Zappos Case

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Case 1
Zappos.com 2009: Clothing, Customer Service,
and Company Culture
Frances X. Frei

Robin J. Ely
Laura Winig

on July 11,2009, Zappos.com-a privately held online retailer of shoes, clothing, handbags, and accessories-learned that Amazon.com, Inc.-a $19 billion multinitional online retailer of books, electronics, toys, and other merchandise-had won its board of directors'approval to offer to merge the two companies. (See Exhibits 1,2, 3, and 4 for selected financials for both companies.)

Amazon had been courting Zappos since 2005, hoping a merger would enable Amazon to expand and strengthen its market share in soft-line retail categories such as shoes and apparel---categories the company considered strategicaliy important to its business groMh.r while Amazon's interest intngued Zappos'cEo, Tony Hsieh, and chairman, COO, and CFO, Alfred Lin, the two senior executives had not felt the time was dght until now. Amazon's offer-l0 million shares of stock (valued at $807 million),o $40 million in cash and restricted stock units for Zappos'employees, and a promise that Zappos could operate as an independent subsidiary-was on the table. Zappos'financial adviser, Morgan Stanley, estimated the future equity value of an initial public offering to be between $650 million and $905 million; this estimate skewed the Amazon offer-at least in financial terms-toward the high end of Zappos'estimated market value. (See Exhibit 5 for market values ol comparable oniine and footwear retailers.) Hsieh and Lin knew that much of Zappos' growth, and hence its value, had been due to the company's strong culture and obsessive emphasis on customer service. In 2009, they were focusing on their three cs-clothing, custolner service, and company culture-the keys to the company's continued groMh. Hsieh and Lin had only a few days to consider whether to recommend the merger to Zappos' board at their July 21 meeting.

ZAPPOS AND THE RISE OF ONLINE FOOTWEAR
RETAILING
In late 1998, Nick Swinmurn, a 26-year-oid marketing manager for an online car-buying service, went to a San Francisco-area siropping mall to purchase a pair of Airwalk shoes but could not find any in the color, style, and size he wanted. Swinmurn turned to the Internet but was frustrated by the lack of online footwear-only retailers: "[There were] a bunch of little sites but nothing that jurnped out at you," he said.2 aStock value

based on the average closing price of Amazon shares

for the 45 trading days ending July 1 7,

2009.
Professors Frances X. Frei and Robin J. Ely and Senior Researcher Laura Winig, Global Research Group, prepared this case. HBS cases are developed solely as the basis for class dtscusston. Cases are not jntended to serve as endorsements, sources of primary data, or rllustrations of effective or ineffectjve management.

Copyrtght O 2009, 2A10,2u 1 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School publishing, Boston, MA 02'163, or go to wr,r,w.hbsp.harvard.edu/educators This publrcation may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permissron of Harvard Business School.

49s

496

Case

EXHIBIT

I

Zappos.com 2009: Clothing, Customer Service, and Company Culture

1

Zappos Income Statement,2007 to 2009 ($ thousands)

Source: Amazon.com Inc. S-,1. filed Julv 27.2009, andAmazon.com

Inc. S-.{1A, Pre-Etfective Amendment to S-4. filcd Scptember 25,2009

2009

2008

2007
12

months

ended
June 30

ended

526,829
333,884

152,613

635,01

97,158

285,323
181,406

192,945

q5 455

143,917

223,36,1

58,681

123,260

37,862

70,792

153;285

36,87A

18,962

5,870

23,0:41

5,788

18,224

6,154

12,443

25,262

5,767

201,588

48,425

Dec 31

Gr,oss

profit

months

6 months

ended
Net'revenues'
Cost of...
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