Amazon changes Shoe retailing forever, buys Zappos.com

Amazon’s purchase of Zappos.com for $807 million is big, big news.

Mr. Bezos has talked about ‘how surprising Amazon’s success with selling shoes has been’ and Amazon had earlier bought Endless.com. Well, things really must be good because according to Bloomberg Amazon just did the ‘biggest acquisition in Amazon’s history’ -

Amazon.com Inc., the world’s largest online retailer, agreed to buy Zappos.com Inc. in the biggest acquisition in its history, adding more than 1,000 shoe and apparel brands to its selection of books, clothes and videos.

Video from Mr. Bezos to Zappos.com employees -

Amazon’s Newest Billion Dollar Business

  1. Amazon suddenly has another billion dollar business -

    Closely held Zappos.com made more than $1 billion in gross merchandise sales in 2008, almost double the amount in 2006, according to its Web site.

  2. This goes very well with Amazon’s existing (books, music, dvds, electronics) and upcoming (kindle, publishing, cloud computing) billion dollar businesses.

I’d contrasted Google’s dependence on advertising with Microsoft and Amazon’s diversified billion dollar businesses, and have to say that this is an excellent, excellent addition to Amazon’s billion dollar businesses.

Shoes are a great business to be in

Shoes are one of the most profitable businesses left and a business that’s great to be in -

  1. Everyone wears shoes.
  2. Lots of people own multiple pairs.
  3. Shoes offer a lot of ‘status’ and ‘desirability’ cues which means men and women alike are always upgrading.
  4. This also means shoes will never be commoditized.
  5. There are a lot of genuine shoes-lovers who spend considerable amounts on shoes.
  6. The branding is already done for you.
  7. Amazon can get great deals from shoe companies – even better than Zappos could.

When Steve Jobs claims that ‘people only wear shoes 40% of the time’ and ‘no one wears shoes in bed’, Amazon can take respite in the fact that they’re making 40%+ margins on Manolo Blahniks.

A lot of this applies to high-end apparel too, and Zappos was beginning to establish a presence in apparel. A nice bonus.

Zappos was a mini-Amazon even before this

There are lots of similarities between Zappos.com and Amazon -

  1. Both disrupt traditional retailing using long tail availability.
  2. Both ‘obssess over customers’ and have impeccable customer service – Zappos bills itself as a ‘customer service business that just happens to sell shoes’.
  3. Every Zappos employee has to spend 2 weeks in customer service and 1 week in the warehouse. Cue to Mr. Bezos spending two weeks in a warehouse every year or so.
  4. This is Zappos’ growth – 

    2000: $1.6 Million.
    2001: $8.6 Million.
    2002: $32 Million.
    2003: $70 Million.
    2004: $184 Million.
    2005: $370 Million.
    2006: Unknown.
    2007: Unknown.
    2008: Over a billion. 

In many ways Zappos, in 4-5 years, could have been a legitimate challenger to Amazon in retail (see this). And there aren’t too many others.

Buying it not only gives Amazon a billion dollar business in a new niche, it also eliminates one of the few companies that have a comparable customer service reputation and, arguably, similar customer loyalty.  

Given the similarities its not surprising that the Zappos management team will continue to function independently (from the Bloomberg report).

You can get more in-depth analysis of Zappos.com at the StartUp Review Blog. Zappos co-founder and CEO Tony Hsieh also founded and sold LinkExchange to Microsoft in 1998 for $265 million.

In Conclusion: Amazon’s newest billion dollar business cost them just $800-$900 million

The fact that it was Amazon stock makes it even more of a bargain. Not sure why Zappos.com would sell itself at this price point (Update: Investors wanting to cash out).

Quick Thought: Anyone starting a big Internet company – stay away from Investors if you can. Greedy VCs leads to stupid things like selling a $1 billion revenue company that’s grown revenue 625-fold in 9 years for $800-$900 million.  

Amazon’s strategy is close to flawless – Equal parts scary and beautiful.

7 Responses

  1. I have a very tough time fitting shoes for various reasons and I gave up after going to 5 stores here. I wound up trying out Zappos, which sends you shoes in various sizes if you want and you’re free to return them all for a full refund if they don’t fit. Fantastic selection too.

    No shipping charges in either direction. That’s why they’re so popular. Amazon had better keep that policy.

    If you can afford to buy a couple of sizes at a time (some buy many more for trying out), you’re pretty much guaranteed to buy. Two’s the limit for me though.

    When I send back the shoes that don’t work as well (you have a year to send them back for the full refund if in new shape) , they either give a full refund or offer credit on the next pair plus 1- or 2-day shipping. I think it was 1-day.

    Their boards are filled with happy customers. I didn’t take a 3rd look at Amazon’s Endless because they couldn’t compare with Zappos, so, to me, this is a really great buy!

    – Andrys

  2. Can you clarify what you meant by “This also means shoes will never be commoditized?”

    • simply that people will always spend money on shoes (and other status indicators).

      the better off people are, the more shoes they’ll buy and they’ll buy progressively more expensive shoes.

      people might download free mp3s illegally. however they still buy ‘cool’ ipods and iphones to listen to them.

      Apple is one of the companies that uses the whole ‘status indicator’/’coolness’ concept in its products – in fact it might be the second biggest selling point (after usability).

  3. Interesting.

    Is there a subset of defining factors that makes a product or service destined for commodotization?

    Like, lack of uniqueness + universal need = inevitable competition amongst suppliers, driving down prices or fighting for ease of access?

    • I’d say it’s stupidity of the companies in the niche (newspapers devaluing their content) or desperation of one company or advent of new technology (see encarta replacing britannica and then getting replaced by wikipedia).

      lack of uniqueness is definitely a factor. Basically any time a product or service no longer bestows a competitive advantage.

      take jeans. a few people start wearing seven jeans, then everyone is. At that point it’s no longer cool. Then people move to true religion (which has the added benefit of super-gaudy designs on the back-pockets so everyone knows you spent $250 on a pair of jeans). Then everyone is, so people move to Evisu which is even more expensive (and thus the competitive advantage can’t be matched as easily). And the cycle continues.

      The Internet tends to commoditize everything it touches because there are low barriers to entry, low costs, a super huge market, and lots of competitiveness.
      Plus there are people who out of their belief system (open source people), greed (venture capitalists), or
      other reasons (desperation for success) will give away value for free.

  4. Okay, I think I’ve got it (for now); found this compact definition which seems right: http://economics.about.com/od/commodityprices/f/commodity.htm.

    So shoes in the post won’t be commoditized because of the uniqueness factor. Shoes in general could be commodities – widely available, uniform quality overall — but the “status and desirability” cues are where the uniformity break occurs.

    Oddly, I think the Internet can also help combat commoditization, by assisting (some) brands in developing a rep or cachet, at viral speeds.

    Anything that assists or supports the growth of a coolness factor can oppose commoditization, and the resultant drive towards cost of sale = marginal cost of production.

  5. that’s a very good point.

    yes, definitely a brilliant idea to reverse commoditization using the internet.

    i think this is one of the reasons twitter is really taking off. twitter basically lets you enhance your branding – both for individuals and for companies.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 9,733 other followers