Zalando Business Model | How Does Zalando Make Money?

Zalando is an eCommerce company founded by David Schneider and Robert Gentz in 2008. 

Zalando was originally called Ifansho, but it changed to Zalando to reference the Italian word zalare, which means “telling jokes.” Zalando business model is based on purchasing inventories and selling them for a profit. 

Zalando also charges a commission to businesses it works with for the chance to sell through its platform. 

The commissions Zalando earns from each purchase are not disclosed. Advertising on Zalando’s website and the app also contribute to the company’s revenue.

What is Zalando?

Zalando is a fashion e-commerce platform with products for men and women, including shoes, clothes, and accessories.

Zalando earns money from product sales, commissions on products, fulfillment services, subscriptions, advertising, and a style box. Zalando is a marketplace retailer.

Zalando was founded in 2008 and has evolved to become one of the largest fashion websites in Europe. The company went public in 2014 and now operates in more than 20 countries.

How Does Zalando Make Money?

Zalando is an e-commerce site where people can buy clothing from around Europe.

The company offers clothing for men, women, and children, including new and used items. The customer can shop by categories, such as shoes, accessories, jeans, and shirts.

The brand selection on Zalando is also quite varied (in fact, it has more than 2,000 options). The store offers mainstream brands like Nike as well as upscale labels like Armani.

Unlike Farfetch, which sells clothing from independent brands that it doesn’t own, most of the clothing sold by Zalando is purchased wholesale. 

However, it allows brands to use its logistics service and sell their products through its platform.

The company distributes and fulfills products to consumers (with warehouses in Germany and Poland).

Thus, customers have the option of returning their purchase within 14 days, no questions asked.

Zalando maintains physical retail outlets, called Zalando Outlet Stores, throughout Germany and its online business.

Zalon is also a styling service offered by the corporation. The company offers a monthly service where consumers get to try one to two outfits (like what turned Stitch Fix into a billion-dollar public company).

You can access Zalando’s mobile application or website (available on Android and iOS devices).

How Does Zalando Make Money?

Zalando earns money from product sales, affiliate commissions, fulfillment services, subscriptions, partner programs, advertisements on its website, and a style box.

The goal of Zalaando’s business plan is to become a platform for fashion manufacturers to sell their products. 

Thus, the company resells things it purchases at wholesale prices and collaborates with other companies interested in taking advantage of its traffic.

Zalando earns its revenue mainly from stock purchases and reselling for a profit like many other retailers.

Profitability is attained in part through economies of scale. Zalando has a monopoly in most of Europe, allowing it to purchase goods in bulk and offer them to its customers at competitive prices.

It is also possible to earn money by improving the online purchasing experience. Zalando strives to make online shopping inspiring. 

There is comprehensive information about its items as well as a glossary and blog which offers fashion tips.

Zalando maximizes earnings by offering free delivery and returns, an important aspect in a sector where return rates can exceed 50%. 

A detailed sizing description and detailed presentation of each product help minimize the purchaser’s risk of returning an ill-fitting product.

The section below examines each revenue stream in more detail.

Sales of Products

Zalando generates most of its revenue from the products it sells on its website.

The company buys large quantities of goods from thousands of brands and then sells them profitably.

This business relies on finding popular goods, purchasing them in quantity at competitive prices, and maintaining a world-class supply chain.

It’s therefore not surprising that such a small business unit (dubbed Fashion Store) generates such poor profits. The company’s profit margins are often very low, depending on the investments it has made.

Zalando Lounge, a concept in which discounted assortments from previous seasons are sold, is also available. The company also offers similar discounted items at its retail locations.

Zalando focused its efforts for a time on its brands via a subsidiary named labels. The margins on these products are typically higher, but they also require a different set of skills, including product design and sourcing suppliers.

This has led to the company abandoning its in-house label strategy in 2019 (even though it continues to design, manufacture and sell garments for some of these brands) in favor of a platform strategy – which we’ll talk about next.

Subscription

Zet (later rebranded as Plus) was launched by Zalando in July 2017 as a subscription-based membership model that’s similar to Amazon Prime.

Premium subscriptions cost 15 euros annually and include the following additional services:

• The delivery is faster, and there is no shipping charge.
• Special offers
• Excellent customer service
• Individual style tips

You can trial the service for free before committing to a yearly plan, similar to other modern subscription services.

Notably, the incentives apply exclusively to products sold directly by Zalando. As a result, items sold through the partner program are excluded.

Fulfillment Services

Zalando has invested hundreds of millions of dollars in expanding its shipping and warehousing network throughout its existence.

It has turned one of its largest expenses (logistics) into a profit center by providing fulfillment services to other fashion brands, just as Amazon has done.

Zalando’s fulfillment option allows brands to keep their products in any of its warehouses and have them delivered directly to their customers.

The benefit for brands is that they can leverage the existing supply chain network instead of investing millions in their own. It is especially beneficial for established companies looking to enter the European market.

Zalando earns money from its fulfillment services every time it stores or ships an item on behalf of a partner. As is customary, rates are not publicly announced.

Partner Program

The aim of Zalando has evolved away from pure e-commerce to be Europe’s biggest fashion marketplace in 2019.

Zalando now allows fashion labels to sell directly on their website, leveraging its over 40 million users.

Fashion brands then handle logistics (and returns) on their own, while Zalando handles payments.

Zalando’s platform generates income by charging a percentage of every sale. The exact percentage share is not disclosed publicly.

Styling Service

Zalon by Zalando provides customized personal styling for men and women through a monthly shipment of outfits.

Style experts handpicked each outfit.  The best use will come from completing a survey beforehand, specifying the preferred design, color, and size.

A team of human specialists selects clothes based on the customer’s tastes, assisted by artificial intelligence.

Zalando earns money from these boxes by charging a styling fee of €9,95. The styling fee is waived if the consumer selects at least one item (and the firm generates a sale).

Promotional and Marketing Services

Zalando Marketing Services (ZMS) is a platform for advertising that assists customers in discovering other brands on the market.

Zalando’s marketing team conducts dedicated marketing campaigns across their social media channels and advertising their products on the platform (with a “Sponsored” tag).

Zalando has likely set a flat fee for businesses interested in advertising on the platform.

Zalando’s 185 million app downloads and 560 million visits per quarter mean that companies advertising on the platform receive significant exposure.

Who Owns Zalando?

Zane Gifford, an asset management firm, owns 11.29 percent of the company and is currently the chief shareholder of Zane.

A fashion magnate who owns 9.98 percent of the corporation, Anders Holch Povlsen, is next to hold the shares. Povlsen invests heavily in fashion companies like ASOS as well.

Zalando’s founders, Gentz and Schneider, hold a combined interest of 5.38 percent, making them the fourth-largest shareholder group (after Morgan Stanley with 5.6 percent).

BlackRock (5.03 percent), Vanguard (2.88 percent), and Allianz (2.86 percent), T.Rowe Price (4.79 percent), AKO Capital (3.17 percent) are also significant shareholders.

The company’s shares are only freely traded in 89.28 percent of its total shares (free float). The remainder is held in private hands.

What is the Funding and Valuation of Zalando?

Crunchbase reports that Zalando has raised $615.9 million in debt and equity capital over eight rounds.

Zalando is backed by notable investors such as Kindervik, TEV Ventures, DST Global, Commerzbank, Holtzbrinck Ventures, and DST Global.

Zalando’s business value at the time of its IPO was $6.8 billion. The company raised an additional €605 million during its October 2014 IPO. The company is now valued at more than $26 billion.

What is the Revenue of Zalando?

Zalando generated revenue of €7.98 billion in the fiscal year 2020. It represents an increase of 23 percent from the previous year (€6.48 billion).

Success Story of Zalando

Zalando was started in 2008 by Robert Gentz and David Schneider in Berlin, Germany.

Gentz and Schneider both hail from Germany, and they met on their first day of university at the prestigious WHU.

They shared an apartment for the next four years and assisted one another in any way possible to make university work.

Gentz and Schneider chose to go to South and Central America to commemorate their graduation in 2007.

That journey finally resulted in the establishment of their first firm. At the time, Myspace was the world’s most popular social network, while Facebook was still in its infancy. The German student platform StudiVZ was sold recently for $112 million.

Meanwhile, the southern hemispheres of the Americas lacked a robust social network. They launched Unibicate, a student-focused social network, in October 2007. Argentina, Chile, and Mexico all have access to the platform.

If you’re thinking that two Germans with no coding experience creating a social network in South America is a horrible idea, you’re probably right.

Additionally, social networks frequently fail to create meaningful profits (to grow their user base), making them reliant on external funding.

The boys ran out of money within six months. Gentz and Schneider called Oliver Samwer instead of their parents.

Samwer graduated from WHU a few years previously and created a reputation for himself by emulating successful American company methods and replicating them in Germany and Europe. 

Indeed, Samwer advised the men to avoid South America and instead concentrate on constructing something in Europe.

Samwer ultimately paid for their airline tickets — which included a layover in Spain. Because they both knew Spanish, he hired them to work for a newly founded insurance comparison service in Madrid. 

They were both back on their feet and ready to establish another business after a few months of effort.

They were searching for something more reliable and dependable, having been burned by their social network experience. 

When Zappos, an American e-commerce startup focused on shoe sales, was making headlines for its excellent customer service and quick delivery, the company made headlines for its superior customer care.

Samwer took notice of their concept when they approached him, this time with very little money. He invested €50,000 and hired a team of software professionals to produce the website’s initial edition.

Zalando, inspired by the Italian term zalare (“making jokes”), launched as Ifansho but was rapidly rebranded as Zalando. The website launched in September 2008, only days before Lehman Brothers went bankrupt.

To validate the concept and keep costs down, the team originally concentrated on flip-flops. They visited retail locations, purchased the things, and uploaded them to the website.

The merchandise was held in Gentz and Schneider’s Berlin apartment, with Gentz and Schneider handling all postage and customer assistance via their private phone lines.

Fortunately, the ensuing financial crisis proved to be beneficial. Established German shops such as Quelle or Otto were either bankrupt or lacked the financial resources to launch their e-commerce stores.

Additionally, Zalando distinguished itself from the competition by offering free shipping and returns, as well as a diverse range of payment options.

The business exploded in popularity. By month three, the team was earning monthly revenue of more than €50,000. 

Erivan Haub, a billionaire, invested €20 million in the business, enabling the founders to expand into Austria, establish a physical presence, and spend in television advertising.

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These television commercials, in particular, aided in propelling the corporation to new heights. Schrei vor Glück (“scream for happiness”) advertisements featured various clients screaming their lungs out as they received their Zalando box.

Surprisingly, not everyone adored those advertisements. After debuting in the Netherlands, the team attempted to replicate the TV advertisements, earning them two ‘Negative Awards.’

Zalando hired Rubin Ritter, a former classmate who worked as a consultant at McKinsey, as its first CFO in January 2010 (he later became co-CEO). Simultaneously, they expanded their business beyond shoes to include clothing.

Later that year, in August, Kinnevik, Holtzbrinck, and Rocket Internet (Samwer’s venture capital arm) invested an unknown sum in Zalando, valuing the company at over $100 million — less than two years after its debut.

The company focused first on shipping clothing and then went on to sell other items. Zalando rapidly expanded into over ten countries between 2010 and 2011. 

Additionally, Zalando invested nearly $100 million in the construction of a warehouse in Erfurt, Germany.

Regrettably, the warehouse would quickly return to haunt them. According to a 2012 study by German news outlet ZDF, workers face substandard working conditions (such as lack of restrooms and cooling systems) and inadequate pay. 

Zalando deserves credit for making warehouse adjustments and paying their workers higher salaries.

Zalando proceeded to spend extensively on infrastructure over the next two years, raising hundreds of millions of dollars in the process. 

The company also closed two stores (Emeza, a competitor of Net-A-Porter, and Kiomi) in December 2013 – less than a year after they opened.

Zalando was making steady progress towards becoming the top online fashion retailer in Europe despite these obstacles. 

Zalando went public on the Frankfurt stock exchange in October 2014, six years after its start, adding a further €605 million to its balance sheet.

Samwer’s Rocket Internet, coincidentally, went public in the same month as Zalando. By that time, it had already divested most of its shares, and Kinnevik had become the majority shareholder in Zalando.

Zalando continues to reinvest most of its sales back into the firm over the next few years, frequently missing profitability. This became critical, in part, as Amazon began to develop its fashion marketplace.

Zalando created its membership club, Zet (later rebranded to Zalando Plus), in response to Amazon’s growing sway. 

Members enjoy early access to specials, discounts, and free same- or next-day shipping, just like Prime members.

A major move in the company’s strategic planning occurred in March 2019. 

It would transition to a platform model rather than selling its items under the corporate name zLabels (.’including Anna Field, Pier One, Zign, and eight others).

That means that other fashion firms, such as C&A, might sell on Zalando while handling their shipping and returns. Zalando, like Amazon, would act as the marketplace that sits atop the funnel, bringing them additional clients.

This strategy was very advantageous for most of 2020. As retail stores were forced to close due to lockdown measures, an increasing number of fashion designers realized the importance of diversifying their online revenue – many of which began selling on Zalando.

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Zalando had its most profitable and successful year to date as a result. The company’s success had to be celebrated without Rubin Ritter, who has decided to step down from his position as co-CEO beginning in December 2020. That will give his wife the time to focus on career development while he looks after the family.

Zalando is now doubling down on its phenomenal growth in 2020. The company plans to grow into a handful of new countries, primarily in Eastern Europe, in the coming years to capture more than 10% of the $537 billion European fashion market.

Zalando employs over 13,000 people today and maintains over 20 offices and warehouses around Europe.

Key Takeaways From Zalando Business Model

Zalando has formed a joint venture with the H&M Group. This is another milestone in Zalando’s vertically integrated quick fashion store integration strategy.

Nike has joined Zalando’s partner program, which means that the sportswear giant will now sell and ship straight to Zalando customers.

There are 170 brands currently included in the partner program, such as Adidas, Mango, and Superdry.

Schuhe.de, another new member of the partner program that will soon be accessible to Zalando users, is an online sales platform that acts as a “digital shop window” for over 1,450 linked local German footwear businesses.

Zalando has launched Zalando Fulfillment Solutions to expand its B2B offerings to its brand partners. 

Thus, Zalando partners can delegate logistical tasks ranging from products receipt to returns to the e-commerce expert and take advantage of the company’s massive European logistics network currently encompassing eight logistic centers in five countries.

Zalando is also linked to the stationary inventories of four Tommy Hilfiger locations in Berlin.

Zalora has entered into a joint venture agreement with Bestseller United of Denmark for joint (equal) ownership of FashionTrade.com, a Business-to-Business (B2B) online wholesale marketplace created by Besteller in 2015.

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Zalando’s “Zalando Build” initiative aims to improve and personalize the consumer journey by incorporating innovative technology solutions int.’o the Zalando fashion shop.