Zappos.

com Case Study

NOVA SBE MANAGEMENT SEMINAR

Operations case study presentation and questions | March 2019

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Zappos, founded in 1999 addressed the need consumers to access a large
selection of styles, colors and sizes, becoming the largest online retailer of
shoes in 2008

Founded in 1999…

The shoe market in the Zappos got an initial

United states was $40 investment from Venture
billions and 5% of this
business was being Frogs in

$2 million
done by mail order

Zappo founder

…reaching annual gross sales, of $1 billion, in 2008, less than 10 years after its
founding
Est.
1,000.0
840.0
597.0
370.0
70.0 184.0
1.6 8.6 32.0
2000 2001 2002 2003 2004 2005 2006 2007 2008

McKinsey & Company 2

Zappos financial success was largely dependent on three strategic
choices supported by a strong company cultural and values

A. Provide an B. Adapt operational model C. Develop a supply chain

exceptional shopping driven by the company focus management along with
experience for its on customer satisfaction Zappos growth
customers

You can get anyone to buy from you once… the hard
part is getting people to buy from you again and again
- Hsien

D. Strong company culture together We want people who are passionate

with company values was a strong about what Zappo is about service.
affluence on all aspects of the I don’t care if they are passionate
business, including the supply chain about shoes
- Hsien

McKinsey & Company 3

SHOPPING EXPERIENCE

A. Zappos saw customer service as an investment rather than an expense,

after any interaction with the company, customers would have to say:
Wow!

Features Description
Free and ▪ Rapid overnight delivery at no additional charge
rapid beating customers expectations, under promising and over
delivery delivering
▪ Close relationship with UPS to increase efficiency and
drive down shipping costs

Return ▪ Free returns provided for 365 days enabling customers

policy to purchase several pairs of shoes returning those that did Our idea was that over time we were
not fit going to get as close to that as possible,
and that would nearly bring the store to
your home
Fast web ▪ Zappos website loaded faster then any others retail
platform and website
extensive ▪ Extensive information of each product, with pictures from We score call center operators based on
product several angles, detailed descriptions of the shoes and whether or not they went above and
information that would be provided by experts at competitors beyond for the customer… we don’t care
information
if they made the sale or how “efficient”
▪ Costumers could write comments on the shoes they there were… for us, every interactions is
purchased allowing free feedback a branding opportunity

Constant ▪ Questions about products, or returns other issues were

telephone handled by the call center staffed 24/7 in 2008 by ~400 It’s about always looking for new ways
support people to Wow everyone we come in contact
▪ Average of less then 20 seconds from the moment the with
customers calls to the time the call is answered
▪ Call center operator trained to navigate at competitors
websites to look for the products the customer is looking
for
McKinsey & Company 4
OPERATIONAL MODEL

B. The original drop-ship operations model changed overtime driven by the

company’s focus on customer satisfaction
Zappos’ distribution
Drop-ship model Bringing invention in-house Third party fulfillment center in Kentucky

▪ Customers order ▪ Zappo’s purchase an ▪ UPS approached the ▪ To guarantee exceptional service
shoes from Zappos’ abandoned department company to manage its to its customers, Zappos
website and orders are store and turned it into inventory and fulfillment developed its own distribution
forwarded to the an warehouse and ▪ 2/3 of customers could center, designed to meet the
Description

shoes’ companies distribution center in receive deliveries within 2 high SKU needs of its business
which fulfills the order to stock its own days using UPS ground ▪ Initial warehouse consisted of static
orders inventory shelving and simple conveyors, as
business grew, warehouse
operations became more
sophisticated installing robotic
systems in 2008

▪ Lack of accuracy ▪ Not ideally located, no ▪ System could not handle ▪ Very limited capital in the
Challenges

▪ Manual process major airports nearby the number of SKUs beginning

▪ No transparency on ▪ Warehouse was a manual ▪ No experience in developing
shipment dates operation complex inventory management
systems

▪ Cancelations ▪ Long delivery times ▪ Shorter delivery times ▪ Exceptional service

Customers

▪ Long delivery times ▪ Zappos point of contact ▪ Large variety: >1-4 brands, >150
for delivery clarifications k styles in a total of 2.8 M
products available

McKinsey & Company 5

SUPPLY CHAIN MANAGEMENT

C. Zappos supply chain management was constantly reinvented

in order to answer the market needs

Powered Automated Zappos shoe

by Zappos discounted model outlets

▪ A program developed in ▪ Unlike physical stores that would ▪ To supplement the automated
order to help manufacturers need to clean self-space to discounting program for
sell directly to costumers prepare for new products and so selling excess inventory,
drop prices before the beginning Zappos opened several
▪ Website, call center and
of the new season, Zappos was outlet stores in four
distribution handled by
not constrained by the need to locations
Zappos
clear space to make room for
▪ Additionally, in 2017 bought
each seasons inventory
the online shoe company,
▪ Zappos price reductions “6PM”, for customers looking
decisions were based on for the best deals and in 2000
customers’ behaviors and were partnered with “Overstock”
initially made manually but as the to liquidate excess inventory
company grew, this process
was automated

… you can have different When we make a decision to mark

windows to access the something down its because
same inventory customers are telling us that they’re
no longer interested in this product
at that prices

McKinsey & Company 6

COMPANY CULTURE

D. Zappos unique culture embodies many different elements

Be passionate and
Be humble determine
Do more with less
Deliver Wow
through service Build a positive team
and family spirit

Embrace and drive Build open and honest

change relationships with
communication

Create fun and a little Pursue growth and

weirdness learning
Be adventurous, creative
and open minded

… it’s about faith that if we do the right thing, then in the

long-run we will succeed and build something great
- Hsien

McKinsey & Company 7

However, margins were decreasing due to the economic challenge of 2008
but Zappo’s has rejected major international expansion

With a gross revenue …why was international expansion

decrease of 25% in 2008… rejected by Zappos?

Substantial opportunities still to be

840 tapped in the U.S. market (only 3% of
U.S. population were Zappo’s
-24.4% customers)
635
597
Distribution agreements with many
brands required

High upfront investment to establish

a distribution center and call center

Lack of understanding of other

countries’ cultures which would
hamper the provision of the same
2006 2007 2008 service quality

McKinsey & Company 8

Questions to focus on

What are Zappos’ core

competencies and sources of
competitive advantage?

How would you expand the

business? Would you add more
products, more geographies or
by selling private labels?

How would you expect the

environment of a more cost –
conscious consumer to affect
Zappos’ business?

McKinsey & Company 9