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
- 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.
- 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 -
- Everyone wears shoes.
- Lots of people own multiple pairs.
- Shoes offer a lot of ‘status’ and ‘desirability’ cues which means men and women alike are always upgrading.
- This also means shoes will never be commoditized.
- There are a lot of genuine shoes-lovers who spend considerable amounts on shoes.
- The branding is already done for you.
- 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 -
- Both disrupt traditional retailing using long tail availability.
- Both ‘obssess over customers’ and have impeccable customer service – Zappos bills itself as a ‘customer service business that just happens to sell shoes’.
- 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.
- This is Zappos’ growth -
2000: $1.6 Million.
2001: $8.6 Million.
2002: $32 Million.
2003: $70 Million.
2004: $184 Million.
2005: $370 Million.
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.