If you are looking to learn more about banking, it pays to study shoes. Today, we highlight one of our favorite retailers and the only place that we buy shoes - Zappos. Zappos history is instructive as in its darkest hour it was forced to change its business model and come up with a new plan.
Zappos was founded in 1999, during the backdrop of the dot com boom, as an online shoe retailer. While many said that shoes, like banking, was a commoditized business and the market couldn't support another major retailer, Zappos believed it could delivery better service through technology. Despite the hype surrounding the Internet at the time, many analysts underscored the fact that shoes are one of the personal items you buy that must be tried on. A salesperson is mandatory, as the consumer has so many selections and doesn't understand the finer points of the shoes without them being pointed out.
At the time, large retailers like Macy's occupied one end of the market with their big one size fits all approach. At the other end of the market were specialty retailers, like Foot Locker, who focused on providing expertise in athletic shoes. Both types of companies, held major market share and invested heavily in stores across the country to deliver service close to the customer. Zappos, in its 2nd year, struggled with profitability. Failing to raise capital, it made a last ditch effort to change.
While many companies would have laid off workers and cut expenses, Zappos spent its last bit of capital to execute on a new long-term strategy. The company realized it needed control over its merchandise in order to deliver superior service and get shoes shipped within 24 hours, so it increased its inventory. Next, it updated its website, adding some 3mm pictures of shoes from different angles. While this is like updating a branch, the company realized that this investment could be spread over millions of customers so it felt its capital was better used than Foot Locker (that ultimately had to close stores).
Next, Zappos built out its technology, created more granular profitability information on its vendors and customers and allowed each shoe manufacturer to see the data. In this manner, venders became partners with Zappos, as each could transparently see their real time performance and offer help on how to improve.
Finally, Zappos retrained its employees with a single motto - We are a service company that just happens to sell shoes. That's a powerful statement and one that should be completely understood by all bankers. As we have said before, banking isn't about loans or deposits for that matter, but rather, it is about delivering financial solutions with excellent customer service.
The combination of an efficient delivery channel and game changing customer service, has pushed Zappos to the most profitable shoe company in the world (now acquired by Amazon) with over $10B in sales. Not bad for a commoditized product.