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Q&A: Probing the Amazon-Zappos Deal

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Amazon this week acquired Zappos for $847 million in cash and stock. Since Zappos founder Tony Hsieh asked and answered some of his own questions about the deal in a letter to employees, I thought it'd be useful to engage in a Q&A with myself about the deal.

Why did Amazon by Zappos?

Two numbers answer that succinctly: About 5 percent of Amazon's sales are apparel/footwear sales, compared with 97 percent of Zappos' sales (according to June 2009 data from our retail tracking service). Simply put, Amazon has not dominated apparel sales as it has most other categories online. While Zappos isn't biggest seller of apparel/footwear on the Web, it is the largest of Internet pure play retailers. More importantly, Zappos has developed a reputation for customer service (Amazon's No. 1 priority according to founder Jeff Bezos) that will only improve Amazon's already strong standing amongst online shoppers. More than 1 million people follow Zappos on Twitter (a cornerstone of their customer service), far beyond any Twitter account managed by Amazon.

Did Amazon pay too much?

I'm not a financial analyst, but the online apparel category is the largest online merchandise category, expected to grow to $41.8 by 2012. For Amazon not be a formidable player in this space is nearly unthinkable for the company that sees itself as the World's Biggest Store. Amazon has tried to answer Zappos with the launch of shoe and handbag site Endless.com, but was never able to materially chip away at Zappos' dominant position. Endless.com registered about one fourth the traffic that Zappos did in June 2009.

Why didn't a company like Walmart or Target buy Zappos?

I'm sure that this notion was entertained by the big brick-and-mortar retailers, but the reality is that companies like Walmart and Target have their best online opportunities run through their stores. The fact that they have thousands of stores throughout the country is a huge asset to their online businesses that a big pure play purchase such as Zappos might be distracting to their longer term success. I do wonder, though, if Amazon's decision to buy Zappos could have been at least partly driven by a fear that this might happen.

Beyond merchandise sales, how do Amazon and Zappos fit together?

Amazon and Zappos have relatively similar customer bases, although Amazons' is substantially larger (60 million uniques per month vs. 4.1 million for Zappos in June 2009). Zappos' customer base does skew a bit more female (69 percent compared with Amazon's 55 percent) and a little younger, largely a function of the merchandise offered by Zappos. The most telling statistic is that in June of 2009, 77 percent of Zappos shoppers also shopped at Amazon.

Amazon has said that it will run Zappos as a separate brand. Is this smart? What do you think that Amazon should do in the longer term?

Zappos elicits more passion from its customers than any other brand that I can think of, online or offline, something my colleague Pete Blackshaw has documented for some time. Amazon would have been insane to scuttle the brand. In the long run, it becomes more interesting. I think that Amazon will benefit from the Zappos halo, and vice versa. Amazon can learn from Zappos' innovation around customer service and marketing. Zappos can learn from Amazon's technology and database marketing. In five years, I'd say that it's even money that Amazon looks more like Zappos than the other way around. As to how they brand it, I'm not willing to lay odds either way.

Ken Cassar is vp, industry insights, Nielsen Online.


Nielsen Business Media