Amazon's Zappos Acquisition Makes Good Stategic Sense

The deal to acquire Zappos marks an important strategy shift for Amazon (AMZN). Amazon has thrived on selling things that require little human touch beyond user-generated reviews. Products like music, movies, electronics and many hard goods sell this way. Customers essentially buy based on features, price, user reviews and delivery - all things that Amazon is great at.

However, products like shoes and clothes are much harder to sell this way. Here, selection, fit and service around returns become far more critical. Zappos is obviously all about selling online but in contrast to Amazon, they excel at talking to customers over the phone - helping them make selections and dealing with their inevitable returns. It’s often the case that things don’t fit or simply don’t look right. Zappos allows customers to send items back for 12 months and includes return postage.

The Zappos culture is already legendary and led by their charismatic CEO Tony Hsieh. As is typical with deals of this type, there are questions about how Zappos will be run and if they will be able to preserve the qualities that have made them successful. Jeff Bezos is not the typical CEO so there is a decent chance that Amazon and Zappos will do far better than other companies in making this work. Zappos is being kept as a separate entity for now so we’ll have to look back in a year and see how they are doing.

More broadly, the question of how Amazon will leverage a high touch model of customer interaction and service to not only grow the historical Zappos business but enter new markets is the one we find interesting. Many transactions that have appeared “safe from Amazon” may be addressed with a Zappos approach.

Our guess is that Amazon and Zappos will look upmarket towards higher-priced goods. The high touch model obviously comes with higher costs. It’s much more attractive when selling a $400 pair of boots than a $29 pair of flip-flops. Zappos has already been rapidly expanding their product offerings so greater sales of fashion items like handbags and wallets are already steps in this direction.

The acquisition also begs the question for us of whether Amazon will enter services areas like travel/vacations, financial services or healthcare. These may seem far afield today but they are very large markets, demand a high touch approach and profitable segments can be identified and exploited by smart operators.

Strategically this makes good sense for Amazon.

Disclosure: none

Comments

[donzoab:]

Yet another great move by Bezos to continue building the brand and diversifying the model. Cross selling opportunities abound and this is still only the begining. Growth will continue for another 10 years here.
Look for new highs to be coming and use pullbacks as the obvious opportunity to build a great position.

Jul 23 11:09 AM

[Mary7:]

I am shocked that no one feels the need to mention that Amazon owns a shoe website, Endless.com, and that Amazon does have experience in the shoe world.

Jul 23 12:48 PM

[Tony Searight:]

AMAZONS + ZAPPOS= GREATER EXPOSURE SHOE INDUSTRY ONLINE BY AMAZON!!!!!!

Tony Searight & Youth Investors
"A FATHER TEACHIGN KIDS TO INVEST AND GIVE BACK!"
tonysearight.zoomshare...

Jul 23 04:29 PM

[Tony Searight:]

AMAZONS + ZAPPOS= GREATER EXPOSURE SHOE INDUSTRY ONLINE BY AMAZON!!!!!!

Tony Searight & Youth Investors
"A FATHER TEACHING KIDS TO INVEST AND GIVE BACK!"
tonysearight.zoomshare...

Jul 23 04:29 PM