Zulily Nips Business Model in the Bud
‘Flash sale’ retailer concedes need to keep inventory on hand to speed up shipment
Plagued by long shipping times, Web retailer Zulily Inc. is trying something new: Stocking inventory before selling it.
That may sound like an obvious approach, but it isn’t the one Seattle-based Zulily took as it grew rapidly from an e-commerce startup five years ago into a public company with more than $1 billion in annual sales and a large following of female shoppers.
The flash-sale website staked its growth and profitability on being able to offer thousands of new items for sale daily at deep discounts, purchasing baby gear, women’s apparel and other merchandise from vendors only after shoppers ordered them. Vendors would then ship the items in bulk to Zulily’s warehouses for sorting and delivery to customers.
The limits of that unusual supply-chain system are now evident. In the fourth quarter, it took 13.7 days on average for an order to leave Zulily’s warehouses, versus 11.5 days a year earlier. Pile shipping times on top of that, and customers in most cases had to wait longer than two weeks for their orders to arrive.
Zulily’s struggles highlight the hurdle that distribution has become for a company that remains one of the country’s fastest-growing retailers, with sales up 73% last year to $1.2 billion.
Zulily’s struggles highlight the challenge distribution has become for the Web retailer. PHOTO: MATTHEW RYAN WILLIAMS FOR THE WALL STREET JOURNAL
“We need improved processes that can be scaled,” Zulily Chief Executive Darrell Cavenssaid in an interview. “We don’t want to grow ahead of our capacity.”
Zulily shares, which last year topped $70, have dropped 44% since the start of this year and are well below their 2013 initial public offering price of $22 a share. On Monday, they closed at $13.22. Several Wall Street analysts cut their growth forecasts last month, after Zulily said lower rates of new customers were returning to shop.
The approach is similar to a model used for years by Amazon.com Inc., which stores merchandise in its warehouses for thousands of third-party sellers and ships on their behalf when orders are placed through its website.To shorten shipping times and reduce errors, Zulily is trying to get a wide assortment of merchandise into its warehouses before selling it online. The goods won’t be on Zulily’s balance sheet, Mr. Cavens said, because vendors will own the merchandise until it is sold. Zulily tested the program with a group of suppliers over the past year and is now pitching it to more vendors, Mr. Cavens added.
Zulily says vendors will have to pay fees for the program. The company has 15,000 vendors, but will be targeting mainly smaller businesses that may have a harder time keeping track of their inventory. Sometimes they will say they have 100 units of an item for sale but in reality have only 99, so someone’s order ends up being canceled, Mr. Cavens said, speaking hypothetically.
“It’s been a challenge since the day we started the business,” he said.
