Zalando: Enduring Competitive Moat of Size and Network Effects

Pieter Hundersmarck of Flagship Asset Management presented his thesis on Zalando (Germany: ZAL) at European Investing Summit 2020.

Thesis summary:

Zalando is the leading online apparel & footwear retailer in Europe with ~10% online market share. It is a focused, pure-play online retailer which offers a one-stop fashion destination, including shoes, apparel and accessories, from 2,000+ global brands. Zalando’s website attracts 4.2+ billion visits per annum and as of Q1 2020 it had nearly 32 million customers in 17 European countries.

Today, Zalando is the European online leader, generating €6.5 billion in revenue and employing over 14,000 people. It is still headed by founders Robert Gentz, David Schneider and Rubin Ritter. Customer service has since been moved to a dedicated team, as has package delivery.

Similar to Amazon (another fund holding), Zalando’s business model required large upfront capital expenditures in warehousing, logistics and technology. These investments were so large that for many years Zalando never turned a profit. However, the capacity created by these investments, as well as the upfront customer acquisition spend, are the reason for the company’s dominance today. While the investment was ‘capital heavy’, it now allows the business to be ‘capital light’ as many of the growth drivers, from here, require little incremental capital. The extent of Zalando’s warehouse network throughout Europe is notable.

The key to Pieter’s thesis is the fact that Zalando is going to look very different in 10 years’ time. Pieter expect Zalando to successfully shift from an inventory-carrying wholesale model to a scalable, asset-light, commission-earning platform with lucrative fulfilment services and marketing revenue streams that are offered as add-ons to its platform partners (“the stores”).

Read Pieter’s research report on Zalando.

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About the instructor:

Pieter Hundersmarck is the global portfolio manager for Flagship Asset Management, a specialist global investment management boutique based in Cape Town, South Africa. Flagship (est. 2001) is one of South Africa’s most awarded boutique asset managers, with deep experience across asset classes in developed and emerging markets. Pieter has been investing internationally for over 14 years. Prior to Flagship, he worked at Coronation Fund Managers for 10 years, and also co-managed a global equities boutique at Old Mutual Investment Group. Pieter holds a BCom (Economics) from Stellenbosch University and an MSc Finance from Nyenrode Universiteit in the Netherlands.