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Zappos.com (A):

Bring the Shoe Store to Your Home

05/2014-5932

This case was written by Oh Young Koo, Institute Fellow of the INSEAD Blue Ocean Strategy Institute, under the
supervision of W. Chan Kim and Renée Mauborgne, Professors at INSEAD. It is intended to be used as a basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
cases.insead.edu.
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This document is authorized for use only in Mendez Christiam's Marketing digital course at Universidad de Lima, from February 2017 to August 2017.
Bring the Shoe Store to Your Home
In 1999, Nick Swinmurm, a webmaster for Silicon Graphics, went to buy a pair of shoes in
downtown San Francisco but couldn’t find what he was looking for. When he found the right
style, they weren’t available in the right size. When the size was right, the colour was wrong.
Returning home empty handed, he searched several online footwear stores for the shoes he
wanted ... in vain. However, what Swinmurm did discover was a business opportunity: to sell
shoes online so that frustrated customers like him could find the right style, colour and size.
He quit his day job and launched an online shoe store, shoesite.com, to offer people a wider
variety of shoes than existing brick-and-mortar stores. Later, shoesite.com changed its name
to zappos.com, derived from the Spanish word zapatos, meaning shoes.

But initially, this dotcom start-up failed to attract investors – no one wanted to put venture
capital in a company selling shoes online. Shoe retailing was considered a classic brick-and-
mortar business because shoes need to be tried on. Online shoe retailing accounted for only
US$37 million of the entire footwear market, worth US$40 billion in 1999. In 2003, only one
out of 100 pairs of shoes was sold online, while 96 out of 100 pairs of shoes were sold in
stores (see Exhibit 1).

Store-Based Shoe Retailing


Footwear retailing consisted of children’s, men’s, women’s, and athlete’s footwear outlets.
The market was further segmented by the type of consumer (age, gender, income level,
household location, etc.) and price level. Retailers included large chains such as Venator
Groups (owner of Foot Locker), department stores, discount stores, supermarkets and
thousands of local retailers. The market was consolidated, with the largest 50 chains
accounting for almost 80% of market share, while single-brand shoe stores had disappeared.
This had occurred because large chains managing a large inventory could benefit from
economies of scale more than small stores. With high-volume orders, they could negotiate
lower wholesale prices. These large chains owned distribution networks – they received
merchandise from multiple wholesalers and sent it to individual outlets. Each outlet carried
200 to 700 styles of single-brand or multi-brand shoes, so it was important to maintain an
efficient logistics system that could check the inventories of various brands, styles, colours,
and sizes, and re-supply stock-out products in a timely manner. Despite sophisticated
computerized systems, one in three sales was lost due to unavailability of the right size for
customers.

Retailers tended to rent or own a prime location in a shopping mall or commercial strip mall.
The average store size varied from 1,000 square feet to 6,000 square feet, except for super-
sized stores. These stores competed primarily on the basis of a diverse shoe selection and
excellent customer service. The presence of staff trained to extend courtesy and knowledge to
customers directly influenced sales, although most workers were part-timers and staff
turnover was high.

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According to American Apparel and Footwear Association, total shoe retail sales in 1999
amounted to US$21,835 million.1 The market was mature, with flattened sales (see Exhibit 2).
In fact, retail prices declined by 4% from 1995 to 2005. With declining prices, retailers turned
to marketing in order to increase sales volume. They invested in local print, TV and radio
advertising to attract customers. In-store promotions and private sales were held to boost sales
and clear outmoded inventory. In addition, stores were regularly renovated to attract passers-
by and impress customers.

Online Shoe Retailing


Since the late 1990s, the online retail sector had grown rapidly as the internet became an
indispensable part of daily life (see Exhibit 3). E-commerce infrastructure improvements
facilitated the search and purchase of products and services online. Online payment became
easier and safer as secure payment methods such as PayPal emerged. However, online
retailing was not an attractive substitute for all traditional brick-and-mortar stores (see Exhibit
4). Standard hard goods such as books and computer hardware dominated online sales, while
groceries and apparel had a much smaller online presence compared to the total market size.
In particular, footwear was considered an unsuitable category for e-retailing.

Online footwear retailing developed in three different types – pure-player, click-and-mortar,


and manufacturer retailers. Pure-play sites operated only online shops, while click-and-mortar
sites such as Nordstrom ran both brick-and-mortar and online shops. Shoe manufacturers such
as Nike opened their own online stores to sell shoes directly to customers.

To capitalize on this growing market, each type of market player built competitive advantage
in its own way. In the case of click-and-mortar retailers, their e-commerce strategy followed
the model of traditional retailing. For example, Nordstrom.com, launched in 1998, spent
between US$15 million and US$17 million on a 60-day “Make Room for Shoes” campaign
using TV, print and outdoor advertisements.2 It targeted busy professional women who had
little time to shop in stores and young consumers not perceived as Nordstrom’s traditional
customers. By allowing returns to be made either in the store or on the site, Nordstrom offered
its existing customers an alternative channel for shopping. Vendors such as Nike regarded
their websites as showrooms for customers to research future in-store purchases. In a nutshell,
except for pure players, e-retailing of shoes was seen as a supplementary sales channel or a
showroom for an existing business.

Pure-play sites followed orthodox e-commerce strategies, competing head on based on price
and convenience. They targeted price-conscious customers who actively compared prices
between different websites, and offered low-price guarantees and a 100% or 110% refund if a

1 Source: American Apparel and Footwear Association – Full Year 2001 (Revised) – Page 10 of 22. Table
10. US Retail Sales – General Merchandise Stores and Apparel Stores. The estimated annual retail sales in
the Annual Retail Trade Survey by the Census Bureau, U.S. Department of Commerce, include U.S.
establishments primarily engaged in selling all types of new footwear (except hosiery and specialty sports
footwear, such as golf shoes, bowling shoes, and spiked shoes). The sales figures counted only those from
shoe stores, excluding footwear sales from department stores and apparel stores.
2 Rayna Bailey, “Nordstrom, Inc.: Make Room for Shoes campaign,” Encyclopaedia of Major Marketing
Campaigns, Vol. 2, 2007, p.4.

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competitor had a lower price. Customers, therefore, were one-time purchasers rather than
brand loyalists.

In general, most online retailers practiced the drop-ship supply chain management model.
Unlike brick-and-mortar stores, online retailers did not have to keep inventory and fulfil
orders. They simply transferred orders and shipment details to either the manufacturer or a
wholesaler, which then shipped the goods directly to customers. Since online retailers did not
run a physical showroom, customer relations were limited and overlooked. Some websites did
not operate a call centre for customers to contact the company, and even if they did, it was
often either outsourced or poorly staffed, creating lengthy waiting times. Online retailers
spent heavily on marketing to attract geographically diverse target customers. They invested
in traditional media such as TV and print advertising, in addition to Internet advertising. In
particular, pure-play retailers had to invest in marketing more aggressively to advertise their
presence to potential customers than those with physical presence. According to CRM
magazine, pure-play retailers spend US$82 to acquire a new customer, as opposed to US$12
spent by brick-and-mortar retailers.3

By 1999, there were more than 1,500 shoe retailing websites. Most were mom-and-pop-style
companies created during the hype of the dotcom boom. These small online retailers selected
brands or stocked a handful of complementary shoe styles, along with major apparel, yet it
was difficult to get manufacturers involved in these businesses. Few shoe brands were
enthusiastic about going online, because in addition to the small sales volume, products sold
online were thought to be cheap, so manufacturers worried about depreciating their brand
value and were reluctant to entrust their brands to unknown dotcoms.

Zappos.com
In 1999, Nick Swinmurm left a voicemail message with the San Francisco-based venture
capital firm Venture Frog, seeking investment in order to expand his company, shoesite.com:

“The shoe market in the United States is US$40 billion, and 5% of this business is
being done by mail order.”

The co-founders of Venture Frog, Tony Hsieh and Alfred Lin, pondered Swinmurm’s request
and came to see the market potential of online shoe retailing. In the United States, a third of
customers had purchased shoes through mail order catalogue. They believed that if five out of
100 pairs of shoes were bought through catalogues, the existing online shoe market, with far
less than 1% market share, could grow much more. In 2000, Venture Frogs jumped in by
investing US$500,000 in the business and Tony Hsieh became co-CEO, alongside
Swinmurm. With current annual gross sales of US$1.6 million, the company set an ambitious
target to reach US$1 billion annual gross sales in 10 years. The route to success would be
unlike that taken by other online retailers:

3 Burns Elisabeth, “Difference Between Pure-Play Internet & Clicks-&-Mortar Business Models,” eHow,
http://www.ehow.com/info_8545075_difference-internet-clicksmortar-business-models.html,
accessed February 22, 2013.

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“We are not competing with other Internet companies; we are competing with the
store experience.”4

Zappos did not define its business as ‘online retailer’. Rather, it pursued a common recipe for
success across the entire retailing business – offering the widest selection of shoes with the
highest availability and the best customer care.

As a first step, vendor participation was crucial to build a large selection of shoes, but the
vendors were sceptical about pure-play footwear online retailers. To overcome resistance,
Zappos distinguished itself from the low-cost image of most online retailers. Although it was
a pure online store, it mirrored the layout of the brick-and-mortar retailer. It launched brand
boutiques on its website resembling in-store shops at traditional department stores. Each
brand or vendor, such as Tommy Bahama and Bostonian, could present its products and brand
strategies. Fred Mossler, a former Nordstrom buyer who joined Zappos, recalled that only
three out of 100 vendors showed an initial interest in Zappos in the beginning. But in in the
first 18 months the online retailer engaged 50 brands and 100 brands within three years.

Zappos.com did not guarantee the lowest prices, and the website offered smaller discounts
than other online retailers. Instead, in 2007 Zappos purchased a shoe discount website,
6pm.com, via which it sold shoes at a discount (40–70%) but with limited customer service
options, such as a 30-day return period. The call centre operated 9a.m.-5p.m., Sunday through
Friday. Shoes with big discount were also purchased at Zappos physical warehouse located
near its warehouse, but not in the website. In 2008, Zappos ended its best-price protection
scheme.

Zappos created the fastest website among the 50 top online retailers (with an average page
load of 0.879 seconds) by avoiding flashy ads that added loading time. Customers found
Zappos.com easy to navigate; they could narrow their search according to brand, size, colour,
style, width, price, and heel height. They could print size charts to measure their feet. Once
customers decided which shoes they wanted, they could read comprehensive product
information and see pictures taken from eight different angles for each style and colour. Some
product descriptions even provided a video overview by a Zappos merchandiser.

If customers could not make a decision, such as picking a size or width, they could simply
order multiple shoes to try out, as in a brick-and-mortar store. Zappos offered a free, 365-day
return policy, so customers could order and try out shoes in various sizes and widths without
financial penalty. Zappos used as a benchmark the way people rented DVDs through Netflix’s
mail service by providing the customers with a pre-paid UPS domestic label to return the
purchase easily and free of charge.G

Customers with questions before or after making an order could contact the Zappos customer
call centre at any time. The toll-free centre operated 24/7 and was staffed with 300 well-
trained Customer Loyalty Team (CLT) members, who answered in an average of 20 seconds.
Rather than having a script or time limits for calls, they were encouraged to have a
conversation with customers. The longest customer call lasted for 7 hours and 28 minutes on
July 10, 2010. The mission of CLTs was to solve the customer’s problem, whatever it was,

4 Sharma, Nilosha. “Online Footwear Seller Zappos.com: Building Brand through Customer Service.” Amity
Research Center, 2009, p. 5.

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from return inquiries to selection advice. CLTs would search a minimum of three competitor
websites if the merchandise couldn’t be found at Zappos.com, giving customers the best
available option on the competitors’ website so that customers got what they wanted.

Instead of guaranteeing the lowest price like other online stores, Zappos focused on helping
customers shop more varieties easily and conveniently. Zappos eliminated merchandise stock-
out by controlling all orders and keeping inventories 100% in its warehouse. Once an order
was placed, a staff member in the Kentucky warehouse, which was run 24/7, picked up the
item and processed the order fulfilment. In particular, the innovative Kiva mobile fulfilment
system that Zappos installed in 2008 increased efficiency by directing the online order to the
warehouse. The speed of delivery was accelerated thanks to Zappos’ location – a 15-minute
drive away from a UPS domestic shipping hub. While typical online retailers took five to
seven days for ground delivery, Zappos guaranteed free shipping in two to five days, and
delivered 60% of its orders within two days.

Zappos spent minimal amounts on traditional media marketing. Instead, in 2000, the company
devised an affiliates programme, which was a form of search engine marketing (SEM) that
allowed third parties to place links, ads, or other types of visual references on their website to
direct traffic to Zappos.com. The affiliates earned money when customers used affiliate
referrals to make purchases on Zappos’ website. Compared to printing ads that targeted an
anonymous public audience, SEM was cheaper (it cost only when revenue occurred) and
more efficient (people clicked the link when it was relevant to them). In addition, Zappos
considered customer service as an effective marketing tool – once customers appreciate the
top-notch service of Zappos, they would not only repeat purchasing at Zappos but also
promote it to their family and friends. More than 80% of Zappos’ customers were gained
either through online advertising or through word-of-mouth.

Performance

As a result of these efforts and market conditions, Zappos achieved the fastest growth among
online shopping sites from 2001 to 2008 (see Exhibit 5). Although Zappos did not guarantee
the lowest price, customers were loyal – 75% of orders were from repeat customers whose
average order size was larger (US$140) than first-time customers (US$110). Today, Zappos
controls one-fifth of the U.S. online footwear market by providing the largest selection of
shoes with more than 150,000 styles from 1,000 brands. Its inventory in the Kentucky
warehouse tops 3 million units, and the company serves 9 million customers (the equivalent
of 3% of the U.S. population) and has 1,500 employees (2008).GIn 2009, Zappos was acquired
by Amazon, the largest online retailer, for US$1.2 billion.

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Questions for Interactive Class Discussion:
1. In 1999, the footwear market in America was sized at US$40 billion. Mail order shoe
sales accounted for 5% of the market. At that time, the online footwear market was worth
a mere US$37 million. What does this imply? Discuss your interpretation of these facts.
2. On the strategic profile of the brick-and-mortar shoe store:
a. Based on your shoe-buying experience, what are the benefits and pain points of the
brick-and-mortar shoe store?
3. On the strategic profile of the online shoe store:
a. If you purchase a pair of shoes online, what are the benefits and pain points versus a
brick-and-mortar shoe store? If you haven’t purchased shoes online, what is the
reason?
b. Using the Buyer Utility Map introduced in Blue Ocean Strategy, identify blocks to
utilities across the buyer experience cycle.
4. What is the difference between Zappos and online and brick-and-mortar shoe stores? Is
Zappos a typical online shoe store?
a. In light of the Buyer Utility Map drawn above for online shoe stores, which blocks to
utilities has Zappos cleared?
b. How has Zappos brought the shoe store to your home? Answer this question by
drawing the value curve of Zappos on a strategy canvas versus that of conventional
online shoe stores.
c. Out of six paths to create blue oceans, which was (were) used to create Zappos’ blue
ocean?
5. How did Zappos break the existing value-cost trade-off of the conventional online shoe
store?

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Exhibit 1
Sales of Footwear by Distribution Channel in 2003 (%)

Store-based Retailing 96.2


Grocery Retailers 5.8
Non-Grocery Retailers 90.3
Mixed Retailers 29.0
Clothing and Footwear Specialist Retailers 56.0
Other Non-Grocery Retailers 5.3
Non-Store Retailing 3.8
Home Shopping 2.5
Internet Retailing 1.1
Direct Selling 0.2
Total 100.0

Exhibit 2
Estimated Annual Sales of U.S. Shoe Stores (1992 – 2008, US$ million)

30,000

25,000

20,000
US$ Million

15,000

10,000

5,000

0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Annual Sales 18,63 19,04 19,92 20,35 21,24 21,46 22,25 22,70 22,88 22,89 23,21 23,19 23,70 25,30 26,73 26,86 27,06

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Exhibit 3
U.S. Electronic Shopping and Mail-Order Houses e-commerce Sales by Merchandise
Line of Clothing and Clothing Accessories (including Footwear) (US$ million)

25,000

$19,507
20,000
$17,376
$16,082
15,000 $12,915

$9,501
10,000
$7,062
$5,496
$4,534
5,000 $3,314
$2,258
$910
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Exhibit 4
E-commerce Sales by Merchandise Line (1999, US$ million)

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Exhibit 5
Growth of Zappos (gross sales, US$ million)

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