Zalando report from Olga Loghinovici, Vladimir Dzhadzharov and Kevin De Beule

Vladimir Dzhadzharov – Kevin De Beule – Olga Loghinovici

BUSINESS AND STRATEGY MANAGEMENT Professor Annabel Sels

BUSINESS EXPANSION ZALANDO

30 April 2016

BUSINESS EXPANSION REPORT ON ZALANDO

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TABLE OF CONTENTS

1 COMPANY OVERVIEW................................................................................................................................ 3

A modest start in a shared flat ............................................................................................................................. 3 An international coordinator ................................................................................................................................ 3

2 VALUE CHAIN ANALYSIS ................................................................................................................................ 4

2.1 PRIMARY ACTIVITIES .............................................................................................................................................. 4 Inbound Logistics .................................................................................................................................................. 4 Operations ............................................................................................................................................................ 4 Outbound Logistics ............................................................................................................................................... 5 Marketing and Sales............................................................................................................................................. 5 Services ................................................................................................................................................................. 5

2.2 SUPPORT ACTIVITIES .............................................................................................................................................. 5 Firm Infrastructure ............................................................................................................................................... 5 Human Resource Management ........................................................................................................................... 5 Technology development ..................................................................................................................................... 6 Procurement ......................................................................................................................................................... 6

3 FINANCIAL OVERVIEW .................................................................................................................................. 6

3.1 PROFITABILITY ..................................................................................................................................................... 6 3.2 SOLVENCY ........................................................................................................................................................... 8

4 VRIO ANALYSIS ............................................................................................................................................. 9

5 GEOGRAPHICAL EXPANSION ....................................................................................................................... 12

6 GMOA ......................................................................................................................................................... 13

6.1 INTERNAL ANALYSIS............................................................................................................................................. 13 6.2 IRELAND ........................................................................................................................................................... 15 6.3 PORTUGAL ........................................................................................................................................................ 16 6.4 CZECH REPUBLIC ................................................................................................................................................ 17 6.5 SLOVAKIA ......................................................................................................................................................... 19 6.6 COUNTRY ANALYSIS............................................................................................................................................. 21

Czech Republic .................................................................................................................................................... 21 Slovakia .............................................................................................................................................................. 21 Portugal .............................................................................................................................................................. 22 Ireland ................................................................................................................................................................ 22

7 CAGE ........................................................................................................................................................... 22

Cultural Distance ................................................................................................................................................ 22 Administrative Distance ..................................................................................................................................... 23 Geographical Distance ....................................................................................................................................... 23 Economic Distance ............................................................................................................................................. 23

8 RELATIVE STRENGTHS AND WEAKNESSES ................................................................................................... 24

Rivalry among existing competitors: High ......................................................................................................... 24 Threat of new entrants: Medium ....................................................................................................................... 24 Bargaining power of suppliers: Low ................................................................................................................... 25 Bargaining power of customers: High ................................................................................................................ 25 Threat of substitute products: Medium to High ................................................................................................. 25

9 COMPETITORS ............................................................................................................................................ 26

10 RISK PROFILE .............................................................................................................................................. 26


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10.1 GENERAL RISKS.............................................................................................................................................. 27 Financial risk....................................................................................................................................................... 27 Exchange rate risk .............................................................................................................................................. 27 Political risk ........................................................................................................................................................ 27

10.2 FOREIGN ENTRY MODE .................................................................................................................................... 27 Marketing ........................................................................................................................................................... 28 Postal and shipping companies .......................................................................................................................... 28

11 CONCLUSION .............................................................................................................................................. 28

Weighing costs and benefits towards expansion ............................................................................................... 28

12 REFERENCES ............................................................................................................................................... 32

FIGURES

FIGURE 1: REVENUES AND PROFITABILITY (IN X1000 €).............................................................................................................. 7 FIGURE 2: REVENUES PER GEOGRAPHIC UNIT ............................................................................................................................ 7 FIGURE 3: COST STRUCTURE AND EVOLUTION ........................................................................................................................... 7 FIGURE 4: GDP GROWTH OF SOME EAST EUROPEAN STATES ..................................................................................................... 17 FIGURE 5: INTERNET ACCESS AND MOBILE SUBSCRIPTIONS ........................................................................................................ 18 FIGURE 6: ON-LINE PURCHASES ........................................................................................................................................... 18 FIGURE 7: GDP PER CAPITA AS A % OF EU-28 ....................................................................................................................... 19 FIGURE 8: INTERNET ACCESS AND MOBILE SUBSCRIPTIONS ........................................................................................................ 19

TABLES

TABLE 1: ASSETS ................................................................................................................................................................ 8 TABLE 2: EQUITY AND LIABILITIES ........................................................................................................................................... 8 TABLE 3: CASH FLOWS ......................................................................................................................................................... 8 TABLE 4: RESOURCES ........................................................................................................................................................... 9 TABLE 5: VRIO FRAMEWORK ............................................................................................................................................. 10


3 | COMPANY OVERVIEW

1 Company overview

FOUNDED: 2008 HEADQUARTERS: Berlin EMPLOYEES: 9 9871 Internet-only fashion retailer Clothing, shoes and accessories

A modest start in a shared flat

Zalando SE is a relatively new player in the internet shopping landscape. Ever since it was founding by two friends from Germany in 2008, the company has grown starting in a small apartment to a leading online fashion platform in Europe with almost 10 000 employees. Their goal was to offer an online shopping experience adapted to the wishes and modern tastes of consumers. In addition to shoes and clothing for women, men and children, Zalando also sells exclusive accessories, beauty products, sports and living articles in a very wide product range that only grows bigger. Their products range from established world-famous brands to local and pop-up fashion brands, to self-designed private labels. In total, Zalando showcases approximately 1.500 brands altogether. Just recently in 2011, they also started producing their own private labels, which they manage through a separate entity called ‘Zlabels’. Additional to the convenience of being able to buy online, the fashion retailer offers a combination of unique services: free shipping and returns, a free service hotline and 100 days of return warranty for all products which turns the online shopping to a relaxed and secure experience.

The key competence of Zalando is their technological development which is vital for a strong online website that is understandable and easy to use. Besides that, the company invests a lot in marketing to develop and sustain a reputation as an established online fashion retailer. One of their biggest success was the “Scream of happiness” commercial that made big headlines and became iconic for the online store, attributing to their incredibly high brand recognition.

Up to date, Zalando is active in 15 different European countries, servicing a market of over 400 mln people. The way Zalando operates is through a centralized logistics network with four core logistics centers in Germany. The country’s central position in Europe allows for an efficient and speedy supply to all customers throughout Europe.

In their early years, the financial situation of the company was in a bad shape, accumulating losses until it was profitable for the first time in 2014. This was of course due to the trade-off between short-term profits and growth, in reference to the rapid expansion in Europe and large costs incurring with customers returns. The company is now doing well, and its growth seems stable and secure.

An international coordinator

Zalando can be classified as an international coordinator which strives for efficiency by cutting up parts of the business operations and relocating it in different countries with comparative advantages. In Paris, Zalando’s management has established a buying office which has direct

1 As of 2016


4 | VALUE CHAIN ANALYSIS

access to the prime of the global fashion industry with many of the most important firms and headquarters in the French capital city. Germany’s central position in Western Europe makes it rudimental that their logistic centers are located in their country. Its excellent infrastructure connects to the core markets of Europe with big populations and high purchasing power. Their technological hubs are located in Helsinki in Finland and Dublin in Ireland, as both countries have comparative advantage with their highly skilled IT-workers. They are very successful in exploiting the locational advantages that many European countries offer, and this is of course essential in the success story of the company. Hitherto, Zalando is an online retailer that combines fashion, technology and logistics to offer customers and brand partners great added value.

2 Value Chain Analysis

Making use of Porter's Generic Value Chain concept, we can subdivide Zalando’s value chain in primary and support activities (Porter, 1985). The firm-specific information is taken from the company's annual report 2015 and an analytical report of Credit Suisse (2014). Given the specific compounds of Zalando’s operations, it serves to conclude that it is much focused on technology.

2.1 Primary activities

Inbound Logistics

Zalando’s main products are shoes and clothing, with the first category being responsible for more than 50 % of its revenues according to the Credit Suisse report (2014). With a large variety of brands available for sale, Zalando has set up contracts with several well-known fashion companies. It is their large assortment of different brands that makes shopping on their website so appealing for customers. The contracts with these fashion labels are very important in the value-chain as it constitutes the core concept of Zalando’s business model.

All this clothing is stored in 4 large logistic centres in several strategic locations in Germany that provide good access to their other markets in Europe. Zalando takes care of the management of these logistic centres and preparing the customer’s order as quickly as possible. As of 2015, it has additionally outsourced a logistics centre in the north of Italy. However, it is somewhat extraordinary that 80 % of its logistic operations are self-managed while outsourcing seemed to be almost normative in the industry. They remain keen on the fact that this is the only manner in which they can optimize these processes and guarantee the best service to their customers.

Operations

Aside from inventory management, Zalando actively tries to optimize the speed of delivery to their customers by optimizing their processes constantly. This works hand in hand with their own IT-departments in Berlin (Germany), Dublin (Ireland) and Helsinki (Finland) who work on a variety of different things such as logistic optimization, fashion monitoring, consumer insights and data mining, which are only the most perceptible of their operations. In 2010, Zalando also created the subsidiary firm ‘Zlabels’, which takes on the production of their own private labels. The subsidiary’s mission statement is to anticipate on rapid changing fashion trends, taking advantage of Zalando’s data mining on consumers to learn about consumer tastes and wishes.


5 | VALUE CHAIN ANALYSIS

Outbound Logistics

Zalando sells its products exclusively on their website. The client places its order online and then the firm takes quick action to assemble the package. The actual delivery of the items is done by local domestic postal companies that they have a contract with in their key markets. These contracts are important as they make up an important cost factor for Zalando. Because they emphasize on speed and convenience, they engage in strategic partnerships to fully optimize Zalando’s business operations in order to cut time and costs even further.

Marketing and Sales

The company has invested a lot in marketing as can be seen in the financial overview, consuming a staggering high ¼th percent share of their revenues in 2011. This proportionately decreased as their revenues grew, and partly because they cut back on marketing expenses. But nevertheless, the firm continues to put a lot of stress on marketing as key component to their business strategy. But with 89 % brand awareness in their key markets, it seems their efforts have paid off. Another important sale-related activity, is online showcase marketing by which they hire models to wear the clothes which they photograph and then put on display on their store.

Services

Zalando upholds a cost-free ordering policy which means that customers do not have to pay any shipping fees or returning costs. Another important service lies in the wide variety of payment options available to their customers and adapted to the country’s habits and customs. One of the most important modes of payment, and arguably also the most risk-related one for Zalando, is payment after delivery. This means that clients can make their order without paying for their items beforehand. This together with the elimination of shipping costs as well as a 100 days return policy, make up the most important factors that remove barriers to online purchasing for consumers. The manner in which Zalando organizes this is key to their business model and is of high value to their customers.

2.2 Support activities

Firm Infrastructure

Since 2014, the company is in good financial health, generating enough cash to take on additional investments. Their headquarters are located in Berlin, while their warehouses are set up in 4 strategic locations in the north, east, west and south of Germany (Brieselang, Erfurt, Mönchengladbach, Lahr) and recently also 1 in the north of Italy. Additionally, they also have 2 IT-centers in Ireland and Finland, with the technology headquarters located in Berlin.

Human Resource Management

As of 2015, the company has 9 987 employees from over 100 different nationalities. The lion share of workers are employed in Germany, Helsinki and Dublin. Zalando aims at diversification of its staff and scores rather well when it comes to gender balance with a ratio of 47 % women against 53 % men. In top levels, this ratio is less balanced with 33 % of women taking top positions, but Zalando is keen on improving this (Zalando, 2015). It takes a very modern


6 | FINANCIAL OVERVIEW

approach of HRM and puts in a lot of effort to be seen as a modern, young and dynamic company. It is strongly modelled after the spirit of its (still relatively young) founders, and can be compared to the iconic Google workspace approach. However, despite its modern approach, its working conditions in the logistic centers have not escaped criticism on the long working hours and low wages paid to workers coming primarily from Poland and other East European countries (AFP, 2014). Zalando is keen to improve this image as it could detoriate their reputation and brand in the long run.

Technology development

Zalando makes big headlines on its corporate website, putting technology at the heart of its business operations. It is fairly unique to a physical fashion retailer, but very essential to the operations of an online retailer. It’s nothing new that mobile phones have become the dominant platform in terms of browsing the internet, which makes it no surprise that Zalando has invested a lot of resources in the development of their online presence on mobile phones. Data mining, inventory management and CSR are a few of the branches where they are focusing on and try to be innovative.

Procurement

Zalando is of course reliant on procuring fashion labels from other companies to maintain their broad assortment of products. To do this, Zalando has set up contracts with these fashion companies and sometimes even strategic partnerships by which these companies produce unique pieces that can only be found and purchased on the Zalando website. Secondary of course, are the private labels the firm actively owns and manages, from production to marketing.

3 Financial overview

3.1 Profitability

Zalando has sailed through some stormy waters in the early years of its existence. Look at figure 1 below, we note that their revenues have been growing steadily, but it was essentially a loss-making firm until 2014. The company has proven that their business model can be successful and most importantly: profitable. Part of their financial woes before they made profit in 2014 can be blamed on their rapid expansion in Europe, which was a deliberate trade-off between short-term profits and long term growth. This rapid expansion is reflected in the figures of graph 2, showing the proportionate increase of their new European markets.

Their main activities take place in central and Western Europe. In their year reports, they divide their geographic units under DACH, ‘rest of Europe’ and ‘other’. The last category constitutes part of their partner programme in selected countries of which we have limited information. For 2014 and 2015, more than half of their revenues came from the German speaking countries. Even more interesting to take into account are the Earnings Before Interest (EBIT) for each geographic unit.



It shows that Zalando’s profit is due to its sales in the DACH region amounting to 92.2 million for the year 2015. It is still making losses in the rest of Europe with -10.2 million in 2015, although this number was almost halved down from a loss of -18.6 million in 2014. In their oldest financial report of 2013, we find that they were already profitable, although very modest, in the DACH region with an EBIT value of 5.2 million whereas the loss in the rest of Europe was as high as - 100.8 million for the same year. The other part is affected by

costs spiralling out of control. Most noteworthy are the fulfilment costs and marketing costs. Fulfilment costs are linked to package handling, shipping and costs related to returned items. In the graph of figure 3, which shows two of the firm’s most important cost factors, we observe that these two factors alone constituted more than 50 % of costs, taking note that this does not include the cost of sales which explains the losses of earlier years. The graph in figure 3 makes clear that Zalando has effectively managed to reign in its marketing costs. They have been falling steadily from 26.5 % in 2011 to a record-low 11.9 % in 2015. To a lesser degree, Zalando has from 2011 consecutively been able to reduce its fulfilment costs. There is less of a margin to reduce costs there, and the 3 % rise from 2014 and 2015 is explained by having taken on additional investments on improving customer experience and a rise in external fraud. Furthermore, these figures make due that cost control management has allowed them to make profits in 2014 and 2015. It also serves as a worthy reminder that Zalando will have to continue keeping its costs under control.

Figure 2: Revenues per geographic unit

Figure 3: Cost structure and evolution

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DACH Rest of Europe Other

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-250 750 1750 2750

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Profit Revenue

Figure 1: Revenues and profitability (in x1000 €)

The DACH region includes Germany, Austria and Switzerland, and is grouped together because all three countries have the German language either as official language or official secondary language status. All three countries are geographically and culturally linked to each other. Combining their populations makes up 98 million which makes for a very attractive market in terms of marketing and distribution.

The rest of Europe as a category in their accounting tables, is comprised of all the other countries Zalando where is currently active. This includes, in chronological order of Zalando’s expansion: The Netherlands, France, The United Kingdom, Italy, Sweden, Denmark, Finland, Norway, Belgium, Spain and Poland. All these countries combined have a total population of approximately 325 million people.

The total market population that Zalando is active is made up of 423 million people and includes all the core markets of Europe. Source: Eurostat 2016



3.2 Solvency

In the financial report of fiscal year 2015, they acknowledge the financial downturn but remain firm that their rapid growth has always been managed in a controlled manner. From their accountancy figures in their year report, we have assessed whether this is indeed the case, and if their solvency is adequate enough.

Assets 2015 2014

Non-current assets 253.1.4 194.0 Current assets 1863.5 1591.6 Total assets 2116.5 1785.5

Table 1: Assets

Equity and liabilities 2015 2014

Equity 1271.4 1126.7 Non-current liabilities 31.3 30.9 Current liabilities 813.8 627.9 Total equity and liabilities 2116.5 1785.5

Table 2: Equity and liabilities

From table 1 above, it immediately becomes clear that Zalando is in good financial health. The solvency ratio of the company was 60 % in 2015 down from 63 % in 2014, which is a good number. It means that Zalando is in a healthy and balanced state. It has only a low amount of long-term debts which is not unusual as Zalando doesn’t have the same cost structure like traditional retailers, and while the current liabilities may seem high, it is not immediate reason to be alarmed. Calculating the current ratio by dividing the current assets minus inventories (493.5 mln euros), by the amount of current liabilities, comes down to 1.68 for 2015. In general, the higher this ratio, the better, because it means that Zalando is able to pay off short-term debts without issues. Taking inventories into the calculation is important because this poses the most important risk for Zalando of holding on too large inventory stocks with the risk of not being able to sell all items. It is worth nothing that this is a fashion industry specific issue as it is subject to seasonal changes. A current ratio ranging between 1.4 to 2 is therefore ideal, it should allow the firm to take on additional investments.

Consolidated statement of cash flows (in million) 2015 2014

Cash flow from operating activities 80.8 172.8 Cash flow from investing activities -73.7 -42 Cash flow from financing activities 4.7 510.1 Change in cash and cash equivalents 11.8 640.9 Cash and cash equivalents at the beginning of the period 1065.5 424.6 Total cash and cash equivalents as of 31 December 1077.3 1065.5

Table 3: Cash flows

But this figure alone is insufficient to assess their financial position and possibility to expand, which is why we will take a closer look at cash flows and returns on investments. The most important cash flow, the one from operating activities, is positive but has decreased in comparison with fiscal year 2014. Part of this is due to an increase in reimbursements of


9 | VRIO ANALYSIS

customers and tax liabilities. The negative cash flow from investment activities stems from their increased investments in subsidiaries and needs little further explanation. More interesting for the firm and the assessment of viability towards expansion, is the high amount of cash Zalando disposes of, amounting to 1.07 billion euros in 2015. A complete overview of their consolidated income statement used for the calculation of these figures can be found in annex 1.

4 VRIO Analysis

Tangible Resources

Financial Solid financial position, generating enough cash to take on additional investments.

In a stable situation to raise money from financial markets or from other sources

Physical Several IT departments in countries with specialization in IT 2 headquarters Central position in Europe, access to all core markets Highly efficient state-of-the-art distribution and logistics centers

Intangible Resources

Technological Online store, logistic management system, CSR, distribution system, Inventory management, mobile platform

Reputation Very strong brand recognition (75 % in DACH) due to extensive marketing campaigns of the past and present

Its key proposition is free returns and hassle-free purchasing with a high quality customer service and.

Innovation and creativity Innovative logistic and distribution processes Innovative capacities in their IT hubs

Human Resources

Skills Firm-specific practices and procedures in their DC’s 600 specialized IT-workers in countries with locational advantages International employees from all countries they’re active, but centralized in

their headquarters in Berlin Values employees

Organizational Modern 21st century approach of business management (The Google Office Example)

Organizational capabilities

High quality customer service Very quick deliveries at free of charge for consumers Large brand portfolio with a strong mix of premium and cheaper brands as well as a growing private label

portfolio of their own brands Good relationship with their suppliers, attracting new brands with the Partner Program launched in 2011

Table 4: Resources


10 | VRIO ANALYSIS

VRIO Framework

Resource Valuable Rare Costly to imitate Organized properly Competitive Implications

Distribution/logistic centers

Yes No No Yes Competitive Parity

Free and fast delivery Yes Yes Yes Yes

Sustained Competitive Advantage

Brand Portfolio Management Yes Yes No Yes

Temporary Competitive Advantage

Private Labels Yes No No Yes Competitive Parity

IT-Developments Yes Yes Yes Yes


Brand Yes Yes Yes Yes


Online Store Yes No No Yes Competitive Parity

HRM Yes No Yes Yes Competitive Parity

Product Range Yes Yes Yes Yes


Table 5: VRIO Framework


11 | VRIO ANALYSIS

1. Distribution and logistics centers

Their customized efficient and optimized set-up of their distribution and logistics centers constitute a very important role in their business operations. It is highly valuable but not rare and may arguably not be costly to imitate by competitors. Zalando’s organization skills however put this resource on competitive parity.

2. Free and fast delivery

The ability to guarantee and maintain a free and fast delivery of items from their DC to the customer is a core strength of the firm. Furthermore, it is rare that firms offer such a generous policy which makes it hard to imitate as well as it involves a great risk to remain profitable. Yet despite those concerns, Zalando is profitable which proves as evidence that it is managed properly. It can be a sustained competitive advantage.

3. Brand Portfolio Management

Zalando boasts a very large variety of Brands and strongly diversified in both high premium, middle and lower price segments. This can only exist because of an elaborate network of suppliers on which Zalando is dependent. It is quite rare to find such an enormous collection of brands in a single store. It is hard to imitate for both online retailers and even more so for traditional retailers in physical locations. Their consistent availability proves that Zalando manages it properly and constitutes a sustained competitive advantage.

4. Own private labels

The move towards producing private labels is valuable as it allows them to move up the value chain and with their business knowhow and consumer data they should be in the front seat of being able to take advantage of rapid changing fashion trends and consumer needs. It is however not rare, and is not hard to imitate which is an industry-specific issue. It generates a competitive parity.

5. IT-Developments

Technology and data are key components of their business operations. They consciously invest a lot in this because data mining equals strong knowledge on consumer needs and the ability to generate profit on this knowhow. Their high investments and efficient take on their IT-hubs makes for a sustained competitive advantage.

6. Brand

Zalando has invested vast amounts of resources into marketing to develop and sustain its reputation as an established online fashion retailer. It makes their brand value rare and hard to imitate, which makes for a strong sustained competitive advantage.

7. Online Store

The set-up of their store hosting this large variety of brands and broad product range needs to be efficient and well organized and partially relates to their focus on IT as part of strategic business developments. It is however easy to imitate and not rare.

8. HRM

The manner in which Zalando centralizes an international (European) team in its Head Quarters in Berlin is somewhat rare and unique. Their modern approach works as an attraction magnet for young potentials similar to how Google Offices have such a high employee retention rate.

9. Product range

The broad variety of clothes and sequential subdivisions make up a very large assortment of goods. For new entrants as well as established ones, it is somewhat of a challenge to manage this properly as the fashion industry is marked by a substantial inventory risk. Similar to the large variety of brands, it is rare to find such an elaborate and complete variety of clothing which makes for a sustained competitive advantage.


12 | GEOGRAPHICAL EXPANSION

5 Geographical Expansion

As one of the fastest growing online fashion retailers in Europe, today Zalando provides clothing and footwear to more than 18 million active customers in 15 countries in Europe (Germany, Austria, Belgium, Spain, Finland, Spain, France, England, Italy, Luxembourg, Norway, Netherlands, Poland, Denmark, Sweden and Switzerland).

The foreign entry mode for an e-commerce company follows a different strategy than traditional multinational firms. For Zalando, this involves setting up a logistic system to that country; adapt their website to the country’s language, laws and to a lesser extent even culture. They retain a philosophy that there is no ‘one-size-fits-all’ strategy and they actively try to manage this by hiring people in their foreign markets and employing them in their office in Berlin. These people are responsible for adapting the website, payment systems, studying differences in consumer behaviour, price setting and so on. This allows them to deploy a local strategy, and by centralizing their staff in their headquarters in Berlin, there is a potential for an even greater spill over of knowledge to other business segments. Zalando initially started its geographical expansion to the Austrian market just one year after the company was founded in Germany, Berlin. At that time the company established its first logistic centre, operated by their logistic partner DocData. Along with the expansion of their fashion assortments in footwear and clothing, the company expanded its geographical scope in 2010 by launching local language websites in the Netherland in September and France in October. In the Following year Zalando also entered Italy, in March, United Kingdom, in April, and Switzerland, in October. In the same year the company decided to open their own warehouses in Brieselang and Erfurt not far from the Zalando’s headquarter in Berlin. Nevertheless, it was not before 2011, when the company decided to undertake its most ambitious and aggressive market expansion by entering 7 more countries: Sweden and Belgium in April, Spain in May, Finland and Denmark in July, Norway in August and Poland in September. The final expansion was when Zalando entered the Luxembourg market in the final quarter of 2013.

The aggressive foreign entry strategy proved to be successful for the company and generated a market share in the online European fashion industry of 5 percent. Although at first sight Zalando market share may seem relatively low, the online fashion market is in fact very fragmented with a lot of small players. It correspondingly makes Zalando a market leader in Europe and one of the most efficient in business. Zalando’s geographical market is divided into two units: the DACH region comprising the German speaking countries in Europe (Austria, Switzerland and Germany) and the rest of Europe, containing all the other countries in which the company currently operates. The DACH segment accounts for more than 50 % of their revenue or € 1.1 billion in 2014 and is considered to be the core market for the company. In the rest of Europe, Zalando’s market size has been growing rapidly with a growth rate of 37 % to 0.9 billion in 2014 and 40.5 % in 2015.

However, Zalando’s expansion has not progressed without any challenges. With the entrance to the UK market, the company suffered huge losses. In UK Zalando’s expansions backfired due to cultural distance compared to continental Europe. The Anglo-Saxon sphere of influence attracts large US firms, and moreover, Zalando faced fierce competition from popular and local on-line


13 | GMOA

retailers such as ASOS. It made clear that the UK market is in a markedly different stage of development than the continental European market. Their meagre success may also have ado with the fact that the UK stresses Zalando’s centralized continental logistic management as it narrows the delivery options. Although the company follows a centralized logistic model based on web content and logistic infrastructure situated in Germany, it recently it opened its first logistic centre outside Germany. This came in response to the increased demand of the Italian market, which is why the company outsourced a fulfilment centre in Stradella, northern Italy with 20,000 sqm of logistic space. Secondary of course, was to ensure a speedy delivery as the Alpine mountains forms a geographical constraint to their central management within Germany. With this pilot project, Zalando clearly signals that the company business strategy shifts towards finding best solution for each individual market, not only in the technology and assortments scope, but also in developing different delivery options for each markets. Moreover, the company has also expanded its technological competence by opening two technological hubs outside Germany in 2015. The first opened its doors in Dublin, Ireland in April, 2015. According to Robert Gentz, Zalando’s Fashion Insights Centre in Dublin will play a key role as the company continues to lead online fashion and grow their presence across Europe. Following the Tech Hub in Dublin, in August the company decided to open a second technological hub in Helsinki, Finland. The focus on the technological hubs, is to develop “deep data science and engineering research, involving R&D around how to build a real-time insight platform around fashion”.

6 GMOA

The emergence of digital economy and the e-commerce companies has given an alternative for the traditional way of doing business. Moreover, the expansion of globalization and the development of informational technology and telecommunication have changed the traditional way of looking at MNEs. Online retailers such as eBay and Amazon have the ability to cross easily national boundaries without incurring huge costs for establishing their value-chain operation. Zalando is online in 15 European countries and today is one of the biggest e-retailors in Europe. Though the company’s online presence has roughly reached 420 million people (82 % of EU28). There are still some markets with a big grow potential in Europe where Zalando can expand. Zalando is currently online in all Western European countries with exception of Portugal and Ireland. However, the company has not yet undergone its expansion process with Eastern European countries. Therefore, we believe that the Czech Republic, Slovakia, Ireland and Portugal are potential markets for further market expansion and are with accordance with the business strategy of the company.

6.1 Internal analysis

When MNEs crosses a country boarder to create value they often find themselves in disadvantage due to lack of knowledge which competitors from the host state already possess. In order to overcome such costs MNE’s use their resources and capabilities which they have developed at home and apply them in the expansion strategy abroad. (Verveke, 2009). For less than 8 years Zalando has evolved from online shoe store start-up to a multinational tech company with more than 1500 fashion assortments offered in fifteen European countries. In this context the success of Zalando can be explained as the result of developed capabilities and


14 | GMOA

resources during the company’s existence. The intangible and therefore non-locally bound resources are the main driver of company success. As other technological companies, Zalando capabilities in IT development are the core of their business model. Zalando state of the art software technology allows the company to efficiently manage their customer relationship by tracking customer behaviour and offer them the best possible solutions.

The tangible resources and therefore locally bound resources are grouped into two categories: physical assets and financial assets. The physical assets are presented by their distribution and logistics centers, technological hubs and headquarters. Entering new markets could be a challenge for the company if the market location is far from their home market, because Zalando relies strongly on their logistic centers located in Germany. A possible solution of this problem is to set-up its own logistic centre in the respective country or outsource its logistic process with a home-based company. On one hand Greenfield investment will guarantee the company complete control over their operation investments. However, this type of foreign entry strategy incurs some disadvantage such as allocating more financial resources and dedicating more time to set-up the logistic centre. On the other hand, Zalando could undergo expansion by outsourcing a logistic centre which will be less costly for the firm. This strategy, albeit not new for the company, hides also potential risks such as divergence between the Zalando business practices and the outsourced firm.

Financial capabilities are another locally bound source which plays an important role for the firm. Zalando expansion model have seen some downturns for their stockholders and investors. Though the company has been growing with tremendous peace, it was a loss-making firm until 2014. Thus, Zalando could face potential financial risk if the company further market expansion proof to be unsuccessful. However, in the past two years Zalando rapid-expansion strategy change is course towards success as scaling stated to kick off and profits became real. The fact that Zalando made a profit of 1.3 bn euro wins the argument in favour of further expansion for the company.

Human resources are important part of Zalando business model. The competence and commitment of the employees is the main factor for successful management of the company. Zalando corporate culture based on trust and transparency puts the employees in the centre of the company. In order to promote successful work environment and motivation amongst its employees Zalando has developed wide portfolio of training opportunities and specialize training for both management and non-management staff. Although the company training program is on a very high level, the cultural distances amongst European countries still remain quite high. This hides potential risk for Zalando not to capture consumer preference and accumulate losses. Thus, in order to provide best services Zalando has to adjust their employment background in accordance with the expansion strategy of the company.

The intangible and therefore non-locally bound resources are the main driver of company success. As other technological companies, Zalando capabilities in IT development are the core of their business model. In order to ensure that the company could scale and provide customer experience that maximize orders Zalando build its own in-house system for mobile and internet users alike. Reputation and brand name is another important non-location bound resource. Behind Zalando brand recognition is main goal of the firm to connect fashion and people through wide scope of domestic, foreign and in-house designed fashion brands. Moreover, Zalando key proposition for free deliveries and returns combine with its prominent custom support makes the brand highly recognizable amongst competitors and markets alike.


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6.2 Ireland

Ireland is an island state situated just west of the United Kingdom and east of Iceland. It has a population of around 6.3 million people that is highly educated and relatively young compared to the continental European countries. Its main economic and cultural ties are bound primarily to the UK, North and West Europe, and not to forget the USA due to historic migration to the latter and its numerous offshore businesses.

The island state has a very liberal economy with generous tax policies. All this combined with its strategic position in the Atlantic Ocean, and its membership in both the European Union and the Eurozone, has attracted various multinational offshore companies from the US and the rest of the world. This FDI attraction also shows in the impressive spread between GDP (Gross Domestic Product) and GNP (Gross National Product), with GDP being doubled almost. Its GDP per capita is 134 % above the EU-28 (taken as reference category at 100 %). However, while it is politically fairly stable, many economists and observers alike have raised concerns that its economy is not very resilient and especially vulnerable to global economic distortions as was the case in the economic downturn between 2008 and 2013. But it has since the crisis been doing rather well, and its economy is growing steadily again (Central Intelligence Agency, 2015).

With its high attraction towards high-tech industries, it has seen the development of locational advantages which Zalando also exploits with its tech-hub in Dublin. The area that is most advanced in terms of internet technology has therefore been dubbed as the ‘Silicon Docks’, a reference to the highly developed Silicon Valley where many of the

most important internet companies are located.

While in some aspects its Island status may be an advantage, it also puts them into isolation of the heartland of Europe. International traffic is therefore handled primarily by its ports and airports and they have of course continued investing in these. This is different from the UK who does have an inland connection to the continent via its tunnel through Calais. Ireland is thereby restricted to rely on water or air transport for overseas deliveries which may prove challenging for the business model of Zalando. What concerns infrastructure, Ireland has really done a lot of effort to accommodate its strong economic growth that earned the country its nickname of ‘Celtic Tiger’. Inland traffic is handled through their well-maintained and modern railroad- and road- infrastructure. Another point of interest for Zalando is the degree of urbanization, which hangs at 63 % in 2015 with Dublin as the biggest urban area in Ireland (Central Intelligence Agency, 2015).

Internet penetration in Ireland is high with 83.6 % of the population actively using the internet (Central Intelligence Agency, 2015). More importantly, the Eurostat survey on internet retailing reports that 58 % of individuals purchase online, which sets around the average for the Eurozone at 56 % in 2015 (Eurostat, 2015). Fashion expenditures of Irish households in 2014 levels around 3.7 % of the total household budget which is a bit below the Eurozone average of 4.9 % (Eurostat, 2014).


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6.3 Portugal

Portugal borders the Atlantic Ocean and shares its land borders with Spain to the east. It has a population of about 10 million people, roughly equivalent to Belgium and Sweden. An estimated 63.1 % of the Portuguese live in urban areas, with Lisbon and Porto as largest cities each counting over a million inhabitants. It is a member of the European Union and of the Eurozone which replaced their currency with the Euro in 2000 (Central Intelligence Agency, 2015).

Economically, Portugal has seen sailed some stormy waters especially during the financial crisis which almost led to a default and forced them to take austerity measures and to be reliant on the EU-IMF financial rescue package (Central Intelligence Agency, 2015). From 2013 and onwards, the economy has been recovering slowly, its GDP per capita is however one of the lowest in the EU and of the Eurozone. Its GDP per capita in 2014 ranked at 83 % below the EU-28 which is the reference category (Eurostat, 2015). Although its public debts are very high exceeding over 129 % of the country’s GDP, it is now experiencing a slow but steady economic recovery.

Portugal reaps the benefits of the European single market and is well on its way of modernizing its country. Its main import and export partners are Spain, France, Germany, Italy and the Netherlands and also the USA (Central Intelligence Agency, 2015). Its westernmost position on the European continent make them an important transit country for transnational trade to the south of Europe.

Portugal is in fact a very important country for the fashion industry and has in recent decades been attracting a lot of (foreign) investment towards this industry. It hosts a lot of textile and leather factories and is especially attractive for its high quality products and lower wages and costs (Forbes, 2015). Furthermore, the prevalence of a very modern and well-developed transport infrastructure over land, air and sea make it especially attractive for foreign direct investment.

The online presence of people in Portugal is somewhat modest, with only 66,1 % of the population having access to the internet (Central Intelligence Agency, 2015). The data collected by Eurostat on online shopping sketch a similar picture with only 31 % of individuals reporting to have purchased something online in 2015 which is well below the Eurozone average of 53 % (Eurostat, 2015). Narrowing this down to the percentage of people who purchased clothing online is no cause for celebration either with only 15 % having purchased something online (Eurostat, 2015). Despite these low numbers, the Portuguese do spend more on clothing and shoes taking up 5,7 % of the household budget compared to Eurozone average of 4,9 % (Eurostat, 2014). On a side note, this is below German budgetary expenditures taking up 4.9 % whilst Italians Estonians span the crown with 6.1 % and 6.9 % respectively (Eurostat, 2014). Hitherto, other surveys seem to lead to the same conclusion that the Portuguese are somewhat more conservative when it comes to online shopping.


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6.4 Czech Republic

Economic overview Czech Republic is relatively small and highly open economy which exports nearly ¾ of its output. The country covers an area of 78.864 sq. km with a population of 10.5 million people and active labour force of 5.3 million. Having a strategic geographical location in the centre of Europe, the economy is highly reliant on its trade partnership with the rest of the European countries, accounting for 80 % of the total trade.

Over the last two years the economy has experienced a strong economic rebound and started to emerge from the 2012/2013 economic recession with the real GDP growth rate of 4.5 % in 2015. Moreover, the higher rate of economic growth has resumed the process of convergence towards the average EU income level. Though GDP per capita level still remain 20 % below the EU average level, the Czech Republic have surpassed most of its neighbouring Central Eastern European countries (Commission, 2016). The average real wage growth has increased with 2.2 % reaching 971 euro in 2015. On the other hand, the unemployment rate has fallen to 4.6 % making the country among the first three countries in EU area with the lowest level of unemployment.

The Czech Republic has one of the most advance transport infrastructure in CEE region with 55.761 km in road network. Its geographical location in the centre of the European market and its transitional corridors with neighbouring countries makes the country very attractive markets for foreign investors. The high density of the road and rail network ranks the Czech Republic amongst

2 Functional urban is described as a measurement for urban areas with a population higher than 50,000 inhabitants.

the most developed countries in world (15th in road density and 3th in rail road density).

The service sector accounts for 62.7 % of the total GDP for the country. The economy has also developed highly competitive business support services sector in finance, accounting, ICT and customers support and logistics.

Figure 4: GDP growth of some East European states

E-commerce sector: key indicators The Czech Republic has a population of 10.5 million people from which 75 % live in Urban Area. Moreover 45,6 % or 4.759,524of the population lives in 16 functional urban areas2 from which 5 urban areas are with population above 200, 000 people while the rest of the have population between 70,000 and 200,000 . The urban population of the country is more or less evenly distributed, with exception of Prague which alone accounts for 1.7 million inhabitants.

From the graph bellow it is evident that number of internet users has been rapidly growing in the past 10 years. In 2014, 79 % of the households have access to internets which is very high compare to numbers in 2006 (29%). In addition to the positive growth rate, the price for the internet access service has been following fast. The mobile phone subscriptions have also been growing in the


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recent years reaching 130 subscriptions per 100 inhabitants in 2014. Compare to other European member states the Czech Republic have above the average rate of mobile subscription (see figure below).

Figure 5: Internet access and mobile subscriptions (Source: Eurostat)

The e-commerce sector in 2014 accounts for 8.1 % of the total retail turnover or 3.5 bn Euro. However, in the last year (2015) the e-commerce grew with 20 % and exceeded a turnover of 900 million euro in the last quarter, compare to 2014 the sector increased with only 1 percentage point. The sector is also expected to continue growing with 16 % in 2016. The main driver of the growth in the sectors is the increased online purchase of electronics, toys and clothes (Henoch van Paesschen and Dirkjan Vis, 2015).

The evidence of the growth of the e-commerce sector is also visible from the graph below. According to results based on ICT survey conducted by the Eurostat, 45 % of the all individuals have made an online purchased in the last year (2015), while in 2006 this percentage has dropped to 13 %. Moreover, the results suggest that in the last two years the growth of on-line purchase has been increasing, presumably due to the recovery of the economy. The figure below indicated also that the online purchase of cloths has been increasing in the

last 10 years According to the survey, in 2015 28 % of all individuals said that they have bought a fashion assortment online, while in 2006 it was only 3 %. The data reveal that the average growth rate in purchase of cloths has increased with 22 % between 2013-2015 which makes the country very attractive for fashion retailors and business alike.

According to the ICT survey, the main reason given for not making a purchase online is loyalty to the shops or by force of habit, followed by luck of necessary skills, payment security concerns and concerns about receiving or returning the good. Moreover, from the figure above it is evident that level of perceived barriers to buying goods on internet has increased in all indicators compare to the pre-crises period. However, the level most of the indicators in 2015 is close or below 10 %, with exception of “loyalty to shops”, which could be regarded as very low.

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Figure 6: Online purchases


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6.5 Slovakia

Slovakia has created prominent investment and business friendly environment which is highly recognized both among nations and investors. Slovakia covers an area of 49.035 sq. km and has a population of 5.4 million people. Slovakia economic growth recovered fast after the economic crisis in 2011, however the post-crisis growth rate has been increasing with a very slow paced. Annual growth rate slowed to 1.8 percent in 2012-2014 compare to 8.3 % in 2006-2008. In 2015 real GDP growth picked to 3.5 % thanks to increase in household consumption and public investments. The unemployment rate falls to 11.5 and it is expected to continue falling in the next two years. The GDP per capita on the other hand continue to grow, reaching 75 % of the EU average. Slovakia have an average annual income of 824 euro and the highest labour productivity ratio among the CEE and SEE region since 2006, making the market very attractive for retailors and businesses alike (see the figure 6).

The present infrastructure of Slovakia has a very high density with total road network of 17.946 km, including 180 km of expressways and 3,317 km of 1st class roads. Recently Slovakian road network has been also on process of intensive development and modernization. Moreover compare to situation in 2000, the road network density have increased from 355.7 m/sq. km in 2000 to 886,4 m/sq. km in 2008 (SARIO, 2010). Slovakia has a population of 5.4 million inhabitants from which 53.9 % lives in urban areas. The population density of Slovakia is 113 people per sq. km. Moreover, around 2 million people lives in 8 urban areas with population of more than 50, 000 inhabitants, from which their biggest city Bratislava accounts for 700,000 inhabitants.

Figure 7: GDP per capita as a % of EU-28 (Source: Slovakia Outlook: EU Commission report)

E-commerce sector: key indicators According to Eurostat, the number of internet users has been increasing in the past 10 years reaching 79 % in 2015 (see figure 8). While in 2006 the percentage of households who had access to internet barely surpassed the 20 % level. The mobile subscription has also experience some growth, although with a slower paced in the last two years. By 2014 mobile abonnements reached 129 subscriptions per 100 inhabitants, a number not so distance from their rival partner the Czech Republic and above the average EU level (figure 8).

Figure 8: Internet access and mobile subscriptions (Source: Eurostat)

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The e-commerce sector has showed great potential for growth in the last 2 years. The total turnover from e-commerce in Slovakia was 13 % in 2014 and 18 % in 2013. Moreover, compare to the EU average it was higher with 4 % in 2013. According to a Survey conducted by Media Research Slovakia, more than 25 % of the respondents buys online a product or services at least once a month. The finding also indicated that Slovakian buys most frequently products such as clothing/footwear, cosmetics, electronics and books. Although Slovaks buys usually from domestic shops, 46 % of the interviewee said that the bough a product from a foreign e-retailor (Lesakova, 2015).

The data from the ICT survey also indicates growth in the sector. According to the survey 50 % of all individuals have made a purchase in 2015 and in compression to only 11 % in 2006. Figure 7 below also shows that the share of cloths and sports goods sold on internet has been increasing since 2006. By 2015 33% of all interviewee said that they have bought fashion assortment on internet. In comparison to 2006 the percentage change was 29 points less. Thus the figures suggest that the e-commerce market is attractive for e-retailors, especially in specializing in fashion sells and business alike.

According to the ICT survey, the main reasons given for not making an online purchase in 2015 is also loyalty to the shop (28%). Other much less important reasons include concerns about receiving the good (6%), payment security concerns (6%) and luck of necessary skills (8%) Moreover, according to data, the perceive barriers for online purchases in regard to

security payment concerns and concerns about receiving the good has decrease with 3 percentage point, indicating that e-commerce sectors starts to gain more trust in the consumers.

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Figure 7: Online purchases (Source: Eurostat)


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6.6 Country analysis

Czech Republic

The country analysis reveals that the Czech Republic could be a viable choice for further expansion of Zalando. Though the purchasing power of the country still remains below the EU average, in the last two years the economy has kicked off and it’s again on the way of reaching the EU threshold. Moreover, the analysis reveals that the e-commerce sector, which accounts for 3.5 bn. euro, shows great potential for growth and comparably high economic trust in the consumers. Mobile and Internet users have also been increasing in the last 5 years with tremendous peace reaching above the EU average level. Another favourable fact for international expansion to Czech Republic is its close proximity to Germany. It is without doubt that the Czech Market is very accessible for Zalando’s distribution system and thus, respectively very attractive choices for Zalando close proximity strategy for expansion. Moreover, the Czech Republic has a high dense road infrastructure, ranking the country amongst the top 13 in world. Thus, the geographical location of the country combined with its modern road infrastructure helps Zalando to guarantees its fast delivery and return policy and decreased their costs from return orders. With combination of low wage costs, the country also provides healthy environment for natural growth to many ICT companies such as Microsoft, DHL, and IBM which makes it attractive for Zalando and its greenhouse expansion strategy in setting up Tech Hubs. Furthermore, the lack of any big competitors for Zalando in this market wins the argument in favour of further expansion in the Czech Republic.

Slovakia

Slovakia’s deep structural reforms undergone in the past five years created a dynamically growing business environment highly recognized by nations and investors. The economy of Slovakia showed quick recovery after the financial crisis. Moreover, the purchasing power of the country has been increasing with tremendous speed since 2o06, reaching 25 % below the EU-28 average (2015). With average income 824 euro, Slovakia would seem to be a potential market for Zalando internationalization process. Moreover, the location advantage of Slovakia combine with Zalando close-proximity expansion strategy is an objective reason for Zalando to enter the market. Thanks to EU structural funds and public investments, the road infrastructure is the process of modernization. The high density of the read network combine with its modernization process could guarantees Zalando fast delivery and return policy which is of the main competitive advantage of the company. The e-commerce sector has also been growing in the past 5 years reaching total turnover of 13 % in 2014 and 18 % in 2013 by all enterprises and a total volume of e-commerce transactions of 3.9 bn. euro. Moreover, accordion to a ICT survey conducted by Eurostat the perceived barriers for online shopping is below 10 % which indicates that consumers trust in the sector remain high, thus, making the market very attractive for e-retailors such as Zalando. The population access to internet has also been increasing in the last 10 years indicating that the country has well developed telecommunication infrastructure. Thus, Slovakia could be seen as another viable choice for Zalando expansion strategy in the future.


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Portugal

Portugal is an interesting country in conjunction with Zalando’s production private labels, but less so in the possibility to enter the market. Several data make clear that the Portuguese internet retailing market has not yet kicked off, and internet-only retailers such as Zalando would require to make substantial investments to motivate buyers to purchase online. This does also come with an opportunity but it inevitably involves a considerable risk of being unprofitable in the short and long run. This in combination with Zalando’s past expansions having just started to make profits in 2014, might make it difficult to motivate towards its shareholders as well. Although it serves as an argument that the company is already active in Spain, Portugal is not as big a market as the latter country.

Ireland

Ireland would seem like a viable choice to expand towards, and while they have highest purchasing power of all 4 countries in the analysis, it also faces country-specific issues that are not to be neglected. Ireland as an island state means that Zalando has only 2 options to service this market. It can only ship its parcels by shipping them overseas, or it must build/outsource a logistics centre on the island itself. Both options can be questioned for their profitability as the Irish market is not so big either. Furthermore, Zalando would not be able to guarantee its shipping policy and fast delivery service. Shipping through the UK would theoretically be more economical, but up to date, there exists no bridges or tunnels linking the two countries together. It sketches a similar situation as with Portugal in terms of viability. Ireland would stress the business model of Zalando and its centralized management of its logistic centres.

7 CAGE

Cultural Distance

Zalando has already expanded in the biggest market of CEE region by entering Poland. Therefore, it is reasonable to believe that the company has accumulated knowledge and sensitivity in regard to cultural differences between the domestic market and Poland. Thus, the acquired tacit knowledge in the CEE region is a prerogative for successful expansion in other Central Eastern European countries such as the Czech Republic and Slovakia.

However, in order to assess more clearly the cultural distance between Germany, Slovakia and the Czech Republic, we will use the 5 dimensions’ approach developed by Hofstede. In relation to the first dimension “power distance” the findings shows that the Czech Republic has less power distance in comparison to Germany, while Slovakia score on this indicator 100 per cent (see figure 9). On the second dimension “individualism” the score of all three countries is above the average level ranging from 52 % for Slovakia, 58 % for Czech Republic to 67 for Germany,

Figure 9 Dimensions of national culture 1 (Source: https://geert-hofstede.com/ 1)

)


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indicating that the individual achievements and values a highly valued in all three economies. On the third dimension “masculinity” Slovakia is regarded as a very masculine culture, while Germany and the Czech Republic scores close to the average. The results of uncertainty avoidance points out that both the Czech Republic and Germany tolerates risk aversion more highly compare to Slovakia. Likewise, all three countries show high percentage level of long term orientation with the highest level in Germany, followed by Slovakia and the Czech Republic (see figure 9). Last but not least, the findings indicate that the Czech Republic and Slovakia have quite similar level of indulgence, while Germany score a little bit higher on this indicator. Although all three markets have visible differences between their cultural backgrounds, they still remain quite similar in some indicators such as individualism, uncertainty avoidance and indulgency. Moreover, all three countries have shared common history and culture since their existence, indicator for which is the high share of German speaking people in both Slovakia and Czech Republic (Sandford, 2013).

Administrative Distance

All three countries are members of the European Union and benefits from the Common European Market and its governing principles of free movement of factor of productions and people. Moreover, the EU community law has a primacy over the law of National States empowered by the doctrine of supremacy of EU law3, and therefore indicating very low administrative distance between The Czech Republic, Slovakia and Germany. Thus, this could be seen as another explanation of why Zalando is so successful in their logistics distribution and could also vote in favor of further expansion in the Czech Republic and Slovakia. Moreover, both countries have shown progress in strengthening their institutions. According to Transparent International and their developed Corruption Perception Index4 , the Czech Republic has moved with 7 percentage points since 2012, reaching 37th place in the world, while Slovakia takes the 51st place in the world as of 2015.

Geographical Distance

As a Central European Countries, the Czech Republic and Slovakia are with a close distance to Germany and respectively to Zalando fulfilment logistic centers. Moreover, the small distance of 300 km between Prague and the logistic center of Zalando in Erfurt, combined with well-developed road infrastructure of the Czech Republic wins the argument in favor of further expansion to the market In regard to Slovakia, albeit the country does not have border with Germany, it still remains with a very close proximity to Zalando in comparison to other markets in which the company is active such as Belgium and the Netherlands. What is more, in the recent years the road infrastructure has been efficiently improving thanks to government spending and EU structural funds.

Economic Distance

Although the GDP per capita still remains below the EU average as for the Czech Republic and for Slovakia, both countries have shown tremendous progress in strengthening their economy.

3 http://www.eurofound.europa.eu/observatories/eurwork/industrial-relations-dictionary/supremacy-of-eu-law 4 http://www.transparency.org/cpi2015


24 | RELATIVE STRENGTHS AND WEAKNESSES

Moreover, in the last two years the economy of both countries kicked off and it is again on the way of reaching the EU average level. However, Slovakia GDP per capita in some regions in the country is characterized by high variance compare to the capital level, which could be regarded as an exposure towards financial risk for Zalando. Nevertheless, the Slovakia regional GDP per capita has shown some improvement towards convergence in the last two years and it is expected to continue moving in this trend.

8 Relative Strengths and weaknesses

To analyse the competitive power Zalando, Porter’s Five Forces analysis will be used to determine the company’s strengths and weaknesses.

Rivalry among existing competitors: High

For the European market, the fashion industry is to one of largest and most important industries of the region. With the great variety of cultures and local preferences, the fashion industry is fragmented and featured by strong online and offline fashion competitor which Zalando has to face. Moreover, the online fashion industry contrary to the traditional one is still growing which puts in even more competition from smaller players. Some of these firms even have similar business models, price strategies, products or/and services as Zalando. Many online firms have existed far longer than Zalando and consequentially have built greater economies of scale and a larger customer base than Zalando. It was only until recently that the firm started to reap the benefits from its universal presence in the core market of Europe. In addition, several producers and/or suppliers of brands to Zalando are sometimes both producers and distributor of fashion articles. However, Zalando’s business model, reputation and customer base has allowed them to differentiate their offer from the latter category by hosting a greater variety of brands and clothing that each individual supplier/producer could possibly host themselves. Zalando is thereby able to reach specific interests groups. Therefore, the first force is considered as high.

Threat of new entrants: Medium

The online fashion industry, unlike the traditional one, has low barriers to entry if a retailer is concentrating on one specific country. This can be concluded from the start-up story from Zalando as well as new entrants require only a modest starting capital to purchase stocks and to create an internet presence. But beside this, there are no more specific skills or permits required to establish a new internet store, nor do they have to purchase/hire stores to sell their wares. Everything can (quite literally) be done from your basement or garage until your business grows and the rest is history. But if start-ups are concentrating on the whole European market, it has faces larger entry barriers. In this environment, there are already strong established companies with economies of scale and scope with broad product ranges that precedes a different kind of knowhow and business as usual. Zalando shows as an interesting case study and proves how at some points their future survival hanged in the balance because of how complicated the entrance of new player is in the diverse European market. It requires an efficient logistic and distribution network to be built up from scratch. So albeit, the threat of new entrants can be rated as medium, because of the easy entrance of small local online stores that can develop into potential rivals for Zalando.


25 | RELATIVE STRENGTHS AND WEAKNESSES

Bargaining power of suppliers: Low

Zalando has a high number of different suppliers representing labels across all product categories. All together, they have low bargaining power. With the high reputation and success of Zalando many local suppliers are eager to sell their items through this online retailer. In recent years, Zalando included premium popular labels in their assortment which adds more strength to Zalando’s bargaining power and differentiates the company from other competitors. These forces exert pressure on those who refrain from supplying to Zalando. With the continued growth of the online store, Zalando’s ability to bargain will increase and even more global brands will be included. It’s essentially a snowballing effect.

Bargaining power of customers: High

Shopping over the internet has become very popular in Europe. In 2015, 65% of all internet user between 16-74 years old bought or ordered goods over the internet. More than 60% of those shopped for clothes and sport goods (Reinecke, 2015). Considering these facts, costumers are in a strong position to influence prices as the internet enforces some kind of transparency. They can quite easily, more easily than in traditional stores, compare for prices or search for stores that offer promotions of some sort. Therefore, online stores have to attract customers with unique offers such as prices, niche products and/or special service. Because of that, the bargaining power of customers is classified as high.

Threat of substitute products: Medium to High

In regard of different individual tastes, the various kinds of materials, the wide range of patterns and colours, fashion is a very multifariously industry. Therefore, the threat of substitutes is classified as high. If costumers do not like specific features of products, it is easy for them to find other similar substitutes according their demands and requests. They are able to search products on different fashion sites and/or in physical stores for cheaper price or high-graded quality. Taking all the above information into account, it is possible to conclude where Zalando’s strengths and weaknesses are.

Zalando is a well-established European market leader with fast growing business and large customer base. With a strong international management, including the IT and logistics team, the company created a lead in the competitive environment. In addition, their wide product and brand portfolio let them stand out from others. Every country-specific customer has the opportunity to shop secure and stress-free with the convenient service that the online stores offers. This includes, among others, the clear and easy navigable website, various payment possibilities, free shipping and return, and not to forget, the 100 days return guaranty that no other competitor offers. Without trying the sketch out a business fairy-tale, not all is bright on the horizon either. Repeatedly, Zalando shows red numbers because of their aggressive growth investments with the danger that someday they are unable to rescue themselves (DPA/TC, 2015) Because of the increasingly complex product and customer structure, the variable costs are increasing as well. Furthermore, variations in quality rise between the various products and brands which can cause negative customer ratings. Publicity is a major theme which can lead to falling customer base and loss of profits. In the recent years, Zalando troubled with criticising news. On one hand, hazardous chemical pollutants in distributed shoes were laboratory-


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confirmed (Duggleby, 2014). And on other hand, a video became public which showed bad working conditions under the roof of the online retailer (Marzilli, 2014). It is possible to conclude, that Zalando’s management is too strongly focused on the growth of the company while partially neglecting its stability and health. Last but not least, the generous services it provides to its customers is not only a strength, but also bares a weak point of the company with high shipping return rates and this seems to be an upward trend (Popplow, 2012).

9 Competitors

The competitors of Zalando can be divided into two groups that each operate distinctly different from the other. The first and most important group of competitors are the internet-only retailers who operate in the main segment of Zalando, the second are retailers who primarily rely on physical stores for their sales but also have an online store. One of the major rivals of Zalando is the US giant Amazon, which is considered as the largest shipping retailer worldwide (Li, 2015). But contrary to Zalando, Amazon does not directly focus on fashion sales alone, but offers a very broad product range from electronical devices, books to movies and food. Furthermore, as a global online retailer, Amazon lacks sufficient localization in Europe and finds itself in a more difficult position to offer the same terms of payment and speedy delivery that Zalando offers (Amazon, 2016).

In 2009 Amazon acquired the online retailer Zappos which is a strong established company in the United States with a similar business model like Zalando. Back in time, this retailer was perceived as role model in Europe. It is not a direct a competitor of Zalando because it operates primarily in the United States. But if it decided to expand with Amazon logistic network in Europe, the online retailer can develop itself to become a strongest rival (Zappos, 2016). Some additional competitors in the online shopping scale are the global retailers ASOS from Great Britain, and the Italian retailer YOOX. Both fashion companies operate in the same segment and have a similar offer compared to Zalando, hosting a very wide range of international brands and in-house private labels. In contrast with Zalando, they both concentrate primarily on specific customer groups. ASOS is specialized for youth fashion where the majority customers are twenty-something shopper (Asos, 2016). And YOOX focus on the high income consumer which is why they offer luxury and high fashion articles (Yoox, 2016). In this aspect, Zalando and their versatile assortment stand out from these online retailers.

The Swedish online store H&M and the Spanish internet retailer Zara are both big companies that compete against each other and Zalando. They however, operate in a very different business environment than Zalando. Compared to the other mentioned online stores, these companies have established stores in the offline environment. Their strong brand awareness enhances their online reputation and the business success. However, these physical fashion retailers are of course constricted to a more limited offer than Zalando or the competitors above, as it only sells its own fashion labels.

10 Risk profile

Zalando is essentially an online retailer reliant on ‘clicks’, however the firm not entirely independent from ‘bricks’ either. The German retailer sells clothing, shoes and accessories. It competes directly against established clothing retailers whose primary source of income comes


27 | RISK PROFILE

from physical stores. This immediately sets out the main difference between Zalando and ‘physically present’ retailers, and although the ‘bricks’ retailers have started to take a move on the internet as well it is to remain clear that they operate distinctively different from an internet-only retailer like Zalando. Mixing ‘bricks’ with ‘clicks’ for traditional clothing retailers should serve as a strategy to gain additional revenues and secondly because an online presence is almost considered mandatory. For Zalando, the online presence is the only and single-most important source of income which makes clear that it demands a different strategy than a traditional clothing retailer.

10.1 General risks

Financial risk

The most important financial risk involved is tied to inventory management, marketing and fulfilment costs related to the expansion to these new markets. Their current logistic centers are not yet operating at full capacity, and both the Czech Republic and Slovakia combined are not expected to stress their operations to much. Albeit, the financial risk can be assessed as low, as it requires no substantial investments. Both new markets are geographically very close to Germany, which comes as a benefit to Zalando’s centralized distribution pattern. It would be able to guarantee its fast delivery policy.

Exchange rate risk

There is no exchange rate risk involved in trade and expansion to Slovakia as they have adopted the euro as their currency. This is however, not the case for the Czech Republic which maintains its domestic currency: The Czech Coruna. But because most of the trade in their country exists between EU countries, and in extension, the Eurozone, the currency is fluctuating strongly with the Euro. The Czech National Bank allows the currency to fluctuate with the Euro to a certain limit, but it is no hard peg nor is it clear if they will maintain this policy (Scrive, 2016). All the rest assured, it should not pose a great risk to Zalando, certainly no greater than its current active markets like the UK, Sweden or Switzerland.

Political risk

The political risk involved with expanding towards Slovakia and the Czech Republic can be set as low. Both countries are member states of the EU that exerts strong influence on both countries, as well as its powerful neighbour to the north: Germany. Because both countries are relatively small but open and liberal market economies, they rely heavily upon trade. This dependence acts as a watchdog which should create and sustain a stable business environment and political environment.

10.2 Foreign entry mode

The expansion strategy towards the Czech Republic and Slovakia shouldn’t differ much from their earlier modes of expansion. All four logistic centres are not operating at full capacity yet, so it could do without a further expansion of these centres without stressing their operations too much. The similarities of earlier expansions come with marketing efforts and contracts with postal and shipping companies for the delivery of their parcels.


28 | CONCLUSION

Marketing

From the cultural distance analysis, we have concluded that both countries share a historical and culturally legacy, and Germany’s cultural distance to either countries is lower than man of the other countries they’re currently active in. Zalando must put heavy emphasis on targeting the right consumers through its marketing while keeping its costs in check. Building on earlier successful marketing campaigns, it should therefore be able to recuperate some of these and adapt them to be effective on Czech and Slovakian consumers. The most effective medium to reach a broad target audience for the Czech Republic are up to date television and cinema advertising (Statistia, 2016). The situation is the same for Slovakia where both mediums are the most popular to reach the biggest audience (Statistia, 2015). Cinema advertisement is especially useful as it generally reaches a younger audience that makes up a very important part of Zalando’s customer base. Additionally, the on-screen advertisement should be combined with targeted online advertisements and internet coupons providing additional price cuts on the customer’s (initial) order. We advise on an aggressive marketing and intense marketing campaign where the client’s benefits and the company’s added value is highlighted.

Postal and shipping companies

Because part of their business strategy involves speed and free of charge shipping, they must find a worthwhile agreement with reliable partner. It does involve a certain risk, and it requires Zalando to monitor the quality of its partner early on. On the other hand, Zalando’s business model has an immense impact on shipping companies and puts the retailer in a very strong position to negotiate on terms and prices. This must be seen in reference to the pressures on shipping companies’ traditional business models that have come under stress with the transformative changes of the internet age. Hitherto, the risk should therefore be manageable. The largest postal company of the Czech Republic is the state-owned Vesak Posta and services the entire country. It is essential for Zalando to set up a strategic partnership as it has also done in other countries (Post and Parcel, 2012). The partnership is necessary as to optimize the speed of delivery that Zalando has been very successful at. The same strategy is applicable on Slovakia where Sloviansk Posta, also a state-owned postal company, services the entire country. Additionally, Zalando could also opt to build on its partnerships with many of the international courier companies such as DPD, TNT or DHL. However, it may be more economical to go for the domestic postal countries in the Czech Republic and Slovakia.

11 Conclusion

Weighing costs and benefits towards expansion

Taking into account all the empirical analysis of previous chapters, we can conclude on a cost and benefit analysis on the expansion towards the Czech Republic and Slovakia. The costs clearly outweigh the benefits of generating bigger economies of scale and scope. Their current distribution centres are not operating at full capacity which serves as an important argument towards expansion. Furthermore, the company can build upon earlier successful marketing campaigns and both the Czech and Slovak market combined are not too large. It should in the medium and long term generate a steady customer base and revenue stream if the firm


29 | CONCLUSION

manages to extend its policy and diversify where necessary. Expanding their operations to Poland was the first time the company experimented on the Eastern European market and was accredited to be a success. Geographically and culturally, both new markets are close to Germany and should not stress the centralized logistic management strategy of Zalando. The entry also comes at an impeccable timing as both are amongst the economic growers of the EU and an early presence is key on securing long-term growth, while the West European markets are moving up the PLC entering stages of maturity. It puts Zalando in a more than advantageous position as neighbouring country and strong trading position of Germany which indeed generates a locational advantage for the firm. The Czech and Slovak market could build upon the experiment in Poland and provide more knowhow on expansion to even bigger Eastern European markets such as Ukraine and Romania.

With minimal efforts, it could generate a win situation and pave the road to further eastwards expansion. It has a large enough stock of cash to take on this investment. With all risks being assessed and accounted for, it should not cause unrest amongst its stockholders if the decision towards expansion is motivated accordingly.


30 | CONCLUSION

Annex 1: Consolidated income statement

In x1000 euro Jan 1 – Dec 31 2015 Jan 1 – Dec 31 2014

Revenue 2958.2 2214.0 Cost of sales -1624.0 -1255.3 Gross profit 1334.1 958.7 Selling and distribution costs -1118.9 -793.8 Administrative expenses -129.0 -109.2 Other operating income 10.2 12.2 Other operating expenses -7.0 -5.8 Earnings before interest and taxes 89.6 62.1 Interest and similar income 1.2 0.2 Invest and similar expenses -6.1 -4.6 Result of investments accounted for using the equity method

-1.6 0.0

Other financial result 3.5 -0.1 Financial result -3.0 -4.5 Earnings before taxes (EBT) 86.6 57.6 Income taxes 34.9 -10.5 Net income for the period 121.5 47.1 Thereof net income attributable to the shareholders 121.5 47.1 Net income for the period as percentage of revenue 4.1 % 2.1 % Basic earnings per share (in euro) 0.49 0.21 Diluted earnings per share (in euro) 0.48 0.20

Financial position

Non-current assets

Dec 31 2015 Dec 31 2014

Intangible assets 48.8 29.0 Property, plant and equipment 128.2 111.0 Financial assets 17.6 49.4 Deferred tax assets 47.5 0.9 Non-financial assets 3.5 3.7 Investments accounted for using the equity method 7.4 0.0 253.1 194.0 Current assets Inventories 493.5 348.3 Prepayments 1.4 0.9 Trade and other receivables 149.7 140.1 Other financial assets 175.9 13.6 Other non-financial assets 66.7 37.6 Cash and cash equivalents 976.2 1051.0 1863.5 1591.5 Total assets 2116.5 1785.5


31 | CONCLUSION

Equity Dec 31 2015 Dec 31 2014

Issued capital 247.0 244.8 Capital reserves 1140.9 1120.4 Other reserves 1.4 1.0 Accumulated loss -118.0 -239.5 1271.4 1126.7 7.4 0.0 Non-current liabilities Provisions 9.1 5.8 Government grants 1.8 3.0 Borrowings 14.4 17.6 Other financial liabilities 2.1 0.6 Other non-financial liabilities 3.1 1.3 Deferred tax liabilities 0.8 2.6 31.3 30.9 Current liabilities Provisions 0.0 0.5 Borrowings 3.2 3.2 Trade payables and similar liabilities 645.8 492.1 Prepayment received 8.6 6.7 Income tax liabilities 18.2 6.1 Other financial liabilities 71.8 61.9 Other non-financial liabilities 66.1 57.4 813.8 627.9 Total equity and liabilities 2116.5 1785.5


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