Zalando brands raise concerns on fulfilment model, says UBS report

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Zalando brands have raised concerns on the marketplace’s fulfilment model which they are more reluctant to use, says a new report ‘ZFS Partner Interviews. Downgrade to Sell’ by UBS.

The study interviewed some of Zalando’s top 10 largest stock volume brands in their fulfilment service network to understand the sellers’ opinion of the service. Two of the interviewees have also held positions at Zalando.

According to the report, the interviewed Zalando brands express their reluctance to increase Zalando Fulfilment Solutions (ZFS) volumes to protect their margins.

How does Zalando Fulfilment Solutions work?

It is similar to Fulfilment by Amazon (FBA) which enables sellers to keep their inventory in Zalando warehouses. Merchants are charged per order for a storage and delivery fee. However, Zalando sellers are saying that the fulfilment’s stock split method.

There is the possibility to pull stock back but if you think about it from a cost point of view, you’re adding more costs to the situation. You send it [stock] to Zalando and they charge you for manhours and handling. If you want it back they will charge you again...”
– Zalando brand seller

The last three months saw Zalando’s share price rising by 70% as investors have focused on the marketplace and margin upside it promises. Increasing Zalando Fulfilment Solutions (ZFS) volumes is a major part of protecting margins during the transition from a wholesaler to a marketplace.

Split inventory concerns

Split inventory is the main reason for the merchants’ reluctance to rapidly increase the use of ZFS. Split inventory means less flexibility in stock allocation. This could mean higher discounting and lost sales – reducing the relative profitability of using ZFS.

What does less flexibility in stock allocation mean for brands?

It means that brands may end up in a position with lost sales and deeper discounts, says the report. A dress could be selling better on brand owned ecommerce than Zalando. This could happen if Zalando is promoting wholesale items more actively and sellers item prices become less competitive – Zalando is willing to operate on lower margins than most brands. In this case, brands must pay to retrieve stock. Extra costs can have a significant basket margin impact as many ZFS brands’ items on ZFS are lower than the average selling price.

Some of the interviewees also pointed out that ZFS may offer revenue opportunities beyond simply adding more items to Zalando. Brands on ZFS will be able to offer express delivery. Faster delivery and fewer shipments per order should drive better customer satisfaction.

‘ZFS is not one size fits all’

The report says that the advantage of ZFS may not be so compelling for everyone. The interviewed brands are saying that the main benefit of ZFS – lower per order fulfilment cost – is less useful for:

  1. Larger brands
  2. All markets
  3. Higher average selling point brands or items

UBS are saying that Q1 saw Zalando growing ZFS volumes mostly through adding smaller brands and taking existing brands international. Citing Zalando’s David Schroeder, chief financial officer statement during Q1 earning’s call, the report says that the marketplace expects “bigger partners to join in the coming months.” However, the report says that it may be more difficult to increase ZFS penetration rapidly amongst larger brands because of their existing partnerships with logistics suppliers.

This is the challenge they’re running into simply because of the fact that the larger brands not buying into it simply because if you’re a brand the size of us then you already have your own logistics programs, you already have your existing conditions with DHL and Hermes and other shipping services.”
Zalando brand seller

Zalando’s response

We started Zalando Fulfillment Solutions (ZFS) about two years ago and we are receiving positive feedback from our partners who are using the service. Today, 30% of the Partner Program items are handled through ZFS.

“Thanks to ZFS, we can make deliveries more efficient. ZFS provides benefits for customers, as Zalando and partner articles can be sent in one single package. By benefitting from our international logistics network our partners can concentrate on their own core competencies.”

“We are constantly developing our services together with our partners. This includes the efficient steering of stock volumes, for which we are considering multi-channel solutions as one example.”
– Zalando


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