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CASE STUDY ON AMAZON ACQUISITION OF ZAPPOS

Completed By (Team 1):Aakash Bhatia


Shamitha Malineni
SUMMARY
In November 2009, Amazon completed the acquisition of Zappos.com, in a deal worth around $1.2
billion. Amazon announced in July 2009, that it had reached a deal to acquire Zappos in a deal worth
$847 million. The deal was financed by 10 million shares of Amazon common stock worth around $807
million and $40 million of Cash and Restricted Stock units for its employees. The deal was eventually
closed in November 1 2009 for a reported $1.2 billion due to closing share costs of Amazon at that day.
According to Zappos.com CEO Tony Hsieh, the extra cash and restricted stock for employees is meant to
keep them on board and preserve the companys culture. Two investment banks were also involved in
the acquisition deal. Zappos appointed Morgan Stanley as its lead financial advisor to a possible sale or
strategic relationship in April 2009. Amazon hired Lazard as their buy-side advisor for the deal in May
2009 [1]. After acquisition, Zappos remains an independent subsidiary of Amazon retaining its unique
culture and brand. Zappos still operated Las Vegas, NV and the management team was not replaced.
This deal proved to be a great exit for Zappos investors, including Sequoia Capital and Venture Frogs,
who put in about $60 million in seven rounds of stock-market business [2]. Zappos is a service company
that sells shoes as well as over 3 million other consumer products, including apparel, accessories, and
house-wares. Founded in 1999 and lead by CEO Tony Hsieh since 2000, Zappos has grown into an online
powerhouse with 2008 gross merchandise sales of $1 billion and a happy, loyal customer base , threequarters of which is comprised of 75% repeat customers [3]. It was also recognized by FORTUNE as one
of the Best 100 companies to work for in 2009, 2010, 2011 as well as was highest ranking debutant in
FORTUNE list of top 100 in 2009 [4].
PROBLEM
The problem was that the 2008 recession has put Zappos and their investors in a very precarious
position. They had their sales grown steadily since 2005, and by 2008 were doing more than $1 billion in
gross merchandise sales annually. But they relied on a revolving line of credit of $100 million from banks
to buy their inventory. Whereas, their lending agreements required them to hit projected revenue and
profitability targets each month. If they missed their numbers even by a small amount, the banks had
the right to walk away from the loans, creating a possible cash-flow crisis and even bankrupting them.
According to CEO Tony Hsieh, in early 2009, there weren't a lot of banks eager to give out $100 million
to a business in their situation for inventory, as their line of credit was "asset backed" [5]. And as the
economy deteriorated, the appraised value of their inventory began to fall, theoretically they were not
left with enough cash to support themselves. Thus it increased tensions of their board of directors. Tony
believed that getting the company's culture right is the most important thing in it, but the board thought
conventionally, that a business should focus on its profitability. On the other hand, Amazon already had
their own online show store Endless.com, which they launched in 2007 to gauge into some of Zappos

market share [6]. They had good growth in 2009, but most of its focus was on iterations of the Kindle or
on the various affiliate nexus laws, nicknamed the Amazon Tax. But there experiment to outdo Zappos
sales with Endless was a failure. According to comScore, Zappos received 4.5 million visitors in June'09
and Endless.com got 777,000 [7]. Even costs associated with building and advertising Endless were not
cheap, as their incremental cost of maintaining the site exceeds the additional revenue the site
generates, says Colin Sebastian, an analyst who follows e-commerce stocks for Lazard Capital Markets,
Amazon's investment banking advisor. Thus as Zappos felt it was in the best interest of shareholders to
sell, based on their current valuations according to the 2009 market , Amazon believed there was a
tremendous opportunity to grow the Zappos brand as their own online shoe retailer Endless.com failed
to break into the online Shoes and Apparel retail segments.
ANALYSIS
The acquisition of Zappos by Amazon was deemed a success, Zappos and Amazon both benefited from
the acquisition. Zappos remains an independent subsidiary of Amazon retaining its unique culture and
brand. Amazon saw an instant increase in profits which was reported after the publication of their
quarterly figures after the acquisition. Zappos had increased its annual revenue from 0 to $1 Billion in
under 10 years and their Annual Revenue Increase averaging at 20% in 2008. But as the revenue
increased from founding to 2008 exponentially, their growth reduced [8]. The issue of continuing
growth of Zappos was a major factor in why the acquisition deal from Amazon was accepted. Amazon
wanted to purchase Zappos for Market Entry, Operational Processes, People and Assets as they were
very much influenced by the elements of Zappos and saw numerous Sources of Value obtainable from
the acquisition. Zappos had a unique customer service system, with going the extra mile to assist its
customers with services such as a 365 day return policy, free shipping and returns and a 24/7 toll-free
customer support number [9]. Zappos customer service has created strong brand loyalty with 75% of
customers, being repeat buyers. (Cerny, 2009). The management and employees of Zappos are
amongst, The happiest employees on the planet (Hsieh, 2011). So the purchase of Zappos gave
Amazon an excellent platform into this market as well as enabling them to capture its unique culture
and work environment to improve its existing management and employee happiness.
If we apply Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis of Zappos.com
Strengths
Customer relationship & IT support Zappos.com business strategy. Company monitors customer
buying behavior with its unique culture and provide customize solutions based on their previous
purchase history.
Product diversification and sustain growth. Zappos.com has a product range from shoes to fashion
accessories. This will help the company to grow its customer base.
Strong distribution channels. Zappos.com provides a next day delivery service to its customers.
Pricing strategy and profitability. Zappos.com delivers an outstanding service at a low price.
Innovation, Zappos.com innovates the free shipping both ways concept.

Weaknesses
By adding new categories by diversification of products Zappos.com has the risk of damaging its brand.
Because they are famous for online shoe selling.
No region based sites.
Because of the free shipping policy Zappos.com is losing their profits.
Opportunities
E-Commerce expansion in more countries.
Takeover by Zappos.com creates more brand value.
Growth of the Global Internet users.
Threats
High competition due to low market entry barriers.
Global economic crisis leads to low wages, thus employee dissatisfaction.
Hacking problems.
Supply chain management: Its supply chain management allows Zappos to provide outstanding service
to its customers, primarily in the sense of fast delivery, while at the same time operating as efficiently as
possible. With regards to serving customers and being efficient at the same time, Zappos realized early
on the importance of a self-operated distribution network as part of its supply chain. Such a distribution
network is important to enhance the business models reach which is limited by selling physical goods.
Porters five forces Model:-

1. The Threat of new entrants into the online shoe/apparel market is relatively small due to the
fact that Zappos is such an established brand and has specialized their business model. It would
be far too expensive for a new company to copy the characteristics of Zappos including their
next day delivery and large overhead. The fact that Zappos was losing money initially illustrates
this difficulty. Another issue that would create a high barrier to entry is Zappos commitment to
the consumer through overnight shipping. Zappos stated that the overnight shipping caused
those to leave their warehouses open for the entire day. Any other company would be at a
competitive disadvantage if they didn't match this business practice. In all the way Zappos does
business creates a barrier too high for threats of new entry to be high.
2. Threat of substitute products or services: Since there is no substitute of products that Zappos
sells, there is very little pressure for the substitution of products. These specialty stores are not
up to Zappos standards, but at the same time their specialization with certain products make
them a threat to Zappos. The whole person-to-person contact can have a big advantage in terms
of customer service. Zappos answers by extraordinary customer service, which really makes the
average consumer feel as if they are special and are in contact with a real person. But for

Amazon its high since there are many competitors of Amazon.com in online retailing. But due
to its continuous innovation in its services and customer-centric organization, Amazon does not
face serious threats of substation in short-perspective.
3. Competitive rivalry: in e-commerce is very strong and intensive, since this field is developing
very rapidly. A main competitor for Zappos in online retail was Amazon; however Amazon
bought out Zappos. Since their largest competitor is now a sister company, the main
competition now can be from physical-world retailers and other online e-commerce
and mobile e-commerce sites.
4. Bargaining power of buyers is considered to be relatively high, since customers are able to
choose from different e-commerce services in contrast to Amazon or Zappos, which demand
higher quality products or services, these will cause loss of industry profits. Zappos.com has the
customer loyalty because of their value addition on their products with more customer friendly
business strategy, i.e., 365 day return policy and guaranteed low prices from competitors. As a
result 75% of customers were repeat buyers [10].
5. Bargaining power of suppliers is also significant since they can influence the profitability and
conditions of ongoing servicing. Suppliers exerts even more power over an industry if it has few
suppliers, and there are no substitute of their products. Zappos.com have more alternative
suppliers in the market. So they can dictate terms with their suppliers. This is an advantage for
Zappos.com, because they can charge a low price to customers by having products cheaper from
different suppliers.
CONCLUSION
Zappos.com has grown step by step from its initial beginning of online shoe Retail Company. During this
period they have incurred massive losses and it became more expose to competition and threats.
Maintain a low cost while achieving a high profit with growth was Zappos.coms greatest challenges.
However they have key advantages of having a highly recognized brand name, providing high quality
customer experience, massive volume of sales with process efficiency and realizing economies of scale.
Process efficiency was increased when Zappos.com understood that it was competing with conventional
shoe sellers so it improved its efficiency by providing for shipping overnight before waiting for a couple
of days and keeping their warehouse open full day. They provided 24*7 customer service from their
warehouse in Kentucky and used social media comprehensively. They even relocated their headquarters
from San Francisco to Las Vegas- We were having a hard time finding good customer service people in
San Francisco. Las Vegas has a lot of call centers and Lots of people who want to do customer service as
a career [11]. Their recruiting strategy had also been in attention for some time which stated If you
give up, we will pay you USD 1000+ bonus USD 2000 [12]. Doing this Zappos.com was growing by Word
of Mouth unlike other competitors. Amazon and Zappos also achieved their competitive advantage over
others through the use of information systems and technology, i.e. accumulated information about
shopping patterns to improve customer service and website content. Zappos acceptance of the Amazon
acquisition deal was due to growth efficiency, control issues with the CEO and Board interests, increased
sales potential and infrastructure improvements. The outcome of these benefits was opportunities for
access to new markets for potential growth and increased market share for both. This acquisition can

also be said as a friendly takeover and was a success which allowed the two companies to integrate
successfully.
REFERENCES
1. http://techcrunch.com/2009/07/22/amazon-buys-zappos/
2. http://venturebeat.com/2010/06/07/zappos-hsieh/
3. http://www.forbes.com/sites/languatica/2012/05/31/delivering-happiness-why-at-zappos-itsyour-birthday-every-day/
4. http://archive.fortune.com/2009/01/15/news/companies/Zappos_best_companies_obrien.fort
une/index.htm
5. http://rc3.org/2010/06/07/how-the-credit-crisis-affected-zappos/
6. http://www.zdnet.com/article/zappos-ceo-transparency-helped-employees-during-layoffs/
7. http://shoeblogs.com/2009/07/22/amazon-is-buying-zappos/
8. http://about.zappos.com/press-center/media-coverage/upstart-1-billion-behemoth-zapposmarks-10-years
9. http://www.zappos.com/shipping-and-returns
10. https://blog.kissmetrics.com/zappos-art-of-culture/
11. http://recode.net/2014/09/29/downtown-las-vegas-is-the-great-american-techtopia/
12. http://www.businessweek.com/stories/2008-09-16/why-zappos-offers-new-hires-2-000-toquitbusinessweek-business-news-stock-market-and-financial-advice