Initial Read on Amazon / Zappos

Last night announced its intent to purchase for $847m in an all stock deal.  This deal is worth looking at on many fronts.  On the surface this is another data point in the large volume of tech M&A.  However, this actually transcends both tech and retailing by the very nature of what Zappos does, and that is sell footwear, accessories, and apparel. 

We have said in the past that we expect strategic deal flow to continue and we believe this still holds true.  Direct-fulfillment infrastructure and assets are valuable to those that are:

  1. Late to the game of e-commerce.
  2. Saddled with third party arrangements that outsource fulfillment and hosting.
  3. Looking to leverage growth in what is now a well-defined, legitimate, and growing way to distribute products directly to consumers. 

One thing is clear (as judged by the simple fact that Zappos is doing $1bln in revs and most people on the Street had no idea), ecommerce is alive and may actually be nearing a point where profitability on a wider scale is no longer elusive.  Scale is the key here and the consumer has voted for the ease and transparency embedded in the online shopping experience.  

So what is this company with a silly name called Zappos?  Many of us know of it, perhaps ordered a pair of shoes from the site, and (very) occasionally have heard the company mentioned by a wholesaler.  In reality, there is little public information about the company except for few facts that we can piece together from interviews with the CEO or just by poking around the site.  It is widely thought that Zappos generates approximately $1bln in gross revenues, $625m in net revenues, and $40m in EBITA.  The company was founded in 1999 and has been primarily funded by Sequoia Capital, which has invested most of the $49mm the company raised since its inception.  We’re sure you know Sequoia from its other more prominent investments in Google, Yahoo, YouTube, and PayPal. 

Most eye opening is the size of Zappos, which in just over ten years has a revenue base nearly as large as Genesco ($1.6bln), DSW ($1.5bln), and The Finish Line ($1.2bln).  The selection is unprecedented with basically every footwear brand under the sun offered on the site along with more recent introductions in apparel and accessories.  Clearly this is a scalable and flexible platform for Amazon to leverage its current and future direct fulfillment verticals. 

Initial Read on Amazon / Zappos - ZapposComps 7 09

Traditional retailers cannot ignore this transaction.  Which leads to the question, what’s a retailer to do as it reads the press release valuing Zappos at $850mm?  It’s clear to us to be competitive in the space you can either build or buy.  Most companies have built, but with a brick and mortar mentality.  Assets born out of the .com era and not 7th Avenue are likely to be more flexible, innovative, and creative.  Moreover, online only operations are likely to have been built at a lower cost than companies that have built direct businesses as “add-ons” or “extensions” of core legacy operations. 

Now to the touchy, feely portion of this.  We’re not ones to bank solely on culture, but the word was mentioned 21 times in a letter to employees from the Zappos’ CEO explaining the rationale and logistics of the transaction.  Culture may in fact be one of the key reasons traditional retailers have generally lagged behind online only competitors.  There is almost always internal conflict between the ecommerce division and the rest of a retail company.   Should there be separate buying organizations?  Which merchandise should be online?  Should promotions be the same online as in the stores?  You get the picture and there is no simple solution to these questions.  

Perhaps this is why online only entities have a leg up.  Zappos provides some context, with CEO Tony Hsieh having no retail experience at all.  Instead he was a venture capitalist with a desire to dramatically improve the customer service between consumer and retailer.  This out of the box mentality is likely to jump to the forefront as traditional retailers observe this transaction and contemplate growth in a slower growth world. 

The next step is to identify unique online players who “get it” and may ultimately “get bought”.  We’ve mentioned Gilt Groupe a few times and whether an IPO is imminent or an outright sale, this is another great example of an old model (off-price), with a new twist (limited time sales, online only).  The private companies with prominent brands but little presence on the Street cannot be ignored.

Look for more on this topic as we collaborate with Rebecca Runkle to offer her perspective in addition to attempting to identify winners and losers, buyers and sellers, and how the landscape is changing.


Eric Levine


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