The Zalando Business Model – How Does Zalando Make Money?

Executive Summary:

Zalando is an e-commerce platform that offers fashion products for both men and women across categories such as shoes, accessories, or clothing.

Zalando makes money via product sales, commissions from its partner program, fulfillment services, subscriptions, advertising, as well as a style box. Zalando operates on a marketplace business model.

Founded in 2008, Zalando has grown to become one of Europe’s biggest fashion sites. The company went public in 2014 and is now present in over 20 markets.

What Is Zalando?

Zalando is an e-commerce platform that sells fashion products to customers across the European continent.

The company offers new and pre-owned products for men, women, as well as children. Customers can browse a variety of categories, including shoes, accessories, pants, shirts, and many more.

Zalando, furthermore, offers a wide array of brands (in fact, more than 2,000). Offerings range from regular brands like Nike to more luxurious ones like Armani.

Unlike a platform like Farfetch, which does not own any of the brands it sells, Zalando actually goes and purchases most clothing items on a wholesale basis. Nevertheless, it also allows brands to tap into its logistics service and sell their items via its platform.

The company operates its very own distribution and fulfillment network (with warehouses located in Germany and Poland) from which it serves customers.

As such, customers can easily return any product they do not like within a matter of 14 days – no questions asked.

Apart from its online storefront, Zalando also operates a few physical retail locations across Germany called the Zalando Outlet Store.

Additionally, the company also offers a styling service called Zalon. The service, using a mixture between artificial intelligence and human input, sends customers one to two outfits every month to try out (similar to what made Stitch Fix a billion-dollar public company).

Zalando can be accessed by visiting the company’s website or downloading its mobile app (available on Android and iOS devices).

Zalando Company History

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

Gentz and Schneider, both native Germans, met each other on the first day of university at prestigious business school WHU.

Over the next four years, they not only shared an apartment together but helped each other out every way they could to make university work.

After wrapping up their studies in 2007, Gentz and Schneider decided to celebrate their graduation with a trip to South and Central America.

That trip eventually turned into their first business. At the time, Myspace was the world’s dominant social network while Facebook slowly started to acquire users. In Germany, a student-based platform called StudiVZ had just been sold for $112 million.

Meanwhile, the southern parts of the Americas did not really offer a viable social network to use. In October 2007, they launched a student-focused social network called Unibicate. The platform was available in Argentina, Chile, and Mexico.

If you’re now thinking that two Germans without any coding skills launching a social network in South America is a bad idea, then that’s probably because it is.

On top of that, social networks often do not generate any meaningful returns (in an effort to build up a user base), thus making them reliant on outside investments.  

Within a matter of six months, the guys ran out of money. Instead of calling their parents, Gentz and Schneider gave Oliver Samwer a call.

Samwer had graduated from WHU a few years prior and made a name for himself largely by copying successful business models from the United States and establishing them in Germany and Europe. In fact, it was Samwer who warned the guys to not go to South America and instead focus on building something within Europe.

Samwer ended up paying for their flight tickets – with a layover in Spain. Since they both spoke Spanish, he hired them to work for an insurance comparison portal he had just launched in Madrid. After a few months of work, they were both back on their feet and ready to launch another business.

Being still burned by their social network experience, they were looking for something more stable and predictable. At the time, a U.S.-based e-commerce company called Zappos focused on selling shoes, began making waves for its great customer service and fast delivery.

Having literally no money at their disposal, they approached Samwer who this time took a liking to their plan. He invested €50,000 and provided them with a team of software developers to build out the initial version of the website.

Zalando, derived from the Italian word zalare (“making jokes”), initially went live as Ifansho, but was quickly rebranded to Zalando. The website hit the world wide web in September 2008, just days before Lehman Brothers collapsed.

To test the concept and keep the cost base low, the team initially focused on only selling flip-flops. They actually went into retail stores, purchased the products, and just uploaded them on the website. The products themselves were stored in their Berlin apartment, with Gentz and Schneider making postage runs themselves and using their private phone numbers as the customer service hotline.

Luckily, the ensuing financial crisis proved to actually be advantageous. Established German retailers like Quelle or Otto were either going bust themselves or did not possess the financial means to create their own e-commerce stores.

Zalando, furthermore, differentiated itself from those other retailers by offering free shipping and returns as well as a multitude of payment methods.

The business took off like a wildfire. By month three, the team was already generating more than €50,000 in monthly revenue. Billionaire Erivan Haub invested €20 million into the business, allowing the founders to expand into Austria, move into an office, and invest in TV advertising.

Those TV spots, in particular, helped to propel the company to new heights. The ads, dubbed Schrei vor Glück (“scream for happiness”), showed a variety of customers screaming their lungs out as they were receiving their Zalando package.

Interestingly enough, not everyone was so fond of those ads. After launching in the Netherlands, the team tried to use the same TV spots, which ultimately earned them two ‘Negative Awards’.

In January 2010, after growing to over €2 million in monthly revenue, Gentz and Schneider recruited Rubin Ritter, a former classmate of theirs who worked as a consultant at McKinsey, to join Zalando as its first CFO (he later become Zalando’s co-CEO). Around the same time, they expanded from solely shoes to selling clothes.

Later that year, in August, Kinnevik, Holtzbrinck, and Rocket Internet (Samwer’s VC arm) invested an undisclosed amount valuing Zalando at over $100 million – just two years after launching.

Knowing how to ship and sell clothes, it was time to scale. In 2010 and 2011, Zalando quickly expanded into over 10 countries. Zalando, furthermore, built a warehouse in Erfurt, Germany, spending close to $100 million in the process.

Unfortunately, the warehouse would soon come back to haunt them. A 2012 report by German news station ZDF revealed lackluster working conditions (such as missing toilets and cooling systems) as well as low salaries. Zalando, to their credit, made changes to the warehouse and bumped up its worker salaries.

Over the next two years, Zalando continued to invest heavily into infrastructure while raising hundreds of millions in the process. It, furthermore, had to close down two shops (called Emeza, a Net-A-Porter competitor, and Kiomi) in December 2013 – just 12 months after initially launching them.

Despite some of these setbacks, Zalando was well on its way to become Europe’s leading online fashion store. In October 2014, six years after launching, Zalando went public on the Frankfurt stock exchange, adding another €605 million to its balance sheet.

Coincidentally enough, Samwer’s Rocket Internet went public during the same month as Zalando. By that time, it had already offloaded the majority of its shares while Kinnevik became Zalando’s majority shareholder.

Throughout the next few years, Zalando continued to reinvest the majority of its revenue back into the business, oftentimes missing profitability. This became absolutely necessary, in part because Amazon was starting to build up its own fashion marketplace.

As a result of Amazon’s tightening grip, Zalando launched its very own membership service called Zet (later rebranded to Zalando Plus). Much like Prime, the subscription granted members early access to deals, various discounts, as well as unlimited same- or next-day delivery.  

In March 2019, the firm announced that it would undergo one of its biggest strategic shifts ever. Instead of selling its own products under the company name zLabels (brands included Anna Field, Pier One, Zign, and eight more), it would shift towards becoming a platform.

That would mean that other fashion brands, such as C&A, could sell on Zalando while taking care of the shipment and potential returns themselves. Zalando, much like Amazon, would be the marketplace sitting on top of the funnel and bringing them more customers.

This approach proved to be particularly beneficial during much of 2020. As retail shops had to close down due to lockdown measures, more and more fashion brands found themselves in need of diversifying their online income – many of whom began selling on Zalando.

As a result, Zalando celebrated its most successful year in terms of revenue and profits. Unfortunately, that success had to be celebrated without Rubin Ritter who stepped down from his role as co-CEO in December 2020, allowing his wife to focus on her career while he takes care of the family.

Zalando is now doubling down on the tremendous growth it experienced in 2020. Going forward, the company aims to expand into a handful of new countries, predominantly across Eastern Europe, in an effort to capture more than 10 percent of the $537 billion European fashion market.

Today, more than 13,000 people are employed by Zalando which operates over 20 offices and warehouses across the European continent.

How Does Zalando Make Money?

Zalando makes money via product sales, commissions from its partner program, fulfillment services, subscriptions, advertising, as well as a style box.

Zalando’s business model is geared towards becoming a platform that fashion brands can sell on. As such, the company not only resells products it buys at wholesale but also works together with brands that want to take advantage of its traffic.

Let’s dive deeper into each of the revenue streams in the section below.

Product Sales

The bulk of the revenue that Zalando generates simply comes from the products that it sells on its web properties.

More precisely, the firm purchases products from thousands of brands in bulk and then makes money whenever that product is sold at a profit.

The key to this type of model is to identify trending brands, purchase them in bulk at competitive prices, all while running a world-class supply chain to keep your cost base low.  

It, therefore, comes as no surprise that the profit from this business unit (called Fashion Store) is extremely slim. Depending on what investments the company has made, profit margins are only in the single digits at best.

Zalando, furthermore, operates a concept called Zalando Lounge in which it sells the previous season’s assortments at a discount. Likewise, shoppers can purchase these discounted products at one of the firm’s retail stores.

For a while, Zalando had shifted its strategy towards in-house brands under a sub-company called zLabels. While margins on these products tend to be higher, they also require an additional set of new skills, including designing the products and finding suppliers to produce them.

The in-house label strategy was therefore largely abandoned in 2019 (the company still produces clothing for a few of those brands) in favor of a platform approach – which we’ll cover next.

Partner Program

In 2019, Zalando had shifted its strategy from being a pure e-commerce player towards becoming Europe’s leading fashion marketplace.

As such, fashion brands can now sell directly on Zalando’s website, taking advantage of the company’s close to 40 million customers.

The fashion brand then takes care of logistics (and returns) itself while Zalando manages the payment process.

Zalando generates revenue via the platform through a percentage-based commission that it receives for every sale. The actual percentage share is not publicly disclosed.

Fulfillment Services

Zalando, over the course of its existence, has invested hundreds of millions in building up its transportation and warehousing network.

Much like Amazon and AWS, the company had turned one of its biggest costs (logistics) into a profit center by offering fulfillment services to other fashion brands.

With its fulfillment solution, brands can store their items in any of Zalando’s warehouses and have them shipped to the customer.

The advantage for brands is that they don’t have to invest millions into building up their own supply chain network and instead can get going with a working solution. This can be particularly advantageous for established brands that aim to enter the European market.

Zalando generates income from its fulfillment services whenever it stores or ships an item on the partner’s behalf. Rates, as expected, are not publicly disclosed.

Subscription

As previously stated, Zalando launched a Prime-like membership called Zet (later rebranded to Plus) in July 2017.

The premium subscription costs 15 Euros a year and grants customers a variety of benefits, including:

  • Faster as well as free delivery for all orders
  • Access to exclusive offers
  • Premium customer support
  • Personal style advice

Just like any modern-day subscription, the service can be tested out free of charge first before committing yourself to a yearly plan.

Notably, the benefits only apply to products that are sold by Zalando directly. Items sold via the partner program are therefore excluded.

Marketing Services

Zalando’s Marketing Services (ZMS) is an advertising product that helps other brands to be discovered on the platform.

Zalando’s marketing team would create dedicated advertising campaigns on their various social media channels as well as have their products be advertised on the platform (and marked with a ‘Sponsored’ tag).

Companies that want to advertise on Zalando likely pay the company a fixed fee in exchange for advertising packages.

With over 150 million app installs and 560 million site visits per quarter, Zalando can guarantee vast exposure to the brands that aim to advertise on its platform.

Styling Service

Zalon by Zalando is a personal styling service that sends a box containing one to two outfits to both male and female customers every month.

The outfits are handpicked by stylists. To get the most out of a box, customers will have to fill out a survey beforehand, stating their preferences on style, color, size, and more.

The human experts, with the help of artificial intelligence software, then pick outfits based on the customer’s preferences.

Zalando generates income from these boxes via a styling fee of €9,95. Should the customer pick at least one article, then the styling fee is voided (and the firm simply generates a profit on the sale of the product).

Zalando Funding, Revenue & Valuation

According to Crunchbase, Zalando has raised a total of $615.9 million across eight rounds of debt and equity funding.

Notable investors into Zalando include Kinnevik, DST Global, Commerzbank, Holtzbrinck Ventures, TEV Ventures, and many more.

The company raised another €605 million during its IPO, which was conducted in October 2014. When Zalando went public, its business was valued at $6.8 billion. Today, it has a market capitalization of over $26 billion.

For the fiscal year 2020, Zalando generated €7.98 billion in revenue. This represents a 23 percent increase from the year prior (€6.48 billion).

Who Owns Zalando?

Zalando’s biggest current shareholder is asset management company Baillie Gifford with an ownership stake of 11.29 percent.

Next in line is fashion mogul Anders Holch Povlsen who owns 9.98 percent of the company. Povlsen is also a major shareholder in fashion brands like ASOS.

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

Other major shareholders include BlackRock (5.03 percent), T.Rowe Price (4.79 percent), AKO Capital (3.17 percent), Vanguard (2.88 percent), and Allianz (2.86 percent).

It has to be noted that only 89.28 percent of the company’s shares are tradeable (free float) while the rest remains in private ownership.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..