The A-Z of e-Commerce Death Stars
Gastbeitrag von James Roper, IMRG, verfasst am 03.01.2013
Will venture capital produce the ‘ultimate retail weapon’?
The e-retail arms race is escalating dramatically as investors plough billions of dollars into large disruptive start-ups, aiming for their new online shops to dominate entire market sectors. Amongst others in the past, Boo.com tried this with fashion in 1999, spending $135 million of venture capital in just 18 months, but it was too early and Boo.com was placed into receivership on 18 May 2000 and liquidated. Now the speculators are back, constructing competitor-destroying e-commerce Death Stars, but have they got their strategy and timing right, or will they just cause more market mayhem?
Leading the ‘let’s just buy the market’ gamble for separating European online consumers from their cash is the apparently irresistible force of Zalando, the Berlin-based online fashion retailer which launched in October 2008 and looks to have achieved sales worth over a billion euros in 2012, double its 2011 revenues of €510 million.
Zalando started out as a clone of Zappos, the US online shoe retailing pioneer, now part of Amazon, and has since expanded from shoes – of which it claims to sell 30,000 pairs a day – into general fashion and jewelry, offering a range of thousands of products from hundreds of brands. Most of Zalando’s business is in Germany though; it is rapidly expanding and currently sells into 14 European countries including the UK and France, having launched online stores in Sweden, Denmark, Finland and Norway last summer.
Zalando is one of many start-ups by the Berlin-based Samwer brothers (Marc, Alexander and Oliver) who are best known for blatantly cloning – often down to the pixel – existing US businesses like Zappos, AirBnB, Facebook, Groupon and Pinterest, then blitzkrieging consumers with massive-scale traditional marketing backed up by operational excellence to ensure that their new brand rapidly achieves position in the marketplace. A number of these businesses have been acquired by the original cloned company which is obliged to buy or be side-lined.
The Samwer brothers’ first attempt as start-up founders was in 1999 when they approached eBay to start a German version and, after receiving no response, they did it themselves. Three months later they had sold their online auction platform, Alando, to eBay for $50m. They weren't first to market, but what they had managed to do was execute well and, in doing so, proved to eBay that there was a market that couldn't be ignored. Just five years later the brothers had their next successful exit, selling their mobile SMS content company Jamba! to VeriSign for $270m. Remember that annoying Crazy Frog? That's them.
Estimated to be worth around €3 billion, Zalando has attracted more than a billion euros worth of backing from a range of heavyweight backers including the Samwer brothers’ own venture capital incubator, Rocket Internet (owning 44%), Holtzbrinck Ventures (13%), Tengelmann Ventures (8%), Investment AB Kinnevik (16%) and DST Global (9%) from J.P. Morgan Asset Management (1%), Quadrant Capital Advisors (1%), Commerzbank, Sparkasse Mittelthüringen and KfW Bankengruppe.
Zalando is certainly disrupting the already stressed retail marketplace; however, it is too early to tell what the lasting effect of this foray into fashion will be. Like Amazon was for years, Zalando too is being ridiculed for ‘buying’ the market at too high a price and of having an unsustainable business model that will never be profitable. It certainly risks overtrading as a result of growing too fast and may face a natural bottleneck with suppliers or delivery services unable to cope with the demand it is creating. Its overstretched supply lines may fail causing image problems that lose customers and undermine new customer recruitment.
One threat to the Samwer Brothers is their own social recklessness as evidenced by their questionable business practices which may alienate ethical consumers, and be drawn to those consumers’ attention by affected companies. For example, the practice of unashamedly replicating others' hard work seems downright immoral. Consumers empowered by the internet and social media can exert highly effective economic pressure against brands that they disapprove of in the form of boycotts, and there are more people boycotting brands online than you might think. YouGov research shows that half of customers will boycott companies that fail to give good service. Four in five people will tell friends and family not to use firms that disappoint. Another quarter put negative reviews online. Research for the 2010 Ethical Consumerism Report revealed that 55% avoided a product or service because of a company’s behaviour. Most people think that for a boycott to be effective it needs to reduce sales a lot, but if they reduce any company's sales from two to five per cent they have won. Once boycotted few consumers ever return to a brand.
So are Amazon and Zalando becoming the A to Z of e-commerce creators - or annihilators - in Germany?
Amazon is now by far the biggest online retailer in Germany with sales estimated to be worth more than €4billion per annum, while Zalando is by far the fastest-growing German online retailer. Arguably these pioneers are good for the e-commerce market in Germany, where the take-up of online shopping has been relatively slow compared with, say, the Nordic countries or Britain. Many German consumers have been introduced to the benefits of shopping online by either Amazon or Zalando, which to an increasing degree compete with each other. This is good news for consumers but can be a nightmare for other retailers caught in the crossfire. For example, when Zalando emerged as a contender, Amazon’s German fashion brand, Javari.de, began to offer a one year return period, a two-week low price guarantee and fast free shipping - a hard act to follow. On the other hand, Zalando is keen on selling at regular rather than predatory prices, and avoids dumping whereby goods are sold in quantities that cannot be explained through normal market competition.
There are three possible outcomes from all this.
Zalando and similar e-retail Death Stars may succeed and their success will inevitably attract more venture capital seeking fast profit by capturing other market sectors, as Amazon has done but quicker. And as the US and Western European markets become saturated there will be plenty of other opportunities for replicating the model in less crowded, fast-growing markets in regions like Asia, South America and Eastern Europe.
Alternatively, this blitzkrieg model may fail due to the wafer-thin profit margins that extreme competition inevitably generates, rendering brands unable to adequately reward investors for the expensive capital they have staked. In this case there would be a real possibility of damage to the online sector if consumers and staff are severely inconvenienced or lose out, though competitors left standing would breathe a sigh of relief.
The third and worst possibility is somewhere in the middle, where a superweapon brand may limp on, destroying good and bad competitors alike, too big to close down but unable to progress, and not really adding any value to customers, themselves or the marketplace.
All this investment money piling into the online retail market is bound to have a polarising effect, but will it produce the ‘ultimate retail weapon’ like the fictional Death Star superweapon in the Star Wars movies? How big this investment bubble will grow remains to be seen. What is certain is that this is another hammer blow to the traditional high street.
James Roper FRSA | Chief Executive | IMRG – the UK e-Commerce Association