Peeking Under Zulily Covers, Liking What We See

October 25, 2013, Posted by Phil Wohl

While the Street and Silicon Valley feverishly comb through the Twitter S1, the eCommerce community is focused on a different IPO.

Zulily, a flash sales site focused on the “moms and kids” sector will become the first e-tailer to hit the public markets and the first to reward its venture backers with a $1Bn+ valuation exit—M&A or IPO.   With the flash sales category facing a wall of skepticism about the long term viability of the model, it is certainly refreshing to see zulily produce the kind of results that would impress even the harshest doubters.

The jury still very much out on the flash sales category as a whole, but zulily has shown that the right market + the right strategy + the right execution can lead to long term success.

Zulily’s S1 is filled with data that e-tailers everywhere will surely be studying closely in hopes of replicating ZU’s remarkable success.  The company’s operating statistics will certainly turn most competitors green with envy:

  • $272MM in revenue for the first 6 months of 2013, up 114% vs. the year-ago period
  • Profitability! $2.4MM in net income for the first 6 months of 2013
  • 2.2 million active users, up 80%+ from a year ago

With revenue approaching $600MM in 2013, it’s hard to believe zulily produced just $18MM in sales in 2010.  The revenue trajectory is in fact remarkably similar to Twitter’s. So how did zulily achieve this phenomenal growth while also keeping cash burn well below its higher profile peers (Fab, Gilt, etc.) in the flash sales category? They followed the following rules:

#1 Pick the Right Category

The best decision zulily management ever made was its first one: focus on the “moms and kids” category.  Unlike popular categories such as apparel, beauty, toys and home décor, there wasn’t a clear dominant brand, making the commonly heard goal of “creating the dominant brand in the category” a much more achievable endeavor.

#2 Steer Clear of Giants (for as long as possible)

For most eCommerce CEOs, the only competitor that matters is Amazon.  Trying to compete with Amazon on product selection, checkout experience, logistics or customer service is a losing battle.  Instead zulily has created a shopping experience that mirrors the best of Amazon in some areas, and improves upon the Amazon experience in others.  How so? The flash sales model of course is a key differentiator, but in addition, zulily was early in recognizing the power of mobile commerce, currently deriving over 40% of total revenue from mobile.  Perhaps most importantly, zulily has created a community feeling among its members that drives customer referrals, product recommendations and brand loyalty.

#3 Keep Customers Coming Back

With gross margins under 30% and an average order size of only $53, the model would fall apart quickly if customers didn’t return to the site following their initial purchase.  Zulily generates over $200 per customer per year (up from $117 in 2010), meaning that an average customer places 4 orders per year.  There are many reasons for this, including a rapidly changing product catalog (see #4 below), extensive A/B testing, advanced social features and effective post-sale engagement with existing customers.

#4 Keep The Catalog Fresh

The carefully curated zulily catalog must be refreshed continuously in order to keep moms returning to the site on a daily basis, hoping to discover new products.  Since the company was founded, they have partnered with over 10,000 brands, featured over 1.6 million product styles and sold over 42 million items. The company currently features over 250,000 product styles per quarter—a massive undertaking when considering the many operational steps that go into getting a product onto the site, including sample evaluation, photography, measurement, product description writing, photo and copy editing, and vendor management, to name just a few.

#5 Spend Marketing Dollars Wisely

There’s no getting around the fact that flash sales sites require heavy marketing spend in order to bring new customers into the community and keep existing customers coming back. In the first half of 2013, zulily’s marketing spend was $28 million, or 10% of total revenue.  While $60MM in annual marketing spend is nothing to sneeze at, this 10% figure is quite impressive, when you consider that several other large flash sales sites are rumored to be spending upwards of 30% of their revenue on marketing.

#6 Master the Blocking and Tackling

Many eCommerce companies have paid a dear price for underestimating the importance of logistics in operating their business.  Not only is logistics a core competency that cannot be effectively outsourced, it can also be a key competitive differentiator.  After relying on outsourced fulfillment in the early years, zulily decided to build out its own fulfillment capability in October 2011.  They currently have 1.1 million square feet of leased fulfillment space and can handle over 100,000 items per day.  Unlike many other eCommerce vendors, zulily does not hold substantial inventory. This decision certainly results in higher capital efficiency and allows them to offer more product styles, but on the margin may hamper overall growth, as some users may be underwhelmed by slow ship times.

I’m curious to see what path zulily takes once the law of large numbers catches up to them and growth begins to slow. So far CEO Darrell Cavens has given no indication that they will be expanding beyond the “moms and kids” category or the flash sales model.  Given the company’s success (and the fact they have achieved it with only 2 million active users), it’s hard to argue with him, as there’s still plenty of room for growth.

Some copycat sites have popped up over the last couple of years, and more will surely follow, but that battle is really insignificant compared to the more interesting dynamic of the Amazon/Walmart/Target triumvirate trying to protect their market share against the emerging eCommerce power players, with zulily leading the charge.

About the author

Phil Wohl is a Partner at Catapult Advisors, an investment bank providing M&A and capital raising advice to leading software and internet companies.