Zalando wants to move into two unidentified new European markets as part of multi-faceted investments targeting a sales increase of 20 percent to 25 percent and continuing market share gains this year.
The German online fashion retailer raised its turnover by 23.4 percent to €4,489 million in 2017, driven by a larger customer base and increased orders. Sales were up by 18.3 percent to €2,145.6 million in the German-speaking countries and by 25.7 percent to €1,973.6 million in other European markets. Other activities, such as the Zalando Lounge and outlet stores, generated sales of €369.9 million, up by 45.0 percent.
The retailer is projecting an adjusted operating profit (Ebit) of €220 million to €270 million for 2018, which would amount to an operating margin of about 4 percent to 5 percent. This compares with 4.8 percent in 2017, which was a decline of 1.1 percentage point. Zalando reported adjusted operating profit of €215.1 million in 2017, down from €216.3 million the previous year.
Zalando estimates that it has gained share in the European online fashion market and in all of the markets where it operates. Rubin Ritter, Zalando's chief executive, estimated in a statement that the retailer commands a market share of about 1.3 percent in the European fashion industry, and the company's target is to raise that to 5 percent in the long term.
The adjusted operating margin reached 8.8 percent in the German speaking-countries last year, down by 3.7 percentage points. It amounted to 1.1 percent in European countries other than Germany, Austria and Switzerland, compared with a negative margin of 0.2 percent in 2016. The other activities turned positive as well, as they delivered an operating margin of 1.3 percent, compared with a negative margin of 2.6 percent.
Zalando ended the year with net profit of €101.6 million, which was a decline of 15.7 percent. The company said that a lower marketing cost ratio could not fully compensate for the higher fulfillment cost ratio, due to continued investments into capacity and customer experience. This included the ramp-up of new fulfillment centers in France, Italy, Sweden, Poland and southern Germany.
Other investments included same-day delivery and return pick-ups, meaning that returns can be picked up at a location chosen by the customer in a two-hour window of their choice. The retailer also launched Zalando Fulfillment Solutions, a service for brand partners, where Zalando takes on the fulfillment services for brands that are taking part in its partner program.
Capital expenditure for this year is projected to reach about €350 million, excluding potential mergers and acquisitions, compared with €243.9 million in 2017.
Zalando said it had yet to decide on the two markets for expansion this year, but it indicated that they would be adjacent to existing markets. Launched in Germany in 2008, the retailer currently operates in 15 European markets but it hasn't expanded geographically since it moved into Luxembourg in 2013.
Zalando is also expanding its assortment with new brands such as Swarovski and Massimo Dutti, and the launch of the beauty category by the end of March. Ritter said the plan is to launch with at least 100 beauty brands initially in Germany, then learn and optimize ahead of a gradual roll-out to other markets.
At the same time, Zalando is continuing to invest in its infrastructure and convenience for customers. These efforts include the construction of fulfillment hubs in Gluchow, near Lodz in Poland, and in Nogarole Rocca, near Verona in Italy. The group is also ramping up another logistics center in Gryfino, near Szczecin in Poland, and the satellite warehouse of Brunna in Stockholm, while investing in further automation in Lahr, Germany.
Another part of the investment is in human resources. Zalando intends to hire about 2,000 more employees this year, after an increase of 3,000 to a staff of 15,000 in 2017. Works have started for another Zalando office in Berlin, intended to accommodate about 2,500 emploees by the start of 2019. The online retailer's staff in the German capital will then be spread across three other office locations, within walking distance.
On the other hand, Zalando is reportedly eliminating some 250 jobs in its marketing department as part of a strategy to rely more on algorithms and data analytics.
The fourth priority for the company is to invest in the customer's digital experience. The idea is to focus on an increasingly personalized customer experience, providing each customer with their own personal Zalando shop. Ritter said that Zalando would start bundling multiple shipments in one return and extend Pay Later, a payment option that is showing strong traction with French customers.
The investments come at a time when the German retailer is facing increased competition in the European online sportswear retailing market, from players such as Asos and Amazon.
Zalando had 23.1 million active customers at the end of 2017, up from 19.9 million. It counted 2,563.5 million visits, compared with 1,991.6 million in 2016, and the access shifted even further to mobile visits. They made up 70.7 percent of visits in 2017, up from 65.6 percent.
Zalando delivered 90.5 million orders, amounting to 3.9 orders per active customer, up from 3.5 the previous year. This also implies that the average basket size slightly declined to €64.5, down from €66.6.
The figures for last year include a strong finish in the fourth quarter, in which Zalando raised its sales by 22.2 percent to €1,333.7 million. Its adjusted operating margin for the three months reached 8.4 percent, down by 0.4 percentage points. Zalando's net income for the quarter was nearly flat at €60.1 million.
The company said it expanded in the quarter in spite of the tough conditions in October. Sales were up by 19.0 percent in the German-speaking countries, which was a faster rate than the year-ago quarter. Ritter said in a statement that the company has seen strong active customer growth in these countries, both in retaining existing and adding new customers.
After the launch of Zalando Plus in July, most of its same-day delivery and return-on-demand cities are in Germany. The return on demand option is available throughout Germany for about one million Zalando Plus customers, for customers in the Netherlands and six Europe test cities, from Stockholm to Paris, Lyon, Ghent, Hasselt and London.
