Zulily: Not Exactly Childs Play
March 30, 2015
Farida Roberts sits in the lobby of Zulilys Seattle headquarters sipping her coffee. On the other side of a glass wall, her four children scamper through a clutter of clothing, toys and scene settings as they wait to model clothes for the popular online retailer of moms and kids fashions.
This photo session is one of the many ways Roberts life has come to revolve around Zulily since 2010, when she first bought a leotard for her daughter on the discount site. Now, Roberts receives from Zulily a daily email that guides her to a custom-tailored website, where she searches for great deals for herself and her children. I like the upbeat layout and the copy is entertaining and informative, says Roberts. When I make a purchase, a message pops up saying, Hurrah!
Roberts is the kind of core customer who helped drive revenues at Zulily to $1.2 billion last year, up 400 percent since 2012. And shes the kind of customer the company is putting a renewed focus on as it faces headwinds.
Slowing growth has pulled Zulilys share price down 80 percent since its high of $73 in February 2014, a few months after it went public. The company disappointed analysts in February of this year when it announced 2014 earnings and sales were far below expectations and that CFO Marc Stolzman planned to resign. Zulily projected that sales growth this year would be about 30 percent, down from 72 percent last year.
The elevated churn of recent cohorts calls into question the attractiveness of the Zulily value proposition beyond a limited customer base, wrote RBC Capital Markets analyst Mark Mahaney in a February report explaining his decision to downgrade the stock. Mahaney was also concerned with the inefficiency of the companys fulfillment centers. Others analysts pointed to rising marketing costs and delivery times of 12 days or more to justify their downgrades.
Many also see the companys no returns policy as a limiting factor at a time when Amazon has raised expectations among consumers with rapid deliveries and easy returns. Together, those assessments have led to a rising sense that Zulily is losing its momentum, not unlike other flash discount sites like Groupon, LivingSocial and Gilt Groupe. Mahaney acknowledges Zulily has a high rate of satisfaction among its core customers but wonders how many more customers like that are out there.
Zulily CEO Darrell Cavens admits the company may have gone astray by spending too much money marketing products of national brands that customers can readily find elsewhere. By refocusing on obsessively seeking out great products from small vendors and by improving the shopping experience, Cavens believes Zulily can get its mojo back. So much of the excitement at Zulily is about whats new, says Cavens. Customers keep coming back again and again, looking to discover something fresh that they havent seen before.
Every day, zulily introduces on its website 9,000 new products accompanied by catchy captions and attractive pictures photographed with props and backdrops in one of 50 studios inside its headquarters building. The items are introduced through more than 100 three-day sales events with names like Whats Knit to Love and Littlest Prince Couture that set the theme for a particular boutique. A constant update of merchandise and events ensures that theres always plenty to keep the shopping experience fresh. The firm is also pushing into other areas in which women often make purchasing decisions, such as home decor and menswear.
Customers must register to gain access to Zulily.com, and each of Zulilys 4.9 million active members is guided daily to a customized page based on an individuals past purchases. If a mother of boys looks at a display of toys, the page will show boys playing with toys because the mother is less likely to look at a product featuring girls. Each time she buys something, Zulily gets to know her better and can predict with greater success what products she is likely to buy in the future. Shes offered encouragement by way of bonuses, discounts or waived delivery fees as part of a larger effort to win new customers and keep existing ones.
This personalized approach has been effective. Zulilys data suggest that the longer a customer shops with Zulily, the more she is likely to buy. Some 83 percent of customers in North America last year were repeat patrons. Zulily had 21 million orders in 2014, with the average customer spending $59 per order. Frequent buyers those who shopped with Zulily at least a dozen times last year spent an average of $246, up 12 percent from the year before.
Those figures support the original vision of Cavens and cofounder Mark Vadon when they started the company in 2009. The two met when Vadon, a Harvard graduate with an MBA from Stanford, launched online jeweler Blue Nile after shopping for an engagement ring and being frustrated by the experience. Cavens worked with Vadon at Blue Nile before moving to Microsoft, but they stayed in touch.
One morning, Cavens was on the phone telling Vadon about the trouble he was having finding inexpensive quality clothing for his toddlers and how there ought to be a website for moms. Vadon thought the idea of a website had merit because the market was fractured into thousands of small vendors designing and selling clothes and toys for children, and there was no easy way for moms to shop for those products. The two pitched their idea to Dan Levitan, cofounder (with Howard Schultz) of Maveron, a Seattle venture capital firm. Maveron, which had previously declined to invest in Blue Nile, saw Cavens and Vadon as a good bet and agreed to invest $5 million. On its first day of business, Zulily staged three events and sold $1,800 worth of maternity, infant and toddler clothing.
Although both are e-commerce sites offering discounts, Blue Nile and Zulily are otherwise worlds apart. Blue Nile is aimed at men who dont like to shop and wanted an easier, cheaper way to buy jewelry for wives and girlfriends. These men required little special marketing enticement and could be reached easily through Google AdWords. Zulily was aimed primarily at women who enjoyed shopping for attractive, unusual items as well as for discounted products. They were harder to reach and retain, and had to be pulled in through social media, television and a broad range of other approaches.
Cavens and Vadon say Zulily may have drifted from its original mission by being too aggressive in pushing products of national brands like Aerosoles and LeapFrog that attracted customers to the one-time sales but didnt prompt them to return to the site. Such efforts helped drive marketing costs to $101 million last year, up from $60 million the year before, while bringing in fewer active customers. For every dollar we spend, … were getting fewer impressions, notes Vadon. That means fewer people signing up.
Cavens says Zulily will continue to sell products from larger brands but will spend more of its money attracting core customers like Roberts. People who are attracted to the business to discover new and emerging brands are much better customers, he explains. They are also more likely to accept Zulilys slower delivery and no returns policy than buyers of national brands who are accustomed to speedy delivery and generous return policies at places like Amazon.
While zulily may not be growing as fast as analysts would like, the company, which has 2,200 regular employees and 1,700 contract associates, is still growing fast enough that hiring remains a challenge.
Its a concern finding people with the right attitude, says Cavens. It helps that the Seattle-based company recently moved into a building on Elliott Avenue with great views of Puget Sound. Theres also a gym, a cafeteria with food for almost any kind of diet, ample storage for employees bicycles and the requisite ping-pong table.
Zulily is working on improving efficiency to serve customers better and to improve profitability. It comes down to consistent execution and making sure we are constantly optimizing, says Vadon. As part of an effort to cut delivery times to seven days, Zulily has automated its Ohio fulfillment center and will use similar technology in its expanded Nevada facility as well as a soon-to-open center in Pennsylvania.
The company is expanding a program that allows vendors to store their products in Zulily warehouses on consignment, and is piloting a system whereby vendors would have the option to use Zulilys fulfillment centers and warehouses to handle all their orders. Having vendor products in its warehouses would allow Zulily to shorten delivery times without adding to cost since the inventory would still be owned by the vendors. Having vendors products at hand might also, in the future, give the company the option of offering to accept returns on some products.
While acknowledging that cutting shipping time is important, Zulily remains most focused on improving its customer experience. Why has Starbucks been successful? Its obsessive about detail, Cavens declares. Its creating a great customer experience. Cavens says he wants Zulily to respond to customer phone calls within minutes and to emails in four hours or less. He also wants to double down on what makes Zulily unique by encouraging employees to innovate and experiment in search of ways to personalize its service. One approach the company is working on is identifying the styles of clothing customers are interested in whether its work clothes or trendy fashions, for example and only showing customers the styles they are most likely to purchase. Customers who engage with the site on their smartphones would get communications by push texts from the Zulily app.
The company is also restructuring its international operations. The London office was shuttered in January after the company decided the buying and logistics operation
there offered a poor return on investment. Zulily plans to add some of its 1,500 vendors in the United Kingdom to its global network of vendors. Henceforth, U.K. buyers, like those in Canada, Ireland and Australia, will make purchases through the unified United States site. Foreign buyers from those countries, however, will see a localized website that adjusts for different tastes, languages and currencies. Mom at the U.S. site, for example, would become Mum on the U.K. site. Zulily says it can ship to any of those four countries for $9.95 per item. In the future, Cavens expects to target a non-English-speaking country.
A key strength of Zulily is its ability to offer products from 15,000 vendors, many of whom are quite small and have little experience selling in volume or working online. The company is building a team of planners who assist vendors in planning their businesses as far as 18 months out. Were helping vendors to scale up, he says.
Some vendors have seen their revenues double within a year of affiliating with Zulily. And it can be a struggle at first to keep up with orders. Cavens says Zulily partners with vendors to understand price points, styles and business practices. If we move a significant amount of volume, we talk about how we can plan out a more strategic relationship.
The company wants to build on that strength by moving aggressively to add thousands more vendors to its site. Lori Twomey, Zulilys chief merchant officer, heads a team of 500 buyers who scour trade and craft shows as well as the internet, looking for something different that customers wont encounter in a big department store. When she finds what shes looking for, I get on the phone and start creating a relationship, says Twomey. I tell them I want to expose their brand, tell their story, present their product.
Part of the draw for vendors is that there is so much more that can be done online than in bricks and mortar. In a store, youre limited to changing the racks, putting on a sale, says Twomey. Theres no limit with the web. Not only can Zulily do a better job of marketing products for vendors, says Twomey, but it can also provide more detailed statistics about who the buyers are and where they come from. For example, Jelly the Pug, a San Francisco-based retailer of kids clothes, found working with Zulily was a perfect way to build up volumes to a scale where it was able to handle the costly inventory demands of large department stores.
Zulily can also pair with vendors to try out changes in products. Twomey once ran across a cubist-style painting of a monkey. She got a sample and put it up in her office to see how it looked. Vadon stopped by and asked why the monkey wasnt smiling. Twomey called the vendor and suggested it add a smile to the monkeys face. Then she offered to show the artwork with creative copy and photography to help drive sales.
Zulily faces challenges from tough competitors who keep raising the stakes. Amazon has more than 40 million customers who pay $100 a year for Prime membership status. The program started by offering free two-day shipping. Now it includes free video and music services. And it recently began promoting Amazon Mom, which offers Prime members 20 percent discounts on everything from baby wipes to childrens clothing. While most of the clothes are from designer brands such as Calvin Klein, Amazon now works with thousands of small vendors through Amazon Marketplace.
When it comes to dealing with Mom, it may be a while before Amazon can provide the attention Zulily does in connecting vendors to customers. Our customers are addicted to us, Twomey says. And were addicted to the business.
Roberts, watching over her children across the glass wall, says Amazon doesnt offer nearly the same value or selection as Zulily. Nor does she get the sense that Amazon cares the way Zulily does. Around the time of her childrens birthdays, Zulily sends birthday wishes with suggestions of gift ideas. When shes online, shes gently encouraged to make return visits, with little messages offering free shipping on additional purchases that same day. And each time she makes a purchase, a prompt appears letting Roberts know that if friends sign up and they make a purchase, she receives $15 each time. When that package arrives on her doorstep, theres usually a little extra in it. Around the holidays, its a sheet of paper with an outline of a design for a Christmas ornament.
All this attention leaves Roberts with a warm feeling. Zulilys challenge is to bring millions more like Roberts into the fan club.
How Zulily energized a small vendor
Kelly Fleming, co-owner of St. Louis-based Swirl Designs, got a call last year from Zulily merchandisers soon after she and her partner started offering custom designs on everything from cosmetic cases to fleece blankets and jewelry boxes. Once products became available on Zulily, Fleming saw an immediate spike in sales. First, it was 90 units, and then it was 600 units, she says. [Zulily] has helped us find our strengths. Their technology tells us which colors and patterns are working, where the sales are and what customers want more of. I can see where the market is going and plan better.
In the past year, Swirl Designs has doubled its workforce and is planning to expand its product line into new areas. Zulilys data crunching showed us that we do childrens things really well, says Fleming. I see a lot of growth in personalized items. Theres nothing like seeing that new monogram when youre getting married or having a baby, or any other exciting time in your life.
At Swirl Designs, products are made to order. Fleming says that translates into nights and weekends working to fulfill orders in the 12-day window promised to customers. It keeps us motivated, she says. J.K.