Zalando share price down, transfers old items to discount warehouses

Zalando SE, Europe’s biggest online retailer, shifts poor-selling products to its brick-and-mortar outlets as the end of the holiday shopping craze approaches.

Germany’s Zalando offers discounts of up to 70% for its low-demanted items that the six-year-old company took down from its website and moved to one of its two large warehouses in Frankfurt and Berlin.

Zalando’s stores are a bit different, they do not offer new merchandize but rather try to dispose of old one. Recently Amazon.com opened a warehouse in Manhattan near the Empire State Building as an improvement to its one-day Prime delivery.

“We used to call the outlet stores our test balloons,” said Martin Rost, vice president of Zalando Lounge and Overstock Management, cited by the Wall Street Journal. “But now I guess we can call them a success.”

Zalando’s non-online businesses, which consists of the two warehouses and a shopping club lounge, reported a revenue of €32.3 million for the full 2013 and are projected to generate around €53.6 million in 2014.

The practice allows Zalando to clear its old product by itself and not rely on businesses which are involved in inventory liquidation. It also attracts people who are reluctant to online shopping. However, many fashion retailers unload their overstocked clothes reserves to profitable businesses like TJX’s T.J. Maxx and Ross Stores. TJX reported a net income of $1.6 billion for the first nine months of financial 2015.

The idea to control its whole distribution chain and not use third-party services came after the fashion retailer set up its shopping club, named Zalando Launge. The service offered discounts to customers who subscribed to it, however, the launge was not intented to dispose of all inventories. So in January 2012, the company took action and opened a warehouse outlet in Berlin.

Many other businesses have adopted similar strategy, including Warby Parker. The eyeglasses maker’s original plan was to sell only online, but it now operates eight storefronts. Other examples are the luxury fashion discounter Gilt.com, who sets up members only warehouse sales around the US and RentTheRunway.com, wich said it will open its fourth brick-and-mortar shop this month.

“The physical experience is very, very important, as shopping in itself is an experience, something fun that you can do with your friends,” said Nils Stieglitz, a professor of strategic management at the Frankfurt School of Finance and Management. “You don’t necessarily get that feeling from scrolling on a page online.”

Zalando SE gained 0.02% on December 23rd and close at €25.70. Today the company fell 1.15% at 10:11 GMT to trade at €25.41 in Frankfurt. The company is valued at 6.29 billion. According to the Financial Times, the 8 analysts offering 12-month price targets for Zalando SE have a median target of €24.70, with a high estimate of €27.50 and a low estimate of €13.50.