The DNA of Zalora

Robert Stockdill

18th Apr 2018

Alibaba and JD.com may be embracing brick-and-mortar retailing in a move offline, but Southeast Asia’s fashion-focused Zalora still considers itself a pure-play online retailer and has no plan to change.

In an exclusive interview with Inside Retail Hong Kong, Zalora Group CEO Parker Gundersen (pictured above), who will step down from the role at the end of May for personal reasons, says digital pop-ups in various markets across Asia should not be mistaken for a move offline.

“I would consider ourselves a pure-play digital-commerce provider. The pop-up shops for us are largely for marketing. I love them because it is a great way to introduce consumers to Zalora and the products we sell, and to our technology [interface], so they can see how easy it is to shop on our platform.”

Fashion-focused Zalora has a growing presence in Hong Kong, sourcing orders here from its Malaysian warehouse.

Romain Voog, outgoing CEO of Zalora parent Global Fashion Group, says the company treats Hong Kong as part of a cluster of markets that also includes Malaysia, Singapore and Taiwan.

“I think we can see a lot of progress in Hong Kong, especially if we are getting products that are more geared toward Hong Kong customers. It is surprising there is not more Chinese influence selling into Hong Kong. We’ve been surprised by the results we have seen of basically just organising a shipping route into Hong Kong.”

Growth ahead

Voog sees a lot of opportunity for Zalora to increase its Hong Kong presence, especially if it can source a better assortment of product.

“We don’t share our growth rate in Hong Kong, but it is above our [overall] market growth rate. We are starting to invest more into it in terms of marketing and assortment, so we should see improvement in growth reflecting that.”

Gundersen is not tempted to copy the massive investment by Alibaba and Amazon into traditional retailing formats via acquisitions and moving offline, albeit with heavy technology behind the scenes.

“Those two players are in a unique position in this world in terms of the size of their portfolios, their capabilities and what they can do. I can only speak for myself and this business that we run – our DNA is technology and agility, and if I look at our supply chain, it is about efficiency, especially in markets where you have consumers spread out, big populations of consumers who are nowhere near high street. It is such a sensible alternative to have an e-commerce platform where you can consolidate one warehouse and distribute the product to wherever there is demand – it is a far more efficient way to go.

“So for us, I want to stay focused on that model. But there are ways we can partner with the offline world, because if you think about it, 95 per cent of retail today – probably more like 98 per cent in most markets – is still happening offline. So we have a very small share of the overall market.

‘So much opportunity’

“It is interesting to see the big players making these moves, but I think there is still so much opportunity for a company like Zalora because we have that really focused perspective. We love fashion, we love beauty and we love what that does for our consumers. Not all fashion is the same. There is a big spectrum of fashion, but the ability to have a viable channel for brands around the world here in Southeast Asia is still unique.”

That said, the online market is growing fast and Gundersen is excited to see how much more share e-commerce takes. “We’re still limited in terms of size right now, so we maximise our coverage and try to get as much face in this region as possible, reaching as many consumers and potential customers as possible who are now coming online.”

He is speaking about the entire Zalora Asia business, of course, which stretches from the Philippines through Malaysia, Singapore, Indonesia and up to Taiwan and Hong Kong. Forays into Thailand and Vietnam were less successful and sold off to local players, allowing the company to focus on its stronger markets.

Voog will not rule out a return to either market long term, but believes there is greater opportunity through not dispersing resources too thinly in too many markets.

“If you look at the Philippines, Indonesia, Singapore and Malaysia, these markets are at a very early stage. E-commerce penetration is like 5 or 6 per cent, so that means 95 per cent of the business is not online yet. The results are clear: if we double down in these markets, and get the right partner on board where we need one, you can see the results.”

Misinterpreted

In the Philippines, Zalora partnered with shopping mall/banking/telco giant Ayala, which took a 49 per cent shareholding. Gundersen says the partnership – since misinterpreted by some commentators as a partial exit from the market – will allow customers to move between physical and digital channels seamlessly. The two companies can share data, and use that information to improve customer touch-points.

“The partnership creates a special opportunity to align the country’s leading commercial mall company, telecom provider (Globe) and consumer bank (BPI) with the region’s leading online fashion retailer to create a first-of-its-kind retail partnership that focuses on the customer journey,” he says.

“We have very ambitious plans to connect our respective consumer-facing businesses to create some ‘seamless journeys’ for customers in the Philippines and across our markets. The idea is simple: leverage our combined customer-facing business and our digital capabilities to create a far more connected shopping experience for Filipinos.”

Immediate benefits include click-and-collect, allowing online shoppers to have their purchases delivered to an Ayala mall, This gives the mall a strong e-commerce face to consumers, including space for tenants to join Zalora’s ranks of vendors.

As Gundersen explains, “My first responsibility is ultimately how do I please my customer by getting the right product? If I have product the customers don’t really want, it is just going to be left over. You’re not really going to build a brand that way, or a profitable retail company, Partnering with places like Ayala and helping them to invest in creating an e-commerce solution like we have is unlikely for most offline players, unless they are really in a unique position. There are a few out there who are making those acquisitions to bring in that kind of capability.”

Voog says critics alleging the company is divesting misunderstand the Philippines strategy. “It is totally the opposite. We are actually overinvesting, but we are investing in a way where every investment is going to double the result because of the partnership.”

Relationships essential

Gundersen sees strong relationships with brands as essential to Zalora’s success.

“A couple of years ago, few brands were willing to take a shot [with Zalora]. But we are sitting in a unique position because the brands are really now starting to come in and say, ‘Hey, I like what you guys are doing – I like the adjacencies, I like the brands, I like the way you represent brands in your channel and I want to come in’.”

He believes Zalora is attractive to brands because they can achieve incremental sales from customers not initially seeking them out.

“Zalora is like a shopping mall whereas the monobrand website is like a small shop in one location – they just can’t get the traffic we can. And we have that customer relationship, so we can introduce new brands to people. They may come in and buy a Mango or Topshop item, but we can introduce them to Adidas or Nike.”

Is it is a challenge convincing brands they are not cannibalising their own direct-to-consumer sales by listing on Zalora?

“We have the data, so we can show why e-commerce makes so much sense in Southeast Asia,” says Gundersen. “A lot of consumers just don’t have access to offline stores. I think the local distributors are much more concerned, so over the years we have really had to work with them and build confidence and trust. At the end of the day, this is a net positive thing for the overall business.

“With our local distributor partnerships – in some markets we still work closely with those distributors – we really try to focus on how to uplift their performance as well.”

Distributors, he says, are often being pushed by the brands to develop their own country-specific e-commerce site, so partnering with Zalora is sometimes less of a threat and more of an opportunity to appease the brand.

“I’m very focused with my team on how we build stronger relationships with the brands and understand what they need as well, because not all product is the same. There are brands that give only the best products to the best partners. That’s the status I want to get into.”

Profit question

Meanwhile, Zalora’s struggle to become profitable in Asia has attracted a significant amount of media attention in recent years. Never mind that it took Amazon decades to return a profit, the financial press is less forgiving with Zalora. Voog is candid when asked about the timeline for the company making it into the black.

“It is totally different in different markets. Some of our regions, the Middle East for example, are profitable. It really depends on the market maturity and the level of competition there.

“Our view is simple: we want to build the largest, highest-growth and profitable operation, focused entirely on fashion product. We want to be the fashion platform in each of our countries in each of our regions. We want to be the largest, highest-growth and obviously most-profitable fashion platform.

“We’ve seen from our overall GFG result that we are making progress on the path to profitability and we are now in single-digit EBITA negative results, which is a steep improvement to the minus 40 we were three years ago. I am not interested in being a profitable small business – I am interested in being a large, high-growth business, so I think the priority will always be to make sure we stay the leader and reinforce that leadership position. Sometimes that might mean delaying break-even point to make sure you reinvest in acceleration of growth. That is fine.

“The real indicator of success is being profitable on viable cost. Once you cover your viable result, any extra growth will help build your bottom line and help pay for your fixed costs.”

Voog does not believe Zalora has made many major mistakes since entering Asia. “Maybe the only one was to go too broad too quickly, going into too many countries and being subscale and spreading ourselves too thin. That’s why we exited Thailand and Vietnam. If there was one thing I’d do differently, it was probably this one. The rest, we have been lucky.”

That said, there have been many lessons along the way.

“I think we have developed as a company the ability to be agile. We test a lot of things, then we try and humbly measure the results, and if we fail, we stop. It is a huge mistake when you start to do things and you don’t act when you fail and you keep on doing it.

“We don’t do that. If we fail, we stop and we move on.”

This story first appeared on sister site Inside Retail Asia.