E-commerce steps into the unknown with Zalando IPO

"[Zalando] is the elephant in the room," says Stéphane Valorge, partner at Clipperton Finance and head of the firm's Berlin office. "It killed the competition for years by investing a lot of money in online marketing and TV advertisement to scale the business successfully, create a brand and reach a critical mass." This aggressive marketing, reflective of its time at internet incubator Rocket Internet, is now enabling the Berlin-based company to plan its IPO after six years in business.

And trading circles await the online shopping behemoth's approaching IPO on the Frankfurt Stock Exchange with baited breath, which is now once step closer after last week's hiring of Morgan Stanley, Goldman Sachs and Credit Suisse to run the process. As the first IPO of a venture-backed e-commerce platform, could a successful listing pave the way for future flotations?

Rocket Internet has certainly played a distinct role in the German internet business sector. Holtzbrinck Ventures, in particular, seems to have cottoned on to the incubator's success, co-investing in a number of noteworthy e-commerce sites. The VC has held a stake in Zalando since 2010 and in 2012 it acquired part of online furniture supplier Home24, which last year saw its revenues increase to €93m from €52m. Another portfolio company held by the duo is Westwing, a home and living e-commerce store, which also saw an uptick in turnover, almost tripling from 2012's figure of €41m to €110m in 2013. A third of its sales are conducted on mobile devices.

Will the VC-backed Zalando IPO lead the way for similar flotations?

E-commerce certainly has a history with German venture capital. But that history is changing: "Funds tend to follow patterns and waves and e-commerce was part of this. From my perspective, we are now in one of the last phases of e-commerce. ‘Classic' e-commerce with a one-off order of a physical good (B2C) has paved the way for other business and distribution models - what I would label as ‘clever consumption', be it community-based C2C marketplaces, re-commerce or subscription-based models," says Valorge.

Moving to multichannel
However, the rise of smartphones and greater consumer demand for buying choice presents new challenges to venture investors. In mid-April, Afinum Management took a 40% stake in Görtz, Germany's biggest bricks-and-mortar shoe retailer. The company, which has been owned by its founding family for almost 140 years, has allegedly suffered from the increase in e-commerce offerings. Its new owner will focus on the improvement of its multichannel offerings, in order to "generate real added value for the customer, compared with high-street retailers on the one hand and online-only dealers on the other," says investment manager Stephan Schödel, who worked on the deal for Afinum.

"Germany is a good three to five years behind the UK on multichannel," says Sophie Albizua, former investor at HgCapital and Change Capital Partners and co-founder of retail e-commerce consultancy eNova Partnership. "It is behind if you look at the raw number in terms of e-commerce penetration: the UK is 1.8x bigger in terms of its e-commerce business than the number two, which is jointly France and Germany."

But though Germany may be lagging behind, the foundations for success are in place thanks to an efficient distribution network in conjunction with the country's post office system. Says Albizua: "If you look at the history, Germany is the country where mail order was born. They've got the infrastructure and culturally they should be acutely ready for it because they have customers who are very used to distance-selling."

Infrastructure to support e-commerce is as strong as appetite for the segment in the DACH market, yet onlookers would be forgiven for thinking the market is somewhat static compared to the UK. Perhaps Zalando will blaze a trail once more. "[The upcoming Zalando IPO] may help move the market forward. Judging by the amount of interest that anything with a dotcom behind it is generating at the moment, I wouldn't be surprised," says Albizua.

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• DACH
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• Holtzbrinck Ventures
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