Zalando sees investment as the route to success
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Zalando sees investment as the route to success

Online fashion retailer Zalando is taking a page out of ecommerce heavyweight Amazon’s book. The smaller company says that it expects growth in the region of 20% to 25% throughout 2017. However, its profit margin on an adjusted earnings basis will be “in the lower half” of its 5% to 6% range. The reason is a significant reinvestment of the company’s earnings into new facilities and the improvement of its delivery and returns system.

This strategy is down to Amazon in two ways. First, Zalando is largely following a blueprint that Amazon pioneered online: rake in huge revenue, but don’t let it filter down to profit – reinvest, keep growing, and dominate the market instead. And second, Zalando is using Amazon’s strategy to – hopefully – fight the larger company off.

Amazon has been pushing further into the online fashion retailing space, and that could pose an existential threat to existing retailers – online and otherwise!

Zalando’s latest strategy is to enter the wholesale market, where fashion labels pass goods on to third parties. The company’s recent partnership with Danish fast-fashion seller Bestseller is a step forward into this nascent business. According to co-CEO Rubin Ritter, this industry is ripe for digital disruption.

Following that disruption, the company will try to conquer new territories, both in terms of geography and product types – as yet, details are not forthcoming. What we do know is that these investments will justify further investments into the companies existing infrastructure and systems.

That spending has already begun: so far this year, the company has upped its forecast for full-year capital expenditure from €200 to €250 and announced the creation of two huge fulfillment centers in Poland and Italy.

Disclosure
Dominion holds Zalando in its Global Trends Ecommerce Fund.


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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.