Exclusive product lines often are the name of the game in today's hotly competitive retail world. If consumers cannot find a fashion brand elsewhere, they will have a good reason to place a particular store or e-commerce site on their must-visit list. So goes the thinking among retailers of mass, class and everything in between.
But the minds of retailers and consumers do not always think alike. Zappos.com serves 7.7 million shoppers, which is more than two percent of the U.S. population. It commands about one fifth of the $3 billion online shoe business. And its 230,000 SKUs of non-exclusive footwear, apparel, sunglasses and other items can be purchased almost anywhere.
Zappos is making its mark in product selection and customer service. Every Zappos employee and every piece of technology and infrastructure is geared around making sure that products are in stock and available for free, next day delivery. With full inventory visibility, online customers only view merchandise that is in stock and ready for shipping. Shoppers' phone and e-mail inquiries are answered promptly and thoroughly. Returns are gratis. Customers simply fill out an online shipping label and visit a UPS drop box.
"While our selections initially attract people, our service makes them return," says Tony Hsieh, CEO of Las Vegas-based Zappos. "The money we could spend on advertising we invest in customer experience, like free shipping both ways and overnight delivery. Few companies carry this depth of inventory and can track the exact location in the DC. We've even been asked to start an airline or take over the IRS."
Repeat purchasing and word of mouth are 8.5-year-old Zappos' biggest traffic drivers. Shoppers order an average of 1.5 items and spend $130 to $150. This year, $840 million Zappos is poised to hit the $1 billion mark. The company is privately held.
A technology powerhouse dominated by a proprietary enterprise system that is affectionatley nicknamed "Genghis Khan" powers much of Zappos' business. But Hsieh's idea of fulfillment comes from more places than the company's warehouse. Humility, along with caring about customers and employees, are cornerstones of his strategy.
Heish recounts the tale of a bedridden elderly woman who wanted a pair of warm slippers. Her granddaughter ordered them online and received them the next day. The old lady died 24 hours later. But the granddaughter felt she had done everything she could to comfort her ailing relative. "We are so proud when we hear about how what we're doing is affecting customers' lives," he adds.
One story Hsieh does not tell fully is his own. Before joining Zappos, Hsieh says he "worked for" LinkExchange. In reality, the former Harvard whiz kid sold LinkExchange to Microsoft for $265 million in 1998 at age 24. Hsieh is now a key investor in Zappos.
Hsieh, along with director of development, Brent Cromley and other executives, also are not above manning customer phones or helping out in the warehouse. These areas are so important that every employee, regardless of position, must spend five weeks training in the call center and distribution center. As a result, phone reps' inputs are taken very seriously. Calls average 5,000 a day.
"Each rep listens carefully to each customer and passes on suggestions," says Cromley. "If customers ask for a brand, the merchandising team looks into it. We launched the clothing line based on several years' of this type of information." Clothing was added to Zappos' footwear stronghold nine months ago. The retailer plans to move further into plus and petite sizes.
Customer information also prompted Zappos to expand into Canada in March of last year. Zappos also sends out 1,000 daily e-mail surveys that ask customers to rank Zappos on a scale of one to 10.
The Nimble Genghis
Genghis Khan comprises 95 percent of Zappos' infrastructure. Last year, it was augmented with SAP's Financials, Merchandise Assortment Planning and Business Warehouse software. This month, Zappos will complete installation of a Kiva warehouse robot system. Both vendors' products further facilitate filling and tracking of orders. Zappos also is revamping its online search functions.
Zappos' proprietary internal system relies heavily on free, open source solutions. The company uses Linux on all its production servers. Linux is integrated into its backend systems. "There is a community that develops software and gives it out free," says Cromley. "You can buy an operating system or you can get one from Linux. Thousands of developers contribute to this software. For agile companies like us, it provides enterprise class functionality that you can monitor."
Genghis Khan is more nimble than a pre-packaged enterprise system. "If you go with a huge enterprise system that has already been designed, you must modify it to fit your business," says Hsieh. "You must invest millions of dollars, with implementation taking one to three years. We develop much code in-house and make changes daily. As we add new categories, Genghis has to remember more. We update his memory and processing. We take Genghis to the gym and have him work out so he can handle extra product categories."
The flexible system, says Cromley, allows Zappos to do things like create highly customized reports that use pinpointed data. The bottom line, adds Cromley, is that "Genghis ends up in e-mail the very next day." For buyers, this means being able to
obtain very specific information upon request.
"For example, we wanted to put some items on sale at the end of the season," says Cromley. "We didn't know what the impact would be on margins. But every night at 3:00 a.m., Genghis can send a report that directs us to put more or fewer items on sale the following day. As a pureplay, we can change sales items and often do. It keeps people coming back for excitement. If they don't buy, the item may be gone."
The revamping of online search functions will allow Zappos to better serve apparel customers. The search model that had been in place had utilized footwear search criteria. "As we added categories, it was becoming harder to find what you needed," says Cromley. Currently, Zappos' customers can search by size, color, brand, price and other metrics. In addition to footwear and apparel, Zappos sells sunglasses, handbags, Rachel Ray cookware and hot electronics items.
Through installation of SAP Financials, Zappos can track all vendor product orders and all SKUs. It learns how many products need to be ordered and who they should be ordered from. Once items are received, SAP Financials tracks who should be paid. The product has moved Zappos' account closing period from two weeks to four days.
Merchandise Assortment Planning sits on top of Business Warehouse. It allows each merchant to track his/her monthly purchasing budget against what buyers have ordered from product suppliers. It factors in open to buy dollars. Buyers can reforecast and reallocate funds when needed. Business Warehouse allows specific pieces of data to be formatted into reports. Each report can utilize different sets of analytics.
Kiva Systems' robotic ItemFetch split case picking system and its OrderFetch shipping sorter are being implemented at Zappos' Shepherdsville, Kentucky warehouse. Robots, which are linked to a wireless network, expedite order processing by working with Zappos' racking and carousel units. When an order comes in, information is transmitted to the robot. The mobile drive units bring the required shelf to a packing station. A worker then picks the item from the shelf. Robots eliminate the need for batch or wave processes.
"Much of our strategy here has to do with storage capacity, flexibility and the speed at which we can move items to shipping stations," says Hsieh. "The robots are very quick and very smart. They know when they're tired and charge themselves."
Zappos also continues to find additional uses for Genghis Khan. His newest venture revolves around social networking. Recently, Zappos' launched a Facebook application and blogs that allow employees and customers to communicate. Shoppers can also use Zappos to send product recommendations to friends. Later this year, Zappos will add a wardrobe building feature that lets consumers match apparel, shoes and accessories via a virtual model. On the product side, domestics and luggage will soon join offerings.
Long term, Hsieh and Cromley want to continue building the best customer service model--regardless of what they decide to sell. "Look at Virgin--they sell everything from CD's to cola," says Hsieh. "They're all about being hip and cool. We're about having the best customer service. We are at the very beginning."
Exclusive product lines often are the name of the game in today's hotly competitive retail world. If consumers cannot find a fashion brand elsewhere, they will have a good reason to place a particular store or e-commerce site on their must-visit list. So goes the thinking among retailers of mass, class and everything in between.
"While our selections initially attract people, our service makes them return," says Tony Hsieh, CEO of Las Vegas-based Zappos. "The money we could spend on advertising we invest in customer experience, like free shipping both ways and overnight delivery. Few companies carry this depth of inventory and can track the exact location in the DC. We've even been asked to start an airline or take over the IRS."
Zappos' proprietary internal system relies heavily on free, open source solutions. The company uses Linux on all its production servers. Linux is integrated into its backend systems. "There is a community that develops software and gives it out free," says Cromley. "You can buy an operating system or you can get one from Linux. Thousands of developers contribute to this software. For agile companies like us, it provides enterprise class functionality that you can monitor."
