Business in uncertain times: How Zalando is dealing with Brexit, inflation and shifted consumer sentiment
Online retailer Zalando is one of the leading destinations for fashion and lifestyle in Europe. The Berlin-based company serves 25 European markets with an overall consumer base of around 49 million. With its Platform Strategy at its centre, namely the marketplace model and connected retail, Zalando aims to achieve international growth by increasingly expanding its partner programmes to half of its gross merchandise volume (GMV) by 2025.
FashionUnited spoke with Megan Keller Maley, general manager for Benelux, UK and Ireland, about business in uncertain times, best-selling product categories and the future of Zalando’s partner programme.
Inflation fears and the invasion of Ukraine have been weighing on consumer sentiment recently. How is business going for Zalando?
As an e-commerce player, it has been a little bit of a more challenging time in general. The macroeconomic challenges that we, as well as all other companies that operate within this and all sectors, are continuing to face are more intense than we previously anticipated. You referenced inflation, the war in Ukraine and overall, there's just higher costs for private households which obviously impacts spending. This also needs to be combined with the fact that there's less consumer confidence and that customers may be holding back on purchasing decisions or even moving into lower price points.
At the same time we have experienced a normalisation of shopping behaviours with customers being able to go to stores again. We see that our customers have less disposable income, however, they now have more options on how to spend it. This could be in physical stores, travel or hospitality – not only e-commerce, as was the case during the height of the pandemic. All of these changes in customer behaviour have been a challenge in the first half of the year.
And how is your outlook?
As you know, we have just presented our Q2 results. These have demonstrated our agility as a team, showing that we can react quickly to adapt to the current environment while also making the experience of our customers even more inspiring and engaging. We have continued to grow our customer base, and we are now at more than 49 million active customers, and are fully focused on our strategy and making selective investments across our business to ensure our long-term growth. For the second half of 2022, we expect improved profitability and a return to growth.
Are there consumers in certain countries that are less worried than others?
We can say that there is no country that would be not impacted by what's happening in the macroeconomy scene. This is a general situation the world is facing, not just Europe specifically.
How is Zalando dealing with these uncertain times?
Thanks to our Platform Strategy, our Zalando brand partners can quickly react to uncertainty by deciding which of their products they want to dynamically present to our customers. What's great is that the partners can flexibly decide what assortment fits the situation best. They don’t need to decide twelve months in advance what items or price points they're going to be selling on the platform, they can do this dynamically.
To give a clear example, customers’ tastes can evolve fairly quickly, or the weather can suddenly change. Being able to flexibly manage assortment is key. If it's very cold for the month of March, we see our partners continuing to sell winter merchandise, catering to the customers’ needs.
Brexit has shaken up the fashion industry. What challenges does Zalando face in cross-border trade due to Brexit?
As a company, we are experienced in successfully operating in non-EU countries such as the UK, Switzerland or Norway. Together with all involved partners, we worked on implementing all necessary steps with the goal to establish a smooth process for all Zalando customers within the UK going forward. In these past years, we have kept working on adapting our processes to the new rules and we, of course, continue to follow the market closely to give our customers the best assortment and convenience offer possible.
How is Zalando overcoming these challenges?
We have focused even more on our role as a great partner for UK brands. Our priority is to make it easier for brands to join our platform and scale their businesses, both in their local market, as well as in the other 24 markets we operate in. Brands can leverage our insights and analytics tools to steer performance on Zalando, fulfilment and shipping solutions to get access to a wide array of markets in Europe and marketing services to stand out with consumers, reach their target audience, and build their brand.
What types of products are performing particularly well in your Belgium, the Netherlands, Luxembourg, UK and Ireland markets?
When it comes to the actual product categories, streetwear definitely is a big area of growth and development for us as a company, in all countries. We've also seen some great performance in occasionwear as we move back into being more social again, whether that be weddings or going out. Occasionwear has certainly been a big driver within both women’s and menswear.
Our Designer category is also having a bit of a renaissance. This trend has been especially interesting in the UK, where it has become a big area of focus for us and we’re seeing some great results. Thanks to our partnership with the British Fashion Council we are able to offer a great representation of British designer brands that we feel very proud of, as well as international designer brands. This is something that we feel really excited about developing.
Are there differences between the countries?
Streetwear has really been a shining star in all of the countries that I’m leading. The Netherlands is always a market where we see a really high affinity for both streetwear and sports – the same in Ireland. When it comes to Designer, I would say we see this being a really strong angle in Belgium and the UK.
Of course each country is different and so is our position in those markets. Belgium and the Netherlands are very mature markets for us, where we’ve been present for over ten years. In these markets, we have a very large customer base and are focusing on deepening our customer relationships even more. To achieve this, we are doubling down on, for example, our loyalty programme Zalando Plus or categories such as streetwear.
The UK and Ireland are newer markets for us. Here we’ve focused on building overall brand awareness, telling the Zalando story and bringing new customers to the brand. It's a bit of a different approach, just because the markets have such different levels of maturity.
More than 4400 brands are part of the Zalando partner programme. In which country is the Connected Retail programme most successful?
While our partner programme is live in all of Zalando’s markets, Connected Retail is currently available in 13 of Zalando’s 25 markets. Connected Retail – like our partner programme – is a live service that keeps evolving in a continuous way. As we started Connected Retail in Germany first, in 2018, it’s still the largest market in terms of stores connected. However, we also see it picking up well in the other twelve markets, with Poland and Spain being very strong markets as well. We now have over 7,000 stores, and growing, across Europe.
How does the Connected Retail programme help your partners?
Connected Retail basically allows even the smallest retail stores – even a store that has only one shop – to connect their in-store inventory directly to Zalando, and benefit from the high traffic that we get to our website. They are then able to sell their products across the country, regardless of geography, and scale the opportunity for their business. There were some stores that joined Connected Retail during the pandemic and next to their own website, this was their only other source of revenue. Being able to now have, at the same time, their store, their online business, as well as Zalando allows them to benefit from this traffic.
Connected retail has not yet been launched in the UK. Do you plan to introduce the concept there as well?
It's not on the roadmap for this year. I think it's a great opportunity for all markets, but at the moment there's no plan for it to go live in the UK.
How do you convert the ongoing wholesale model into a platform model to reach your goal of 50/50 by 2025?
I'm not sure if I would say we're converting it per se. From the customer's point of view and that we can only offer a complete product range through a combination of our own purchasing and partner programme – we will continue to follow this approach.
The wholesale model is still an important part of the business, especially for brands that are relevant across multiple markets. But what we know our partners love about our partner programme is that they're really in the driver's seat. They control the pricing, they control the assortment, they decide real time based on data inputs, whether it's the weather or whether it's consumer confidence.
We see more and more that brands are shifting to be more active and decide for themselves. Some brands are live via wholesale, the partner programme and Connected Retail, others decide to just connect via Connected Retail. It's really about the models that work best for them. The transition is happening on its own. 32 percent of our GMV in Q1 came from partner business, and that's both the partner programme and Connected Retail. In the markets that I lead, that's even slightly more – in the Benelux specifically. We see that this continues to grow every quarter. So this is clearly something that is also interesting and working for our partners.
What are your plans for the future of the platform business model?
The goal is to always have the best assortment for our customers. Not just in terms of quantity, but quality. We know which of those brands our customers love, care about and want to see on our platform. Our main goal is to ensure that we have the representation of those brands in our fashion store.