5 takeaways from Zalando's annual update

Europe’s biggest online fashion platform, Zalando, shared its future ambitions on Thursday after what was a tumultuous year for many fashion brands and retailers. After narrowly achieving its financial targets for 2018, the Berlin-based company presented its' plan on becoming the starting point for fashion. Here are some of the takeaways from Zalando’s annual briefing.

The starting point of fashion

”We want to be the starting point of fashion”, declared David Schneider, one of the three chief executives of Zalando, at its new campus building tucked between the remnants of the Berlin wall and the notorious Berghain nightclub. In other words, when consumers think about shopping fashion, Schneider wants them to think about Zalando first.

In figures, this means that Zalando aims for a five percent share of Europe’s 450-billion-euro fashion market within the coming five to ten years. This would translate into an online share of 20 percent, while Zalando currently holds a share of 1.5 percent of the overall European fashion market. To achieve this, Zalando aims to continue growing faster than Europe’s overall fashion market.

Selling more products, slower revenue growth

After years of growing its revenue by more than 20 percent annually, things are set to slow down at Zalando, which celebrated its tenth anniversary last year. In 2023/2024, sales growth is expected to slow to 15-20 percent while Zalando forecasts revenue to reach 13 billion euros.

To capture market share, the online retailer is increasing its focus on the number of products from its partner program, which allows fashion brands and retailers to sell and ship their own stock from Zalando’s website. To highlight its growth as a fashion platform, the company plans to publish its gross merchandise volume (GMV) every quarter, which is the total amount that customers spend on the Zalando platform on merchandise from both wholesale and the partners. GMV grew by 21.1 percent to 6.6 billion euros last year and is forecast to increase by 20-25 percent in 2019 and reach 20 billion euros in 2023/24.

Holding less inventory promises less risk of holding items that won’t sell and mitigates last year’s woes of having the wrong stock during unseasonably warm weather. However, this shift also lowers the margins, as the commission which Zalando receives is lower than what it usually earns with its own inventory.

Short-term ambitions

After lowering its earnings forecast several times in the past year, the company still expects revenue to grow within its longstanding target of 20 to 25 next year, but at the lower end of the range. In 2019, Zalando targets adjusted earnings before taxes and interest rates within the range of 175 and 225 million euros after reaching 173.4 million euros of EBIT in the last year.

The average basket size is still decreasing

One key figure is still falling. Average basket size after returns shrank 5.4 percent to 61 euros in 2018. One reason is mobile shopping, younger customers who prefer fast fashion products also like to shop with their phone and place more orders but spend less each time.

Zalando’s emphasis on its partner program has also reduced the average basket size, as one order may contain products sold by Zalando and a partner brand, resulting in two shipments. But the company is working on these issues, said Co-CEO Rubin Ritter at the presentation in Berlin. Last year, Zalando increased the minimum order value in Italy and it also tries to bundle orders from its partner program and ship them with its own fulfillment unit.

Stock market buoyed by Zalando's results

Zalando’s stock price plunged after last year’s profit warnings, trading at 26.21 euros per share at market close on Wednesday before its annual results were announced. Investors seemed buoyed by its earnings statement on Thursday or at least relieved, as shares rose as much as 23 percent to 32.29 euros on Thursday. They still trade below the all-time high of 50.34 euros reached in the past year, though.

Photo: Zalando