Zalando added a line of beauty products from 130 cosmetic and skin care brands to its offer toward the end of the first quarter of this year, accompanied by online tutorials and plans for the establishment of a Beauty Concept Store in Berlin next month. More than 70 percent of the orders placed for these products were made on its websites together with those of fashion products.
This rather logical diversification helped Europe's leading online retailer of shoes, apparel and accessories to post a 22 percent increase to €1,196 million in its total sales during the first quarter of 2018. They were slighly better than what financial analysts had expected.
However, the cold weather spell that swept through most of Europe in March delayed sales of the spring/summer collections, triggering promotional discounts that reduced Zalando's profit margins. Operating earnings (Ebit) fell to €400,000 on an adjusted basis, below the analysts' forecasts, compared with €20.0 million in the first quarter of 2017.
Positive operating profit margins were achieved in the core markets of Germany, Austria and Switzerland, compensating for losses in the rest of Europe. Nevertheless, Zalando ended up reporting a net loss of €15 million for the period against a net profit of €5.1 million in the same quarter of last year.
Zalando's operating margin already shrank last year to 4.2 percent from 5.4 percent in 2016, primarily because of investments in new services and systems. In spite of the loss reported for the first quarter, Zalando's share price went up because of its ongoing growth, well ahead of the market.
The investments will continue, and Zalando's management is holding on to its projections for the full financial year of Ebit in a range of €220 million and €270 million and an overall sales increase of 20 to 25 percent.
Zalando also reported a 16.7 percent year-on-year increase in the number of active customers to a record level of 23.9 million during the latest quarter. On average, they placed orders with Zalando four times over the last twelve months. The traffic on its websites was made through mobile devices in 77 percent of the cases.
The bulk of the orders were made for branded products at full price. They triggered sales of €1.03 billion, up 20.4 percent from the year-ago quarter. Sales in Germany, Austria and Switzerland rose by 16 percent to €552 million. In the 12 other European countries where Zalando operates, they grew at a faster rate of 25 percent to €541.9 million.
Despite the diversification of its range, Zalando will never become a giant marketplace like Amazon or TMall. With about 2,000 brands in its porfolio, Zalando is estimated to have reached a market share of 10 percent in the European online fashion market, two percentage points ahead of Amazon in this segment, and its market share has been growing faster since 2014, although Amazon has been deploying many new initiatives in this segment lately.
As the Financial Times correctly puts it, Zalando may be more vulnerable to the expansion of Amazon's fashion offerings than online retailers like Asos or Boohoo, which mostly sell private label items. Interestingly, Zalando took inspiration from Zappos, the American online shoe retailer founded in 1999 and taken over by Amazon in 2009 for $850 million, to impose its business model in Europe.
On the other hand, the FT notes that Zalando may have an edge in Europe over Amazon because of its fast-growing partnership program with brands such as Nike and the fact that the brands can control their own pricing on the website, while getting access to data on what customers are ordering.
In our opinion, the picture is different in the U.S., where Amazon is generally viewed as an off-price retailer of apparel like Walmart, but Zappos is still a strong factor for sales of branded footwear, with no competitor like Zalando. In the U.S., where it takes longer for consumers to drive to the nearest shopping mall, one-quarter of all purchases of footwear are now made online, including the websites of the shoe retail chains.