Apr 7, 2016
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Online fashion retailer Zalando embraces 'chaos' to stay ahead

Apr 7, 2016

When Europe's top online-only fashion retailer Zalando decided to overhaul its app to exploit mobile sales, it reaped the benefits of a new management philosophy that gives tech staff much more autonomy.

Its software designers and developers were able to set goals with two to four week deadlines because progress was not held up waiting for managers to approve decisions. Who did what and when was up to them.

Zalando's current social media cover photo www.facebook.com/zalando.com

The result was a slick new app, with bigger photographs of fashion items, mobile-only content and a new swipe feature, launched in under three months. That was twice as fast as would have been expected under old methods, Zalando said.

It calls the new philosophy "radical agility", building on the "agile" software development method that has become popular in Silicon Valley.

"We didn't have to go back and keep getting sign off. We were fully empowered and trusted to develop this app by senior management," said Nuzhat Naweed, the head of mobile product and engineering at Zalando.

The app was launched in January, after Zalando saw 60 percent of its web traffic come from mobile devices in the final quarter of 2015, up from 48 percent a year earlier. It reports first quarter results on April 19.

"To stay innovative, we need a certain degree of disorder – you could also call it chaos," said human resources head Frauke von Polier. "If you structure everything and try to control the complex things, that’s the moment when you lose speed."

Founded in 2008 in a Berlin apartment by two friends selling flip flops, Zalando now employs 10,000 people and ships more than 1,500 fashion brands to customers in 15 European countries.

Sales rose more than a third last year to almost 3 billion euros ($3.43 billion) and the company, which listed in Frankfurt in 2014, hopes to eventually take 5 percent of the fragmented European fashion market, up from about 1 percent now.

Yet in a sign of the pressure to deliver, its shares are trading at 54 times forward earnings, twice that of established industry leader Inditex, owner of Zara, and based on expectations Zalando will more than double sales in the next four years, even as Amazon muscles into fashion too.

Rivals like Britain's ASOS and Amazon also use "agile" methods to develop software, but Zalando says it goes further, combining more autonomy with continual learning, allowing staff to spend 20 percent of their time on developing their skills.

It restricts self-management to tech staff, however, unlike U.S. shoe site Zappos - the firm on which Zalando was modeled but has since far overtaken in size. Zappos did away with managers completely in a system it calls "holacracy" but then saw an exodus of staff.

At Zalando's tech hub near to the Alexanderplatz in east Berlin, the teams working on the new app held daily "scrums", short stand-up meetings where each developer gave a quick progress update, minimizing the need for emails and sit-down meetings.

"It only works through face to face communication," said Naweed, who was poached from ASOS a year ago. "You have to have good leadership and facilitation, commitment from the top and support from HR. If left alone, it would fall flat on its face."

Bernstein analyst Jamie Merriman, who rates Zalando shares "outperform", said it was still early days for the strategy.

"It all sounds good but there is still a question mark over how it works in practice," she said. "The challenge is how you manage personnel to give them enough flexibility, without inefficiencies or duplication."

Samsung Electronics Co Ltd, the world's biggest maker of smartphones and memory chips, said in March it will move away from a top-down culture and towards a working environment that fosters open dialogue to counter slower growth.

That kind of approach can boost turnover and employee satisfaction, according to a survey of business leaders by German management consultancy Detecon.

However, such new management techniques can founder due to resistance from staff and loss of control if leaders do not work hard to change company culture and provide a structure within which more autonomous ways of working can flourish.

"It might seem that agile and dynamic structures need little coordination. The opposite is the case," said Detecon consultant Marc Wagner. "Employees who work in virtual and highly dynamic networks must organize themselves very efficiently."

Zappos, founded in 1999 and bought by Amazon in 2009, said in January that about 18 percent of employees had left since it rolled out self-management to everyone a year earlier, while a migration of its technical infrastructure to Amazon's cloud service was taking much longer than expected.

Zalando plans to hire another 1,000 staff this year and said the new philosophy is helping attract applicants from around the world and improve employee morale.

It is introducing other new services such as dispatching clothes, shoes or accessories directly from stores, rather than from its warehouses, to allow same-day delivery.

Anna Droege, a 29-year-old from the Netherlands, joined Zalando in marketing when it had fewer than 200 employees, but became disenchanted when its rapid expansion undermined the start-up buzz. She rejoined Zalando last year.

"There was a time when I felt, 'Oh No' I need things quick and this is getting too slow. But then they made a lot of changes and that is why I came back," she said.

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