Zappos.com, Inc.

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Zappos.com, Inc.

500 E. Warm Springs Rd., Suite 100
Las Vegas, Nevada 89119
U.S.A.
Telephone: (702) 943-7777
Fax: (702) 943.7778
Web site: http://www.zappos.com

Private Company
Founded: 1999 as Shoesite.com
Employees: 400
Sales: $300 million (2005 est.)
NAIC: 448210 Shoe Stores

While its name only hints at its raison d'être, Zappos.com, Inc. is the Internet's premier shoe source, with styles and sizes to fit every foot and desire. In addition to 500 well known brands of shoes, sandals, boots, and athletic footwear, Zappos.com sells a growing range of accessories including designer handbags, belts, wallets, socks, and even diaper bags. What sets Zappos.com apart from other shoe sites is its fast, free shipping and ironclad return policy; any item may be returned within one year of purchase with no shipping or restocking fees. For fiscal 2005, Zappos.com had estimated revenues of $300 million.

In the Beginning, 1999

Zappos.com was born of one man's frustration to find his favorite pair of boots. He looked high and low for the size and color he wanted and came up empty-handed. It should not be so hard to find a pair of shoes, right? So thought Nick Swinmurn, an Internet entrepreneur who decided to put his money where his mouth was and start his own shoe store. The catch was that this would be no ordinary shoe store, but an online megastore stocking all colors, styles, and sizes—and shipping orders anywhere in the world. Swinmurn reasoned that plenty of people shopped for clothing and shoes from catalogues, so why not an online footwear showcase, complete with photos and sizing charts?

Swinmurn was born and raised in California. He attended the University of California at Santa Barbara and earned a degree in film studies in 1996. After graduation, Swinmurn worked for the San Diego Padres before joining Internet pioneer Autoweb.com as marketing manager. His success there led to a position as webmaster for Silicon Graphics, then to his own startup in 1999. After managing to raise about $150,000 in initial capital, Swinmurn christened his Internet shoe store Shoesite.com and launched it in June 1999.

By the end of July, however, Swinmurn changed his mind and revamped the cyber shoe source, calling it Zappos.com. The name played off the Spanish word for shoes, zapatos, and the new site had more selection (over 100 brands for men, women, and children) and offered accounts and passwords for returning customers. In addition, Swinmurn made deals with shoe manufacturers to ship orders, partnered with AOL and several shopping sites to be a featured link, and in a stroke of marketing genius sponsored the Golden State Warriors NBA basketball team for the 1999–2000 season.

After the name change and relaunch, Swinmurn and a handful of employees tried to give Zappos.com the feel of a specialized brick-and-mortar retailer. There were separate pages for major shoe brands, sizing charts (complete with a printable form to measure feet), and a toll free number to speak to a live customer service representative. The timing seemed right too, since Forrester Research, Inc., an Internet trend watcher, released data finding that online shopping would top $1.6 billion in 1999 and footwear purchasing alone would account for some $120 million for the year.

If the Shoe Fits (or Even If It Does Not): 2000–03

Within months of its founding Zappos gained a boost with the hiring of a former footwear buyer from Nordstrom, Fred Mossler, who came on board as senior vice-president. Another important addition came from within its office space. Located in the well known Marquee building in the Bay Area was another firm called Venture Frog Incubators. Tony Hsieh, a Harvard graduate, had vast experience in the dot.com industry after working for Oracle and founding LinkExchange, which he sold to Microsoft in 1998. Hsieh founded Venture Frog to invest in Internet startups, and one such success was web browser AskJeeves.

In 2000 Venture Frog and Zappos came together when Hsieh invested $1.1 million in the e-tailer and came on board as co-chief executive with Swinmurn. By this time Zappos was luring buyers to its site through a number of innovations including more famous brands, contests and giveaways, and an agreement with the West Coast's Shoe Pavilion to run its e-commerce site (shoepavilion.com) and showcase its footwear. Footwear News (May 15, 2000) called the partnership "another marriage of bricks and clicks," which seemed to benefit both traditional retailers and their online counterparts. Zappos had grown to 30 employees, offered customers more than 150 different brands of shoes, and reached sales of $1.6 million for 2000.

Zappos quickly gained a foothold in the online retail industry, becoming the world's largest shoe store by early 2001 despite the onset of a recession. Zappos was succeeding because it had more selection than any shoe retailer, on or off the Internet, and shoppers took notice. While retail analysts still considered shoes a difficult sell over the Internet—photos were not always accurate, it was impossible to try them on, and so forth—Zappos no-fuss money-back guarantee won glowing reviews from shoppers, and more importantly, loyalty. This allegiance helped propel the firm's revenues to $8.6 million for 2001, despite the crash and burn of hundreds of dotcoms. Two key elements set Zappos apart from its rivals, according to Swinmurn: "The best strategy is selection and service," he told Footwear News (February 26, 2001). "If customers can find what they're looking for and have a great experience doing so, they'll be back."

An important facet of service, Swinmurn and Hsieh had learned, was to no longer outsource shipping. Order fulfillment could only be controlled and quality maintained if Zappos had its own warehouse and merchandise. Accordingly, warehouse space of over 100,000 square feet was secured in Kentucky and Zappos took over all aspects of order fulfillment.

The firm's return policy also continued to evolve, becoming a primary attraction for shoppers. Not only did Zappos provide free shipping on orders, often overnight, but free shipping on returns (within 60 days) and no restocking fees as well. With fast service, no-hassle returns, and an ever-increasing selection of footwear, Zappos was not your average shoe retailer. By 2002 the cyberstore had again surpassed expectations, with sales more than tripling from the previous year to $32 million. Swinmurn and Hsieh believed Zappos would more than double its revenues the next year, despite the instability of the economy as a whole.

As Zappos became the darling of the online retail shoe industry, Swinmurn and Hsieh fine-tuned the firm. For marketing, the executives believed word-of-mouth testimonials were more important than traditional media spending—though Zappos did spend about 15 percent of its revenues on advertising, usually for ads with online browsers and portals. Customer referrals, however, proved far more effective as more and more shoppers visited the Zappos site and literally walked away happy. Zappos also made itself available to comparison shopping sites, attracting buyers through reasonable prices and its lack of shipping charges. By making returns as easy as ordering (upping the return policy from 60 days to 365 from date of purchase), Zappos continued to set itself apart from the other online retailers flooding the Web.

Not only were new Internet-created retailers popping up, but popular brick-and-mortar retailers had begun offering their products to online shoppers. From higher-end merchandisers (such as Nordstrom, Nike, and Coach) to bargain stores (such as Kmart, Wal-mart, and Target), every retailer worth its salt had realized the value of the Internet as a business tool. Zappos, however, remained ahead of the curve. By 2003 sales had soared to $70 million and the online retailer had opened two brick-and-mortar stores as well as a warehouse in Kentucky to expedite shipping. Zappos had also begun to sell accessories including purses and handbags that matched some of its designer shoe lines, with apparel a possibility for the future.

Onward and Upward, 2004 and Beyond

In 2004 Swinmurn, as chairman, and Hsieh, as chief executive, made several critical decisions regarding Zappos.com's future, including a move from its offices in Silicon Valley to Las Vegas, Nevada, and securing funding for the cyber retailer's expansion. The former helped cut costs across the board; the latter came from two sources: $20 million from Sequoia Capital Partners and an increase of its line of credit with Wells Fargo to $40 million. By this time the Zappos site was as much about style and content as sales. The online e-tailer's production staff had grown to ten employees whose mission was to provide each major shoe brand its own "boutique" or page, with merchandise shot from multiple angles for viewing from the top, side, and even 360 degrees. Zappos offered its shoppers over 200 brands of shoes for men, women, and children, including Adidas, Airwalks, Birkenstock, Dr. Martens, Nike, Skechers, Timberland, Vans, and designer labels including Steven Madden, Charles David, Kenneth Cole, Isaac Mizrahi, Michael Kors, and Calvin Klein.

From 2003 to 2004 Zappos had more than doubled its inventory from over $5 million to $13 million according to Footwear News (April 12, 2004) and had plans to double its warehouse space as well. By the end of 2004 Zappos outperformed both analysts' and its management's projections, finishing the year with sales exceeding $180 million.

Company Perspectives:

Zappos.com was founded in June 1999 following a less than successful trip to a local shoe store. With brick-and-mortar stores limited by the size of their stock rooms, shoppers can only choose from a handful of styles the store buyer chooses from each brand (and pray their size is in stock). Zappos.com decided that offering customers a complete selection of styles from each brand (in every size, width, and color) would make the shoe shopping experience a much more pleasurable one.

By 2005 designers and customers alike flocked to Zappos, which had proven itself as the Internet's leading shoe source as brick-and-mortar retailers suffered flat sales. To stay ahead of its growing competition Zappos continued to add to its lineup—which now topped 500 brands, nearly 60,000 styles, and more than a million pairs of shoes—including luxe offerings from Donna Karan, Pucci, Marc Jacobs, and even celebrity designs from Carlos Santana and Jennifer Lopez. Additionally, Zappos had expanded its accessories line to include socks, wallets, belts, and diaper bags, while Zappos Couture debuted with its own web address (couture.zappos.com). For those against the use of leather, Zappos even had "vegetarian" footwear. To support its rapid expansion the e-tailer's workforce had grown to more than 400 employees. Sales for the year were projected to reach as high as $300 million, and even higher for 2006.

Zappos.com's success was due in large part to its loyal customers and a return rate the company reported as high as 40 percent. By providing a simple, easy to use site and an unending inventory of shoes in virtually every style, size, and color, Zappos gave prospective buyers what brick-and-mortar retailers could not—a virtually stress-free shopping experience with no down side—no shipping charges, no-hassle returns, no problems.

Principal Competitors

Bluefly.com; FogDog.com; Gear.com; Onlineshoes.com; Shoebuy.com; Shoedini.com; Shoemallusa.com; Shoes.com; shoesonthenet.com.

Key Dates:

1999:: Zappos.com is founded by Nick Swinmurn.
2000:: Zappos.com gets $1.1 million in funding and a new CEO from Venture Frog.
2001:: Sales climb to $8.6 million as Zappos gains momentum.
2002:: Sales for Zappos.com top $170 million and the firm relocates to Las Vegas.
2003:: Two brick-and-mortar Zappos stores are opened.
2004:: Zappos relocates to Las Vegas and secures venture capital.
2005:: The Zappos site offers nearly 60,000 styles of footwear for men, women, and children.