Robert Gentz - Co-founder of Zalando | Podcast | In Good Company | Norges Bank Investment Management

Yeah, thank you very much for inviting me and having me.

I'm very dark today. So everything that I wear I actually got from Zalando today. So it's a bit like Steve Jobs, like your sweater. I mean, today actually I felt like in Norway you kind of have to dress a little bit warmer.

Before we started Zalando, me and my co-founder David, we actually started a social media company in Latin America, which was a student network in Mexico, Argentina, and Chile. And this was a startup that didn't really work out. So we said, okay, well, that shouldn't be it. We actually wanted to try it one more time. And we came back to Europe and thought, okay, well, in e-commerce with soft goods, there's actually a very great opportunity here in Europe. And we looked into various categories, and fashion, and really found shoes quite interesting.

And in June 2008, we started to sell flip-flops on a domain called FlipTops, and it really worked out well. We actually saw consumers really liked it. It really picked up to like 20 flip-flops a day. And I think based on this insight, we got our investment for the big idea of selling shoes online with Zalando, and then we got started.

Yeah, we packed them ourselves. We went to the post office and really enjoyed every single customer contact we had and every single conversation. And we were asked why did they actually go for an online search for flip-flops and why didn't they go to stores, and it was a very good insight. So that was mid-2008, right before the financial crisis.

Yeah, it was very new. And I think that as well was a very good insight that whenever we talked with people about e-commerce and with shoes, we got a lot of feedback from people, 'I cannot really order shoes, you have to try them on, this is more a bricks-and-mortar experience.' But then we actually saw in Google how many people actually search for specific shoes in specific sizes, and that made it very clear that there's a big market. Although it was not a market for like 90% of people, it was actually a market for a few percent of people.

I mean, it was selling shoes online. So I think it was not the most innovative idea. Though, I think what Zappos in the US proved is that with shoes in e-commerce, you can actually build up a big company. And that helped to raise some money in basically June, July 2008, where we got €100,000 of investment. And then the financial crisis hit. And then we said, okay, now we better get this going and survive. And that actually was, I think, in retrospect, a very good thing for us because it really produced a lot of character that I think we still nurture from today.

Yeah, I mean, I remember with my co-founder that we were debating endlessly, for example, for half a day if we should buy this book of the German retail with shoes, which gave us a lot of market data about the German shoe retail. And it cost like €60 at the time, and we really were debating, do we really need to spend the €60? Today we have more than 60 million customers. We have thousands of employees, but we still tell these stories of frugality, of like every single euro and every single resource really counts, and treat it as if it's your own money. Do you really have to spend it? And I think this produced a lot of character that we still benefit from today.

The scaling of Zalando then actually happened extremely fast. So we went from in 2009 we had probably like 5 million revenues, 6 million revenues. Then we went to 150 in the next year, then more than 500 million, and then more than 1.2 billion in the fourth year.

So we literally went from 50 people in 2009 to 2011 we were like more than two and a half thousand employees. So the scaling actually went very fast because then we realized that we have this flywheel going for us. So where when we started off with shoes, and then we understood, you know, the more you provide selection, actually the better you could convert the traffic, the better you could create the experience for customers. So we really had to just scale selection, and then actually we were able to convert the traffic in a good way. And then we asked ourselves, is this actually not only shoes but as well fashion? And can we actually cross-sell fashion, what we then started to do. And then we asked ourselves, is this actually not only Germany, is this actually a European proposition? And then we went into the first market, and we realized that we could actually bring the same selection that we had now in Germany to a smaller market that actually was very much appreciated. And then we actually scaled across Europe, and that was a very, very fast scaling in these first years.

I think when it's very clear how your flywheel works, then I think it's incredibly easy for leadership to actually align under this framework of how you actually grow.

We started off with an Adidas shoe. So people actually on the internet searched Adidas Samba, like a specific shoe size, let's call it 46, like a bigger shoe size than you usually should get in the store. So they had very specific searches. And to convert such a search into a sale, you just need to have the shoe. But there's not that many people that search for this specific shoe. So more people actually search for Adidas Samba, which is the model name, and even more people then search for Adidas shoes or for the brand name Adidas. But the brand name Adidas you cannot really convert until you really have a good selection of Adidas in place. And for us, it actually meant we had to scale inventory. We actually started very specifically to scale around true searches in the first couple of months. And we knew that the more you build up selection, the more you can actually convert the traffic. And then you can actually go from within a brand to the entire brand, then to more brands, and then you have entire Germany. Then you can replicate the same for the next country. And all of a sudden you then have a selection that brings the same amount of selection no matter if you live here in the north of Norway, or if you live in the south of Italy, or if you live close to the high street of Paris, and you have the same access to selection. And I think that was very much the journey of the flywheel of how we built up selection and actually could grow and grow and grow in this environment in a good way.

The way of how we think about it is we have people that we form a relationship with. This is our customers, and we have more than 60 million, more than 15% of the European population that has an active customer relationship with us. And we nurture these relationships with our customers. We invest a lot in terms of our experience to never disappoint, to always deliver in a way that actually exceeds expectations. And then it's a question of how we can use these customer relationships to actually do more for them. So we started off with shoes, went into fashion, recently went as well into sports, into beauty, into families and kids. So into all aspects where we actually can play a bigger role for our customers. So we build relationships and then we grow our role for them in a bigger way. And today it's about €300 on average they spend with us, and our ambition is obviously to grow the role in different categories that we play with.

We're only in Europe. And the big reason for only Europe is because Europe is actually so beautifully complex, and we made Europe very easy for brands to interact with due to our logistical footprint. So we can actually build a big logistical network throughout Europe that can serve customers as well in the north of Norway and the south of Sicily. And within Europe, we actually have the benefit of this network. Outside of Europe, if you have a brand, instead of building out all these facilities yourself, you basically just let us do it.

Tell me about this. So what do you do for the clients?

Exactly. So we have a B2C company, that's how we grew up with, and recently we have as well launched the B2B vector for us, where we basically productize the logistical infrastructure and services that we've built, and as well software. And we regard the 7,000 brands that we work with as customers of our infrastructure, and they can use the same infrastructure that we built for ourselves to actually run their entire e-commerce on. So that has all these localization features throughout Europe, and that they can actually send product through for their own e-commerce or as well connect to different marketplaces and only run the entire inventory from one infrastructure, which is a very good use for the brands because they don't have to invest into own capex of logistics, and they get as well the benefits from the entire network that we have for ourselves.

Exactly.

Yeah. I mean, a good example is Next, that's actually committed their European, the content to European fulfillment. So all the fulfillment for Next within Europe is actually done through our logistical footprint.

Yeah. So I mean, you're right, with 60 million people that actually shop with us on a yearly base and many more visitors that we actually have that use our destination, there's a lot of rich data that we generate on behalf of consumers. For example, what we do here is that we use the data graphs from consumers and as well from merchandise to help consumers to actually find better sizes for themselves or find the sizes that they have a higher probability to fit them. So I mean, if you actually order something on Zalando and you have a history with Zalando, and you sometimes return items, you get feedback on items, some you don't return on items, then we see as well similar customers that have similar history as you have. And when you look at another item that you have not yet bought, we can give you more accurate advice about which size to order, because sometimes these brands run a bit smaller, some run a bit bigger, which we can actually build out of this knowledge graph on sizes.

That can happen sometimes. But I mean, sometimes as well these brands have different size profiles. So it can as well be sometimes that you say, okay, well, in this brand you might actually be an S here. So it can happen, right?

But I mean, these are good data points. But then there's another very interesting data challenge which actually comes in logistics. How do you actually optimize logistics in a right way? Where in this network of logistic centers that we run across Europe, where an item should be put in this network that has the highest probability in terms of speed but as well in terms of cost where it might actually be purchased. There's a lot of math and data that actually really helps to optimize this network, as well on behalf of the entire industry, because we work with 7,000 brands. We run a very big network and there's a lot of inefficiencies which can be calculated away by producing the right algorithms and the right data graphs.

I mean, it has a few components about how we actually interact with consumers. We for example recently launched a discovery feed, which is a great way of how consumers can interact with fashion beyond actually the only buying, but as well in terms of their discovery and their inspiration and entertainment. So we surface from a huge pool of content those items of content that a consumer might be the most interested in, which gives them a great gateway towards finding out, getting inspired, or as well having fun with fashion and lifestyle. So that's an interesting new project that we have launched on our mission to inspiration and entertainment with consumers. A second bigger initiative of ours is an assistant that we have built, which actually enables consumers to interact with us in natural language. So we can actually ask us much more occasion-based questions. So I don't know, like I'm showing up here in Norway, and what shall I wear today in Norway, which is something that e-commerce previously couldn't really answer. But now with all these advances in large language models and as well in our own advancements, we are able to cope with these questions and answer these questions in a good way.

Yeah, could be.

The size and fit is as well really one of the most interesting and complex questions in fashion. And here AI actually helps quite a lot to actually solve these questions.

Yeah, exactly. So you can take a picture of yourself at Zalando, which actually 1 million customers already have done. So you take a picture of yourself using the Zalando app, and we render you the sizes from your body, and this increases our probability to predict the right size for you. But it's a two-sided problem. It's a consumer, it's a body size, but it's the merchandise measurement size, which is another question. I think in the future there will be as well experiences where for a certain part of the assortment, we would have like close to 100% confidence that we can predict the right size for you, where you might have the detail pages where you don't have to select any more size. We do the size selection actually for you, and we're very confident that whatever we will send you will actually fit you.

Nobody really likes returns. The consumers don't like returns. We don't like returns. The environment doesn't like returns. So it's nothing that anyone likes. Consumers don't really like to go to the postal office and just deliver returns. Again, it is something that we work on to help consumers to take better choices. And the big driver of returns is obviously that an item actually doesn't arrive in the way of how the consumer imagined it to be. So be it in terms of sizes, how it fits, or be it in the way of how it was visually imagined when you actually ordered. And there's actually a lot of investments from our side into helping consumers to take better choices here. So on the size and fit we already discussed a little bit what we do there, but even on the product presentation, there's actually innovation happening where this problem might be better solved in future. So for example, we're now able to render from two-dimensional pictures actually three-dimensional experiences or like videos that actually help consumers to really in depth actually try to imagine this item on the detail pages in a way that wasn't possible before.

I think the one key theme is customer obsession. So because consumer expectations are constantly rising, and really staying close to the consumer and really as well staying close to the technology that actually enables you to provide solutions that were not possible before. I think that's one key theme. And the second one is as well to have a very good relationship with the brands, because we work with 7,000 brands, and they as well drive their business and they have a lot of good ideas. And understanding what they really need and how do you as a platform actually cater to them in the right way, and how do you make it as efficient for them as possible to drive their brand equity on Zalando. I think that's the two most important ingredients you have to get right.

Yeah, I mean, you have these Chinese competitors now, but we're basically in a different game than those companies. I think they are only about price. Our promise actually to consumers is, or as a platform, is much more around quality. So as a consumer, you know that the selection you get on Zalando, these are brands, there's a certain quality filter that we actually apply to it, and we invest a lot into experiences to make it better for consumers, like delivery speed, reliability, brand presentation, and as well these innovations as size and fit and product presentation and so on. So that's a promise towards consumers. And the promise towards brands is as well on quality, which is very important, is that they don't compete on Zalando with supply chains that are just after copying their styles at a lower quality and cheaper price. But they actually have an ability to build up their brand on Zalando and tell their story on Zalando and sell their products in the way they want to sell them. So it's a very different kind of game that we play. But these Chinese platforms, you see them in segments of the market that are very price-sensitive, like young fashion entry points, you see them as well in terms of advertising prices, because they're sometimes very aggressive in advertising. So that as well we see that. But I think overall, our Zalando game is much bigger. So it's as well not only about fashion, it's about sports, about beauty, about family, kids, and many more lifestyle propositions that we're active in.

We have a very broad view across Europe, and I think sometimes you see price consciousness a little bit more in some elements of the market in Germany, like Eastern Europe is actually performing quite well, but nothing really extraordinary.