The range of platforms from Amazon to Rocket Internet
The possible range of online retail platforms range from what we can see at Amazon to what we can see at Rocket Internet. Rocket Internet follows a traditional international strategy. The Berlin based company builder is creating local companies to leverage “network efforts more within a country, instead of globally”, in the words of Rocket Internet CEO Oliver Samwer.
Rocket Internet’s mission statement is still “To Become the World’s Largest Internet Platform Outside the United States and China”. “Platform” here refers not to what we normally talk about these days1 but to synergies in the back-end: Marketing, localization and general execution efforts and technology and access to capital. This may have looked all good and fine on paper but it doesn’t seem to be working too well.
Rocket Internet’s approach means the consumer facing side has to be build again and again more or less from scratch with every new company the holding is starting up. In fact, the main problem for Rocket Internet is that once you have a successful company, that company ‘exits’ via IPO or other means and thus it outgrows Rocket’s portfolio. There is, then, nothing left to leverage to get to the next level. Zalando is the main example of a very successful company coming out of Rocket and now being its own master for some time now.
Amazon has all the same scale effects in general, and network effects in particular, but also much more. Amazon is in parts similar to Rocket -internally it is organized as a bunch of startups2 so to speak- and in important aspects very different to Rocket Internet: With Amazon all those internal “startups” are on top of the same consumer facing platform called Amazon:
- They can leverage the vast amount of Amazon customers with credit card information already provided.
- When it makes sense they can live inside Amazon Prime.
- and so on
With Amazon’s approach we can add network effects on the consumer facing side. Those don’t necessarily have to be between consumers (as in social networks). Look at Amazon’s video approach for example. Comparing Rocket’s and Amazon’s approach I wrote last year on video:
Amazon for example is building out Amazon Prime as a means to create loyal regular customers. Prime works as a big giant bundle, which is more than just faster delivery. One main part and driver of new Prime subscriptions is Amazon’s Prime Instant Video. Here a global strategy gives Amazon quite a lot of advantages. Video like any content business is defined by high upfront fixed costs (production cost or licenses) and very low marginal costs. Hence this becomes economically more attractive the more it is spread out to as many customers as possible.
So: Amazon produces original TV content once (high costs), and then makes this content available in all markets where Prime and Prime Instant Video are available. The upfront costs are spread out globally. The more markets Amazon can do this in the better for Amazon. This way, Prime becomes attractive in a way that is hard to copy. Now Amazon is in a position with Prime to offer services and use cross-subsidies across its services to attack companies in a manner that is hard to counter.
This creates tremendous opportunities for Amazon to bring forth asymmetric offers.
There are examples abound why Amazon’s approach is so fruitful:
- The Amazon marketplace only got as fast off the ground as it did because it is seamlessly integrated within Amazon. (Keep that one in mind.)
- Everything Amazon builds now can in the future be accessed by the company’s own platforms from Alexa to Fire TV to the Dash platform.
Imagine an Amazon set up organizationally like Rocket Internet
Now all this about Amazon may seem obvious.
But imagine now all those products and platforms by Amazon being built by a holding like Rocket Internet:
- Amazon, the webshop, as a separate entity
- Amazon Marketplace as a separate entity
- Alexa voice interface platform as a separate entity
- Kindle as a separate entity
- Amazon Video as a separate entity
- Amazon Prime and Prime Now as a separate entity
Do you think a holding owning this portfolio would be larger and more successful than todays Amazon?3
It becomes obvious now how far reaching the drawbacks of Rocket Internet’s approach are on a high level. You may cleverly reuse back-end technology and apoint marketing and development professionals to the businesses most needed but the facts remain: All too often you start from scratch again and again and again.
Rocket Internet may turn out to be successful in the end -we still don’t know-. But one thing is for certain, in my eyes at least:
Rocket Internet as whole will never reach the same level as an Amazon or an Alibaba because the approach the company has chosen will keep holding it back significantly.
Nothing of this is new to readers of Early Moves. It was just a rather long introduction to a closer look at Zalando’s platform.
When Zalando first introduced the new platform strategy at the company’s Capital Markets Day in march of 2015 I came away with the impression that Zalando’s platform on a fundamental level will be closer to Amazon than to Rocket Internet. This would make sense: In the company’s core markets Zalando has a huge customer base to build on. (For context: Zalando made nearly €3 billion in revenue in 2015 and handled more than 55 million orders made by customers in 15 European markets.)
But what I didn’t account for was how difficult it would be for the company to combine Zalando’s brand and a more open/plattform/marketplace approach.
When we look at the consumer-facing pillars of what Zalando sees as the company’s future, we can identify two distinct groups, as I recently wrote: Zalon (a stylist network/curated shopping), Zalando Lounge (shopping club) and the main shop Zalando. The second group consists of Movmnt and Fleek, two new mobile marketplace apps. Movmnt, an outlet marketplace, is aimed at the low end. Fleek, with its social shopping approach towards brands, is aimed at a fashion consient young audience.
Both those consumer-facing ‘pillars’ are detached from the main Zalando brand. I wrote a few days ago:
To not dilute the Zalando brand with the mobile marketplaces, where a wider range of user experiences will manifest themselves over time, Zalando chose to set those apps up completely separated from Zalando itself to the outside world.
The result is that a common user has no way of knowing that they just downloaded one of many mobile apps by Zalando.
So, the core brand is secure. Good.
But now we’re coming to the increased spendings that lie ahead. How do you push forward those new apps if you can’t take advantage of your existing customer base because you don’t want them to associate your brand to closely (or not at all) with these new marketplaces?
Marketing, of course!
At a press event at Zalando a few days before the latest Capital Markets Day I got the chance to talk to executives about this and my initial hunch got confirmed in those talks. Zalando is going to try to establish its mobile multi-app strategy by going the traditional way: Buying app-install ads on Facebook and so on.
Here is the challenge for Zalando: The brand is built on a few very costly aspects with the main one being free return shipments. This has been a core part of the consumer experience with Zalando from the start. Zalando is constantly working on making those return shipments easier for customers. Recently, Zalando started working with a German delivery company, Liefery, to pick up return shipments at the customers home for free.4
Now this only works profitably with optimized processes and at a certain scale. It is something you can not expect from smaller merchants and brands hopping on the marketplace train with Movmnt and Fleek.
Hence, Zalando has been reluctant to associate itself towards its customers with its own future mobile ‘pillars’.
The solution Zalando has chosen is one big companies are known for: Let’s throw money at it. Let’s buy ads.
Zalando still has advantages compared to, say, startups trying to establish similar apps:
- comparatively large ressources,
- an infrastructure and
- experience to tap into,
- and, last not least, good connections to large fashion brands
But these are all advantages on the back-end and not on the consumer-facing side. There, Zalando has to work itself to the homescreen of every user like every one else.
How costly is it going to get if you have to do that with every app you release all over again from scratch? Can this be sustainable eventually?
If nothing else, this approach limits the amount of apps Zalando will be able to successfully establish.
Looking at Fleek, the question arises if it is even necessary for Fleek to be marketplace. Could the app not ride on Zalando’s vast inventory, being ‘just’ another front door? And, looking at the timing, would it not have made more sense to set up Fleek as another Zalando app? In the beginning, cross-promotion at Zalando could have pushed Fleek forward. Be the time “Fulfillment by Zalando” is ready, Fleek could have slowely being turned into a marketplace whilst giving participating merchants the option to go with Zalando’s logistics, or their own if they are up to it. Then Fleek, the marketplace, offers the same Zalando is famous for: Free shipments and return shipments, no matter what the customer orders.
One could argue that this would make sense for Fleek but not for Movmnt (given the latter is aimed at the low end of the market). So why not going with different strategies here?
I guess this is getting debated heavily within Zalando. Because it is not at all clear what the best approach may be here.
Also, see, as mentioned before, the whole saga around apps like Fleek launching without a Zalando login, and then, adding the option to login via Zalando about a month later, with an implementation that feels like an architectural afterthought. And now, the Zalando login gets even advertised on the app store:
All this suggests strongly that Zalando management is still unsure about how to connect the main Zalando brand and shop and the new mobile apps to create a common platform.
Compared to this, the back-end side of things is pretty straight forward to figure out.
A back-end & B2B platform
Given the fact that, besides the oddity that is ZipCart and the mobile app for Zalando Lounge, none of the mobile apps by Zalando are connected to Zalando as the company behind them, one can sum up the platform strategy by Zalando today like this:
A traditional mulit-product approach, combined with an effort to use synergies and scale effects to build out a (more) diversified mix of sources of income.
We provide the fundamental technological infrastructure and marketing reach that helps brands leverage the power of the internet. Currently, we operate the Zalando Shop, which sells around 150,000 styles from over 1,500 brands. Owning almost the entire inventory, we engage in direct sales to the customer.
We also let selected brands sell their products directly on our websites via our partner program. In this model, we connect the customers with the brand who then sells directly to the customer. We receive a commission on the sale, and the brand is responsible for the delivery process. With our platform strategy, we will increase the opportunities for brands to sell their products directly through our websites and mobile apps. We believe that such opportunities can take various forms, enabling different groups of brands to sell their merchandise through our ecosystem, e.g. branded / unbranded market places, different kinds of production models or custom-designed tools that connect the offline world to the online world.
Zalando’s Media Solutions are a good example for the diversification of the revenue mix at big online retailers. Zalando is big enough to amass enough valuable data for better trageting of brand ad campaigns. For this Zalando bought the German advertising service provider nugg.ad from Deutsche Post at the end of last year. (press release, German) (And Zalando bought Metrigo before nugg.ad. (German, Google Translate))
Ultimately, this is going to work out fine for Zalando. Media solutions and differentiated marketplaces additionally to the traditional shop will add up very well.
But, going back to the comparison between Amazon and Rocket Internet and how much more options the former has for smart business models, it makes one wonder how much potential Zalando may be giving away by not becoming a strong consumer-facing platform in its own right.
- Zalando Signals Coming Marketing Spending Increase, Most Likely to Push Fleek & Movmnt
- Zalando’s Same-Day-Delivery app ZipCart Expands, but Remains a Puzzle
- Zalando’s Fashionflow is a Tinder-like Fashion Shopping App
- “Distributed Commerce”: How Zalando Wants to Make Selling Fashion go Mobile
- Zalando’s Plans for the Coming “Fulfillment by Zalando” Service
- Capital Markets Day ’16: Zalando’s Strategy Behind Movmnt
- Capital Markets Day ’16: Zalando sees Itself as the Spotify of Fashion
- Zalando: What is Fleek’s Value Proposition for Users and Brands?
- How and Why Zalando is Making Return Shipments Easier
- Zalando Media Solutions & the Diversification of Revenues at Big Online Retailers
- Platforms like iOS, Facebook Messenger, Wechat, Android etc. ↩
- Own P&L, relatively autonomous organizations and decision making ↩
- If you do, I would really like to hear your reasoning behind your conclusion. Feel free to write a comment or send me an email at email@example.com. ↩
- Some while ago Zalando executives talked publicly about A/B tests that revealed that costly or even harder to manage return shipments directly lead to fewer future orders. Easy to handle and free returns increase the customer lifetime value. (Makes sense with fashion.) ↩