Significance of E-Commerce Business in the Market Place - Case Study Example

ZAPPOS CASE of the of the Introduction This study would be centered towards analyzing various operations of Zappos Company. Zappos was established in 1999 and belongs to the retail industry. It is an online platform which sells clothes and shoes. This company is located in Las Vegas, Nevada. Zappos Company had implemented innovative marketing strategies to acquire desirable percentage of market share. Amazon had acquired this company in 2009. The firm was acquired by paying a value of $1.2 billion. Zappos.com has been successful over the years by offering creative shoe designs to target customers. It is considered to be largest online store across the globe. Shoes are the primary items which are being sold by the company. 80% of overall revenue is contributed by selling of shoes. Zappos has always maintained a wide variety of shoes in its stock so as to enhance customer loyalty. There are more than 50,000 varieties of shoes that are being sold by this online shoe store. Different shoe brands are offered by this online platform and this unique feature has supported its business expansion. Steve Madden, Nike, Aldo Shoes and Ugg boots are some common brands which are offered by Zappos.com. Niche shoe markets are also catered by Zappos.com. There are other distinct categories also explored by Zappos.com, such as hard to find sizes; wide and narrow shoe widths, vegan shoes and American made shoes. High end shoes section was also launched by the company known as Zappos Couture. The company even did not restrict its business to shoes but expanded into other product categories. This inventory stock comprises of eyewear, clothing, watches, handbags, kid’s merchandise, etc. Strategic implementation enabled the company to increase its revenue margins. History of Zappos Company In 1999, Zappos.com was founded by Nick Swinmurn. He got inspiration for this online shoe store when he was not able to locate brown Airwalks in nearby mall. Later in that same year, Alfred Lin and Tony Hsieh were approached by Swinmurn to focus on this new business idea of opening up an online shoe store. In the initial phase this idea was not given much importance by both investors. Nick Swinmurn mentioned a projected data that in United States footwear section accounts for $40 billion market. There is already 5% of market share being acquired by catalogs of paper mail order. This influenced the investors to be optimistic for this business idea and invest approximately $2 million. The firm was inaugurated in 1999 and it was initially named as ShoeSite.com. However the brand name was later changed to Zappos. This term is usually derived from zapatos which in Spanish means ‘shoes’. The brand name basically depicted that the business would not be confined only to footwear. It later expanded into multiple sections. Additional capital was invested in order to build office space for Zappos.com. There was a minimum sale percentage witnessed in the beginning year but in 2000 revenue margin of $1.6 million was gained by Zappos.com (Zappos.com, 2015). Over the years the company has grown and expanded into different business segments. Annual sales of Zappos.com quadrupled in 2001. The overall revenue margin in this particular year was $8.6 million. Fulfillment center was established by the firm in 2002 in Kentucky. Word of mouth publicity has triggered sales margins of the firm. Advertising costs was always low for Zappos.com. The company was even listed in Fortune in terms of best workplace to be a part of, this eventually increased brand reputation (Ulwick, 2005). Zappos gained revenue margin of $70 million by 2003. Drop shipping concept was totally eradicated by the firm. This was done to enhance customer service level. Inventory level needs to be controlled by a firm in order to deliver superior quality customer service. The annual revenue was doubled in following three years. In later time period, Zappos even expanded its inventory into clothing, watches, handbags, kids merchandise and eyewear. It can be stated that entrepreneurial skills of Nick Swinmurn had led to magnificent growth and development of Zappos.com. Annual reports of over sales The gross sales margin of Zappos.com has increased over the years. This has been because of innovative strategies implemented by the company. The yearly sales of Zappos have quadrupled in recent years. Zappos gained its expertise in selling shoes online, but later shifted into other product categories. Revenue margins of the firm reached its peak point when the company was able to satisfy hidden demand of customers. There were innovative shoe designs offered to customers which were rarely available in any other retail store. Annual report of the company in figure 1 portrays the growth in sales figure in early years. Figure 1: Consolidated Statement of Zappos (Source: Michelli, 2011) As per figure 1, it is clearly evident that revenue margins of Zappos were higher in 2009 in comparison to 2008. In 2008, the net revenue margin has been 132,708, whereas this figure has witnessed a growth in 2009, and it was recorded to be 143, 866. $1 billion was total annual sales of the firm in 2008. The management of Zappos had forecasted this figure to be achieved in next two years time span. On the contrary, Zappos through its wide base of loyal customers fulfilled sales target two years in advance. Long term growth of the company has been because of its continuous replenishment of stock and investment in particular product category. Gross profit of the firm was 15.8% in 2008 over 2007. The profit margin was doubled in initial few years. As per the annual report, operating expenses was regulated appropriately by the firm and this supported growth in market share of Zappos.com. Gross sales of the firm had rapidly increased in initial few years and it was reported to be $70 million in 2003. The company exercised strong control on its inventory level and it accounted for high revenue margins. In 2004, gross sales margin of the company was almost doubled. Zappos reached $184 million in context of gross sales margin. The positive flow of funds enhanced business operations and the firm was able to focus on other key segments. However selling of shoes contributed maximum towards gross revenue margin since its time of inception. Events or forces that are relevant The forces can be either external or internal to an organization. External forces are usually determined through conducting PEST analysis. Consumerism can be treated as an essential political force. Consumer Bill of Rights which was established in 1962 enables customers to acquire all possible information before making a purchase. Movement of products is also governed by NAFTA or North American Free Trade Agreement. Online shoe platform all has to abide by such norms. To be more precise, governmental support in United States towards ecommerce business has facilitated growth of Zappos.com (Batey, 2012). Economic forces mainly indicate unemployment rate, unstable stock markets, interest rate, exchange rates, etc. It is evident that recession decreases spending power of customers. This aspect negatively affects business operations of Zappos. Social or cultural force plays a significant role in ecommerce business. Zappos.com has been able to succeed simply because customers were inclined towards online shopping (Lasserre, 2012). This kind of shopping mechanism enables customers to purchase products at their own convenience. Technology is another important force which is responsible for increased revenue margins of Zappos.com. Technological infrastructure of United States has supported the company to establish an online platform where shoes, clothes, handbags, etc., can be sold (Peng, 2013). Porter’s five forces model helps in determining internal market forces. The bargaining power of buyers of Zappos.com is considerably higher. This is because there are wide array of shoe retail outlets from where customers can purchase desirable product. The bargaining power of suppliers falls in the range of moderate to high (Porter, 2008). Zappos belongs to the branded shoe segment and hence suppliers have some control over price. The threat of substitute is higher since retail outlets as well as online store like Endless.com offers similar product range. On the other hand, threat of new entrants is high since retail outlets might implement strategy of designing online shopping platform. There exists intense rivalry amongst competitors like Endless.com and DSW. Similar product offerings influence these firms to provide value added services. High quality product of Zappos is combined with creative designs which cannot be imitated by other players (Franzen and Moriarty, 2008). The firm even encompasses other product categories so as to ensure that it has extended customer base. Customer loyalty has always been a crucial factor in ecommerce business. This is because absence of physical evidence hinders trust level of customers on a particular brand. USA shoe trends The footwear industry has always witnessed increased growth in United States. High consumption rate clearly portrays that individuals are inclined towards purchasing shoes. Apparel and shoes are purchased simultaneously by U.S. customers. Internet platform was certainly new in context of selling shoes. The shoe trends in United States were different from that of other geographical regions. Brand conscious customers are more in United States. There are two distinct customer categories in United States (Keller, 2008). One set of customers prefer to purchase branded products at higher price. On the contrary, the other customer category is inclined towards buying products at low price. Zappos target customers are those who belong to high end segment. The products are so designed that it is appealing to selected customer market segment. Boots and heels are basically preferred by all customers, specifically women (Baker and Hart, 2008). Men in United States are likely to buy formal shoes or sport shoes. Boots or sport shoes are purchased by style conscious customers. This trend is observed across United States. Steve Madden heels or Nike shoes are highly desirable shoe category of customers. Zappos.com has effectively taken into consideration this aspect and offers products as per customer taste or preferences. Americans are more prone to purchase locally made products in comparison to imported products (Alba and Hutchinson, 2008). This factor has encouraged Zappos.com to maintain stock of American made shoes. Niche shoe market also forms an essential component of United States shoes trend. This market resembles non-rubber or rubber shoes purchased by wide base of customers. Zappos.com also extended its product line to this particular segment. Shoes which are hard to find due to size or widths can be easily located in Zappos.com. Since high end shoes or stylish shoes are high in demand in United States, it is been included by this online store (Mcfarlin and Sweeney, 2008). In overall context, the shoe trend of United States has been successfully captured by Zappos.com and is reflected through its wide array of product items. Branded shoes are offered by the company in order to enhance customer loyalty and gain market presence in specific time period. How Amazon acquired Zappos Zappos had reached $1 billion in 2008. This sales figure was forecasted to be accomplished by 2010. There long term goal was achieved in minimal time period. The firm even was listed in Fortune 100 in context of delivering best workplace environment. Amazon however acquired this ecommerce business in 2009. Board members like Alfred Lin and Hsieh were focused on sustaining corporate culture of Zappos but other members were more concerned about maximizing profit margins. The acquisition strategy enabled the firm to retain profit margins in an economic downturn. Amazon executives had engaged into a direct discussion with Zappos in order to buy maximum shares of the firm. CEO of the company analyzed the situation and identified that Zappos would be allowed to operate as a different entity. Negotiations were initiated henceforth and Amazon finally acquired the firm by paying an amount of $940 million. Share owners of the firm were given 10 million shares of Amazon, and employees were offered restricted stock units along with $40 million cash. In November 2009, the deal was finally summed up at an amount of $1.2 billion. In earlier years of business operations, Hsieh had mentioned that they believe in building memorable customer experience. This form of experience can be structured only when management exercises control on inventory level and product delivery. However after acquisition it appeared that Amazon.com would control operations as well as customer experience. Employees who relied on management of Zappos were then taken care by Amazon.com. Amazon has been able to explore markets internationally due to its effective distribution channel. Online channel facilitates easier distribution of products across the globe. Cloud drive, app store, etc., are key online platform which are accessed by Amazon.com. Physical distribution is another component that initiates international distribution. Faster response time and centralized distribution centers are important factors of international distribution. Quick response approach is supported by Amazon.com. Information is provided to wholesaler or suppliers once order is placed (Ulwick, 2005). Then information is again directed to customers. Manufacturer stays in direct contact with distributor in order to supply products in least time possible. Wide range of products is stocked in Amazon which is accessed in minimum time so as to reduce lead time associated with international distribution. Shoe industry on other markets The footwear or shoe industry is forecasted to rise by 2% in coming years. During 2011, global footwear industry accounted for gross sales margin of $192.3 billion. There is increased sales percentage observed in emerging economies such as Asia and Latin America. 6% compounded annual growth was observed in global footwear industry. China is one such market that has high consumer demand for footwear. 87% of total footwear import from United States is constituted by China. This clearly indicates that Chinese customers have high demand towards stylish footwear. Brazil is considered to be one of the biggest suppliers of shoes in United States. An organization can form strong partnership with manufacturing companies of Brazil in order to address customer demand of neighboring countries (Wintzer, 2007). There are diverse set of consumer demand in relation to shoe industry. Figure 2 highlights the different shoe trend across the globe. Figure 2: Footwear Sales (Source: Erdoğan, 2014) As per figure 2, athletic and non-athletic footwear segment have equal importance in current scenario. The concept of branded footwear is gaining market presence in global context. Europe is also one of the key market segments in terms of growth of shoe industry. United States and Europe is expected to notice a growth of 7% by 2015 specifically in shoe industry. This indicates that there are developed and developing economies offering immense opportunities to footwear companies. Zappos.com has confined its business to United States. This would not be a suitable option for long run since there is intense competition in the market place. There are other markets across the globe which denotes high consumer market demand for footwear. The shoe industry of Latin America, Europe and Asia outlines a positive growth rate over the years. These markets can be explored by Zappos. International expansion strategy would be appropriate for the company (Fill, 2013). This is simply because long term sustainability can be achieved only when a firm has acquired high market presence. Expansion is not only required for avoiding intense competition in local markets but even helps to understand hidden demand of global customers. It is recommended that Zappos should expand on its business operations. This would serve as a medium to increase revenue margin. Conclusion This study has been able to portray various dimensions of online business. In recent years, ecommerce business has gained significance in the market place. This is because customers prefer to shop at convenience. Customers consider visiting retail outlets as a time consuming process. Online platform provides them with multiple choices and customers can efficiently compare amongst product category. Zappos.com initiated the business idea of offering shoes online. In the early stage of business operation this innovative idea was not considered to be a productive one. Forecasted growth of online shoe industry motivated board members to focus on this business strategy. Zappos had taken into consideration demand of US customers towards shoe trends. This demand pattern was greatly reflected in their product line. Relationship marketing strategy has enabled the company to explore wider geographical markets. The company invests least in advertising techniques and relies more on word of mouth. Customer loyalty has increased revenue margins of the company. Zappos reached its breakeven point prior to forecast time period. This proved to be major competitive advantage of the company. Zappos.com could sustain its market share due to replenishment of stock, availability of funds and large base of loyal customers. The company was later acquired by Amazon but it was still regarded as an individual entity. Amazon provided a platform whereby Zappos could access wide base of customers. The firm was not only inclined towards high end products but it even catered niche shoe market. Global shoe industry clearly indicates rapid growth in this particular sector. International expansion would ensure long term development and growth for Zappos. References Alba, J. W. and Hutchinson, J. W. (2008). Dimensions of consumer expertise. Journal of Consumer Research, 24(3). Baker, M. and Hart, S. (2008). The marketing book. Great Britain: Routledge. Batey, M. (2012). Brand meaning. USA: Psychology Press. Erdoğan, F. D. (2014). European Union and Turkish footwear industry. Germany: Anchor Academic Publishing. Fill, C. (2013). Marketing communications: brands, experiences and participation, 6th edition. Harlow: Pearson Education. Franzen, G. and Moriarty, S. (2008). The science and art of branding. New York: M.E. Sharpe. Keller, P. (2008). Strategic brand management. New Delhi: Pearson Education India. Lasserre, P. (2012). Global strategic management. Singapore: Palgrave Macmillan. Mcfarlin, D. B. and Sweeney, P. D. (2008). International management. New Delhi: Dreamtech Press. Michelli, J. (2011). 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