Zalando’s growth mirrors Berlin’s vibrant entrepreneurial scene

A bet on the rise of ecommerce that appears to have paid off

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In 2008, Zalando was a start-up selling shoes from a Berlin flatshare. This year, the German group is on course to make comfortably more than €2.5bn in sales, and has established itself as Europe’s largest online-only fashion retailer.

In a country famed for its dominance of the old economy, Zalando — which sells clothes, shoes and fashion accessories — is one of the most prominent of a younger generation of tech-driven companies, such as HelloFresh and SoundCloud, spawned by Berlin’s effervescent start-up scene.

Investors have welcomed its rise. A year after it listed amid much fanfare on the Frankfurt stock exchange, Zalando’s market capitalisation now stands at €7.3bn — higher than more established names such as Lufthansa, Germany’s national airline.

Rubin Ritter has been there almost from the start. He gave up a job at McKinsey at the end of 2009 to join the fashion company set up by Robert Gentz and David Schneider, two friends from his student days at WHU — Otto Beisheim School of Management, a German business school.

“It’s funny when we sit together — we also used to do case studies together at university,” says the 33-year-old, sitting in a room in the group’s office in east Berlin, which features both a mounted lady’s shoe and a life-size cardboard cut-out of Mr Bean.

“It’s a similar atmosphere, but of course much more serious, and also much more fun, because we are building a company together.”

Mr Ritter, who is a member of the management board, joined just after Tengelmann, the German retail conglomerate, had made the first big outside investment in Zalando, and just as the group was beginning to take off. In 2009, Zalando drew in €6m in revenue. In 2010 it was €155m. “At the beginning of 2010, we increased the company by a factor of 10 within two months,” Mr Ritter recalls. “And off it went.”

Despite the rapid growth, Zalando’s progress has not been without glitches. The most recent came this year, when Zalando’s profit margin took a hit after the company suffered a wave of fraudulent orders at the same time as it increased the value of goods customers could pay for by invoice.

In response, Zalando has increased its investment in the scoring systems it uses to assess the creditworthiness and reliability of its customers, as well as tightening its invoicing policy in some cases. “We have put a big internal focus on the topic,” says Mr Ritter.

However, despite this and other setbacks, Mr Ritter says the company’s leadership has never lost faith that their bet on the rise of ecommerce was fundamentally right.

“There are days when you come to the office and some things don’t work and you have to fix them and you think, ‘OK where is this ever going to go’,” he says.

“But ultimately, I think we always believed in the success of the company, and always were optimistic, because fashion is such a big opportunity and is so clearly moving online that we are sitting on this megatrend.”

Zalando’s growth has coincided with the flourishing of Berlin’s start-up scene. Low rents have helped attract young entrepreneurs priced out of other cities, and an infrastructure catering to their needs has emerged, providing everything from technological know-how to short-term office space.

Mr Ritter says that over the past five to 10 years a great deal has changed. “You have some successful start-ups and this leads to venture capitalists spending more time in the city, or maybe also later-stage investors spending time in the city, which of course nurtures the ecosystem.”

However, despite the progress, Mr Ritter believes the German attitude to failure needs to become more relaxed if the country is to achieve higher rates of entrepreneurship.

“The whole mindset that founding a company and failing and then starting again is fine — too many people are afraid of that process. Look at Robert and David. They tried twice before Zalando, but the third try was a huge success. I think that kind of culture is still missing,” he says.

“Of course, sometimes you have to be sceptical. But I think we are missing out too much in believing in the size of some opportunities. I hope what is happening in Berlin now can help change that.”

In the coming year, Mr Ritter says Zalando — which ships its wares to 15m customers in 15 European countries — will focus on expansion, although he is not expecting to enter any new markets.

To manage this, the group has been hiring rapidly — it expects to have 10,000 staff by the end of the year, up from 7,500 in March — and Mr Ritter says the rapid hiring will continue in 2016.

Zalando is also planning to open a distribution hub in northern Italy to enable it to speed delivery to customers outside its German-speaking heartland.

“We believe Zalando is still quite small compared with what it can be,” he says. “Currently, we have a market share of 1 per cent in Europe [of the total fashion market]. We think this share can be 5 to 10 per cent.”

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