growth of customer visits and orders by raising awareness. They benefited from a scaling back of media spend by their competitors in the wake of the onset of the global financial crisis in 2008. With a subdued media market, they could buy TV ad spots at significant discounts and by running a basic ad they had scripted themselves they kept the production costs to around €5,000. The reaction was very strong - driving visits, opening new accounts and boosting sales. TV advertising worked for them. The next time Zalando ran a TV ad, it had an even bigger impact, breaking rules and expectations around its industry. As Dames recalled:

We took a bold decision, hired a top creative and created a spoof spot like the film The Blair Witch Project. It was dark and polarizing, featuring a man who locks himself inside a closet full of his partner’s shoes. Because it wasn’t about the product, styles or even fashion, it stood out in a sea of jaded fashion ads. It gave us a clear direction and tone of voice which enabled us to build 90% brand awareness across Germany.46

Seeing the ad’s response and immediate impact strengthened team members’ belief in Zalando’s overall approach - put the customer first. As Dames explained:

You see these types of decisions working and they give you confidence. This confidence was important for Zalando’s growth ... Next, we decided to launch into seven to eight new countries in one year, which is crazy if you think about all the different payment methods and regulations and return policies.47

Hence, Zalando took on the challenge of Europe with its maze of different languages, regulations and fashion tastes with characteristic gusto. Zalando takes a customised approach to each country, including website, payment and delivery methods, products and communication. While Dutch customers use electronic payments, some French customers prefer cheques, and in parts of Italy and Poland, shoppers can pay the postman in cash.48 By 2014, at great expense, Zalando had created IS country-specific websites and established three fulfilment centres, including Europe’s largest e-commerce distribution warehouse. It was another reinforcing Moment of Belief, sustaining employees’ understanding that success needs to be measured in terms of customer-value creation.

Another Moment of Belief cited by Dames was Zalando’s decision to extend its brand into new categories including sport, beauty and its own range of clothing. Today, Zalando is one of the biggest sports retailers in Europe and one of the largest customers of Nike in Europe. According to Dames:

There was a unifying ambition and an underlying strategy. We saw what was possible in this market to create something meaningful... if you feel this, it drives you and allows you to make different decisions and think in terms of the long term rather than optimising the next quarter.49

All these customer-led strategies are born from outside-in beliefs - longterm customer satisfaction will in the end prove more valuable than shortterm margin protection. Thinking from a customer perspective has become the default, leading to many small but significant outside-in decisions that make Zalando an unusual company.

For example, by 2019, Zalando had taken its very first Moment of Belief - 100-day returns - and stretched it to neatly solve another customer problem while addressing the thorny industry issue of sustainability. Customers are now able to return old used clothes that they no longer want. They’re reimbursed in Zalando vouchers (not the original price but a fair amount), and the second-hand clothes are recycled on Zalando’s used clothes marketplace. Dames explains, ‘This is an important and timely evolution of our original promise, “we’ve got you covered.’”

As Zalando grew from start-up to publicly listed market leader, it had to pay close attention to its culture - staying customer-led, fast and innovative. According to Dames:

We hired very young people, which was a bold move... It was often their first job, so they were inexperienced but with a high ambition. We made sure that the people who joined back then had the same enthusiasm about what we were building. That gets harder as you get bigger.50

Zalando has successfully protected its outside-in approach as it has grown. From the outset the founders have been clear about what they regard as success. When the company’s share price dropped after its successful IPO, Rubin Ritter sent out an email to all employees who were concerned by the falling stock price:

Please, don’t look at the share price day-to-day - the company did not change. Look in the long term. Yes, we need to think of profitability, but we will not become corporate.5'

And when the company was marking its first 10 years and hit a bad quarter at the end of 2018, the founders noted:

Our loth Anniversary reminded us to think in longer time periods than quarters or seasons. When we hit challenging times, we worked hard to fix problems that needed fixing, but at the same time we made sure our team focussed on what really matters: the needs of our customers and how we intend to serve them in the future. That way, having a bad quarter never kept us from having a great decade.52

This customer-led approach has paid off. Zalando is now active in IS European markets, offers its customers more than 20 local payment options, collaborates with different regional logistics service providers and speaks 12 languages, not only in its online shop but also in customer service.

Selling the wares of close to 2,000 international brands to 26.4 million active customers, sales grew a further 20% in 2018.53 When a series of Dutch shoe stores went bankrupt in 2017, many pointed to ‘the Zalando effect,’ echoing the impact that Amazon has had on bookshops.

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