“Aggregation Theory” and Zalando

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Last year independent market analyst Ben Thompson wrote up a framework he called “Aggregation Theory”:

The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. (..)

The fundamental disruption of the Internet has been to turn this dynamic on its head. First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.

This has fundamentally changed the plane of competition: no longer do distributors compete based upon exclusive supplier relationships, with consumers/users an afterthought. Instead, suppliers can be aggregated at scale leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.

The result of this dynamic is the rise of global tech giants like Google, Facebook, Uber, AirBnB or Netflix (the latter launched globally a few days ago). Or Amazon. Thompson:

Amazon

  • Previously, book publishers integrated editing, marketing and distribution. Amazon modularized distribution first via e-commerce and then via e-books
  • Amazon integrated customer data and payment information with e-book distribution and its Amazon publishing initiative (the framework is clearest when it comes to books, but the integration of distribution and the customer relationship also applies to most of Amazon’s business)

Now, consider again, against this background, Zalando’s ambitions to become an online fashion retail platform. This is the context for Zalando’s ambitions and the potential position the company might achieve.

Zalando wants to become the (global) distributor/aggregator in fashion, connecting all suppliers and consumers.1

Let’s go through some points. Thompson:

suppliers can be aggregated at scale leaving consumers/users as a first order priority.

Zalando, with revenues just grown to under €3 billion in 2015, already attracts the consumers. It successfully established an online fashion retail operation at scale.

Next up: Be everywhere.

Here’s the vision as presented by Christoph Lange, VP Brand Solutions at Zalando, at the latest K5 conference last year:

Lange’s example at the conference: If someone finds a fashion item on Instagram. This item is in stock at Zalando but also in stock in a local store. The long term goal is that Zalando’s fashion network will be able to connect customer, local store and logistics provider (Uber) to bring the item as fast as possible to the user.

Zalando’s grand plan is to become a fashion aggregator, a multi-sided platform. Zalando wants to become the major middle man platform for any conceivable way to find and buy fashion items. That is a lofty goal. And it makes a lot of sense, given the internet’s market dynamics.

Combine this vision with Zalando’s mobile offensive and the picture becomes clear.

What Zalando is trying to do is not without precedent when you start comparing industries; even if it sounds rather grandiose today. Instead, it is part of a market pattern evolving in the digital economy. If Zalando would not try to get into this market-making position, someone else might.

Zalando and fashion may in time become as synonymous as Facebook and social or Google and search.

More on Zalando’s platform ambitions:


  1. “All” as in: More or less “all” people in the West are on Facebook or search with Google. It is not exactly literal but close enough. 

3 comments

  1. […] We talked recently about Ben Thompson’s Aggregation Theory framework and how it helps to bring context to the positioning and strategy of Zalando. […]

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  2. […] “Aggregation Theory” and Zalando […]

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  3. […] to each other to draw too many analogies and those categories all fall into the media basket. I see where he’s coming from […]

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