In our second interviews, About You co-CEO Tarek Müller gave us even more insights into the business. In our second interview, we discussed the path to profitability, customer cohorts, retention, marketing, and the powerful potential of Scayle.
We have discussed the following topics:
- 1Check out Interactive Brokers
- 2Introducing Tarek
- 3Target: break even by FY 23/24
- 4Paths to becoming EBITDA break-even
- 5Growing in existing markets
- 6Acquiring new customers
- 7Inflation and fashion consumption
- 8Watching the stock price & thoughts on buybacks
- 9"Depressed Mr. Market"
- 10Cash position
- 11The customer journey
- 12Managing inventory
- 13Onboarding & keeping standards high @ About You
- 14Supply chain issues
- 15Active customers
- 16Marketing campaigns
- 17Penetration rate outside of DACH
- 18Role of influencers for About You's model
- 19Marketing steering: Where to spend money?
- 20Day-to-day improvements to the fashion platform
- 21Profit contributions of new customers
- 22About You's platform model
- 24Second-hand fashion
- 25Optionalities in About You's business
- 27Community Exclusive: Scayle in 5 years
- 28Can Scayle attract customers outside of fashion?
- 29Scayle's revenues
- 30Thank you
Check out Interactive Brokers
[00:00:00] Tilman Versch: This episode of Good Investing Talks is supported by Interactive Brokers. If you’re ever looking for a broker, Interactive Brokers is the place to go, I personally use their service because I think they have a great selection of stocks and markets you can access, they have super fair prices and a great tracking system to track your performance. If you want to try out the offer of Interactive Brokers and support my channel, please click on the link below. There you will be directed to Interactive Brokers and can get an idea of what they offer for you. I really like their tool and it’s a high recommendation by me. And now, enjoy the video.
[00:00:37] Tilman Versch: Hello, audience. Hello, Tarek. It’s great to have you back, Tarek. We already did an interview a few weeks ago. So, for the ones who missed it, you can find it up here and enjoy our first conversation. With the second conversation to understand About You and your mission better, Tarek, we waited a bit because you could release also some new news and new guidance.
Target: break even by FY 23/24
[00:01:05] Tilman Versch: So, let us first take a look at the news and updates you bring with you and then look for the long term. So, as I said, guidance, there’s also a nice slide in your presentation on guidance. And you modified this guidance a bit. I think the new point is this breakeven target you set for 23/24. Maybe let’s start with this. Walk me a bit through this, how do you want to achieve this breakeven target by 23/24?
[00:01:41] Tarek Müller: It is actually not a new target. So first of all, we published our full-year results last Tuesday. Today is Wednesday, the 1st of June at the time of the recording. We have published our full-year results. We have a bit of a different fiscal year. The fiscal year ends end of February. Let’s maybe quickly start with this. How was our first fiscal year being public? At least we are very happy. I think also the capital market reacted heavily in its own way because we published our results on a day when all stocks went down. But our stocks went down less than the ones of our peers. It’s the kind of appreciation that the capital market gives you.
What happened last year? We grew our revenue by 48.5%. This is great, because, at the time of the IPO, we forecasted 40-50% growth. So here we ended up at the very top end of the forecasted range. And in terms of EBITDA, we landed at minus 66 million, which is also better than guided at the time of the IPO. At the time of the IPO, we guided for minus 70. So basically, the top line and bottom line were at the top end or even better than guided. And we have achieved basically or delivered all the things that we promised, i.e., market entries in Southern Europe, fast ramp-up and southern and Nordics, etc.
And then the next milestone we communicated at the time of the IPO is indeed the breakeven next fiscal year. So, this is not new. It had been already communicated at the time of the IPO and we reiterated that goal of becoming breakeven next year.
And then the next milestone we communicated at the time of the IPO is indeed the breakeven next fiscal year. So, this is not new. It had been already communicated at the time of the IPO and we reiterated that goal of becoming breakeven next year. And on your question on how to achieve this, it’s actually pretty simple. In our last fiscal year, we have had a lot of market entries. And in our fiscal year presentation, we’ve actually also outlined how much we have invested in Nordics and Southern Europe, it had been 102 million. Making the math, last year we loss making by 66 million. We invested 102 million in Nordics and Southern. All things equal, taking out the new countries that we have started, we would have been profitable.
That is actually also one big lever towards profitability is actually no market entries. Because market entries are always a very cost-heavy investment. We are investing in building brand awareness in the first month, not towards revenue. So, it is quite inefficient in terms of cost-revenue relationships. It is quite efficient in terms of brand awareness. So, that’s a long-term investment. But if we don’t do any large-scale market entries, we already save a lot of money compared to the last years when we always had big market entries.
The second lever is an increased efficiency in marketing, which is also just a result actually of having more existing customers and a lesser share of new customers within our customer base, and that actually decreases our marketing spend by nature.
The third lever is a fixed-cost digression. Just scaling your revenue doesn’t mean that you’re linearly, proportionally scaling your costs as well. So, there’s a digression.
Those three factors – no market entries, higher marketing efficiency due to more existing customers, and fixed costs digression – we believe will bring us above the breakeven line.
Those three factors – no market entries, higher marketing efficiency due to more existing customers, and fixed costs digression – we believe will bring us above the breakeven line.
Paths to becoming EBITDA break-even
[00:05:27] Tilman Versch: Thanks for correcting my question. Now, maybe it’s the focus of the stock market that…
[00:05:33] Tarek Müller: No, it was not totally incorrect. We gave, like, a trillion information at the time of the IPO, I believe. I mean, back then, it was more or less a year ago, the capital market also focused on different things. We came from a time when it was all about growth. Nobody was really looking at things like profitability. Actually, the focus also from media, from investors, and the questions we got were very little around profitability back then. Even though we have communicated it, so it was in the prospectus, etc.
So, I’m not surprised that you didn’t see it, because it was not very visible, because it was not very much in the focus. Now, obviously, one year later, the world has changed dramatically. Profitability has become a huge focus for investors. But actually, I believe it’s good because we haven’t had to change our strategy. We can stick to our strategy because our strategy already incorporated the breakeven target next fiscal year.
[00:06:32] Tilman Versch: What kind of breakeven are we talking about? Is it cash flow breakeven? Or is it EBITDA breakeven?
[00:06:40] Tarek Müller: So, the communication was around EBITDA breakeven. Also, I think it’s important to understand that we are reporting three segments. Our About You commerce business is split into two segments, the DACH region being the German-speaking area, the rest of Europe region being all other countries outside of German-speaking area, and then our B2B segment, Tech Media and Enabling where we are licensing out our technology and selling inventory on our website.
So out of the three segments, two are already significantly profitable. The DACH segment generated a 6.6% EBITDA margin last fiscal year. It had been profitable throughout the last years. And the TME segment is also significantly profitable with a profit margin well above 10%. So, it is actually just the rest of the Europe segment that is heavily loss-making. I don’t think that it’s a particularly crazy assumption to get to breakeven next fiscal year. And it’s on the EBITDA level.
Growing in existing markets
[00:07:45] Tilman Versch: But there’s also like, if we look again at the guidance, you’re still guiding for a lot of growth. You want to reach the target of 5 billion in 25/26. Maybe you can walk us through a bit where this growth wants to come from. And I also have another chart from the presentation that I found quite interesting. This one here, where you show this kind of funnel of potential future growth. Maybe explain to us a bit, even from looking at the DACH region where the growth is slowing a bit more, how you want to grow with the existing customer and existing markets to the reach of 5 billion?
[00:08:28] Tarek Müller: Yes, indeed, our goal is to reach 5 billion in net revenue in our fiscal year 25/26. It starts 1st of March 2025 and ends on February ’26. You said, the slowdown of growth in DACH, I think there’s also another way to look at it. I mean, DACH is already nine years old. Still, we are growing at close to 30%. Still, we are outgrowing all our competitors, even though we have significant size, and are significantly profitable. So, I think that shows that the type of business we have built actually is able to organically grow at a high profitability rate, even in a very mature state.
DACH is already nine years old. Still, we are growing at close to 30%. Still, we are outgrowing all our competitors, even though we have significant size, and are significantly profitable. So, I think that shows that the type of business we have built actually is able to organically grow at a high profitability rate, even in a very mature state.
If you now take other countries, I mean, look, more or less all other countries, our oldest non-German speaking countries are Belgium and Netherlands and we started at the end of 2017. So, they’re much newer. And then most of the countries we are active in had been started in the last two years. They have a significant growth runway in front of them. Actually, we already see that they’re all developing better than Germany. But let’s say they are developing equal to the DACH region, so German-speaking areas and German-speaking areas are still growing at close to 30% in year nine. I think that really shows how great the growth runway is.
Obviously, growth per country will slow down every year. We’re always starting at triple-digit growth rates, obviously, at some point, we go towards the 100%, towards the 50%. And then as in the DACH region, towards the 25-30%. But as most of the 26 countries we are active in are so new, they are in the triple-digit, high double-digit growth state still. So, there’s a lot of room for growth.
Acquiring new customers
[00:10:27] Tilman Versch: Do you have a rough estimate of how many new customers you need to achieve these growth targets? And how much growth comes out of the existing cohorts? We will go deep into cohorts later, but maybe you can also give an idea here.
[00:10:41] Tarek Müller: Yes, we’re tracking that. I think we have not disclosed it. One could do the math out of all the data we have published, and a couple of assumptions. I mean, what you can see is, luckily, we have positive net revenue retention per customer cohort. That had been published in our Q4 results here. Maybe we can also show that slide.
Perfect, that’s the slide. So here, you can see something very exceptional for an e-commerce business, that more or less every cohort is growing every year since ever. And that actually is super unusual, because usually, you’ll see a decrease in cohort spending over years. That’s due to churn. Because people are churning out. The remainder is basically having stable spending. And that leads to a slight decrease in cohorts.
You can see something very exceptional for an e-commerce business, that more or less every cohort is growing every year since ever. And that actually is super unusual, because usually, you’ll see a decrease in cohort spending over years.
For those who are not familiar with the concept of cohorts, cohorts basically mean you’re bundling customers by the year of acquisition. So, there’s a 2017 cohort, these are our customers being acquired in 2017. And then you basically follow how to have these cohorts developed over time. So how much have they spent in 2018-19, and so on, so forth.
So, as I said, usually it’s a decreasing line. In our case, it’s an increasing line. Why? Because we are seeing very, very little churn. I believe that is due to our superior model of inspiration, personalization on the smartphone building a huge lock-in effect. If you have used About You 10 times, it really becomes your best friend in terms of recommending great products. That creates a huge barrier to basically churning out our system. So, we have very little churn. And we have an increasing share of wallets among our customers every year. Even on cohorts that are eight years old. What I just said, actually even holds true for people who we have acquired in 2014. So, we have positive net revenue retention.
We are seeing very little churn. I believe that is due to our superior model of inspiration, personalization on the smartphone building a huge lock-in effect.
And when we think about growth, it comes basically out of two pockets.
- One pocket is increased revenue retention, where actually, we are always very conservative because we always believe it might stop. It had never stopped. But here we have very conservative assumptions on increasing cohort performance. So far, every year, the reality has beaten our expectations, but that’s one pocket of growth.
- And then the larger pocket of growth is the acquisition of new customers. Here, we obviously have a number in mind, how many new customers we need every month, year, whatever. We are also tracking this on a daily basis, on a country basis. That then leads to our 5 billion revenue goal.
Inflation and fashion consumption
[00:13:40] Tilman Versch: You mentioned this increasing share of wallet. If we talk about the total wallet of a person in an inflationary setup, we currently have, maybe you can give me some more details on who are these customers? Who is in this cohort? What kind of target groups are there? Why are they willing to spend more on fashion, which might be also priced sensitive topic in the future, with inflation coming up?
[00:14:06] Tarek Müller: Let’s start with who’s our customers, it’s roughly 75-80% women. And our core target group is 25- to 35-year-olds, and the extended target group is 18 to 39, 18 to 45 maybe. We have customers that are also older. Theoretically, we have no customers below 18 because you have to be 18 to order. Some might say that some customers might lie about their age. We obviously don’t know. So, the median number of customers ends at 20-30.
Who’s our customers? It’s roughly 75-80% women. And our core target group is 25- to 35-year-olds.
The increase in net revenue retention, I believe, is not due to the fact that they are spending more on fashion. I mean maybe they do. If they start very young, if we win a customer that is 20, then for sure, the overall fashion consumption is increasing due to more income. But let’s take a customer that is early 30, mid 30, I don’t think that they are particularly— That our increase in their revenue is not driven by them spending so much more on fashion, but it is more our share of wallet, basically, our share of the respective fashion spend of that respective customers increasing. And the reason for that is that the proposition is just very good. The more you use us, the better the proposition gets is one reason. And I think, the more you use us, the more you think about “Why do I actually buy anywhere else?”
And the second reason is our category expansion and our overall assortment expansion. We have expanded our assortment every year, at a double-digit percentage rate. We have added new categories like sports, kids, special sizes, premium, and so on and so forth. Accessories have been strengthened. Shoes have been strengthened in the past. So actually, we are also covering much more categories that had not been covered in the past. And we are also planning to further grow our assortment. There’s a lot of potentials to further grow our assortment.
And then the third factor is exclusive products. We are having an increasing share of products you can’t buy anywhere else. And it also leads to a higher share of the wallet.
Watching the stock price & thoughts on buybacks
[00:16:36] Tilman Versch: That’s interesting. We have some quite interesting trends here. You have this growth, where you have an idea and good tracking of it, where it should come from, and quite a strong certainty about the future trajectory of the growth. We have the stock price that goes down and down and down. And as with your management team, you have to decide where to allocate capital. With this kind of setup, at which level does the stock price get so attractive that your stock is the most attractive investment About You could do? So, when do you start thinking strongly about buybacks?
[00:17:18] Tarek Müller: I’m probably the wrong person to ask. That would be more of a question for my co-founder, Hannes. I personally have never thought about buybacks. That’s potentially something he would think about. I don’t know. But I thought about it, I don’t think so. At least, I really try to make sure that we meet our goals and that we create basically ROI-positive investments.
The stock price is something that is very unsatisfying because as mentioned, we have met and over delivered all our goals. I always thought if you deliver on the things, you promise and you even over-deliver on them and at the time of the IPO, there’s always a bit of skepticism that basically discounts your stock. You earn credibility, and then you over-deliver your numbers, then your stock price should go up. Actually, we’ve done that, yet our stock price went down by crazy, more or less 65% or something. Or 60%, I think, was the issue price or a bit less. That is very unsatisfying.
But the stock price of all our competitors globally, except of maybe one has gone down even more. So that shows that it’s not an individual problem of our individual performance, but it’s a sector problem. And actually, within that global peer group, we are structurally disadvantaged because most of our peers are profitable, we are not. And we know that being unprofitable at the moment is not the best. Because increased interest rates mean value in the future is valued less today. So, there we should have ceteris paribus, we should have gone down more than our profitable peers, and most of them are profitable already.
The second is the Ukraine war. So, we have no exposure to Ukraine and Russia. But we are the market leader in a lot of neighboring countries of the Ukraine that had been massively affected. So, the demand in those countries has massively gone down when the war started. Luckily, it has also gone up again. But we saw a significant dip, actually, when the war started. So, this is another reason why we should have gone down structurally more. So even though we were structurally disadvantaged by being loss-making vs peers’ profitable, by being more exposed to Eastern European countries than our peers, our stock went down less. So, in other words, we outperformed the market, even though we went down 60%. And I think that shows that we are on the right track. Actually, in their very own way, the capital market is appreciating what we’re doing.
I have to admit, I would have never thought that macroeconomic things have such a strong impact, a much, much stronger impact than your individual performance. Because there is no other conclusion. We have delivered everything. We have over-delivered most of the things. We have built credibility. All investors actually tell us, we’re doing a great job. We’ve just recently won the prize for having the best IR even though we’re public for one year. I think actually, we are doing an okay job at least. That’s what we hear and get from the investor community. And we are asking everyone, “what can we do?” Everyone tells us you’re already the poster child of the 2021 IPO cohort, you are already outperforming your competition, which is actually already a great achievement because you are structurally disadvantaged.
But still, I found it so unsatisfying, because in my life, I always try to make sure that everyone that invests alongside my things, or the things that I do, or I’m involved in, makes money.
But still, I found it so unsatisfying, because in my life, I always try to make sure that everyone that invests alongside my things, or the things that I do, or I’m involved in, makes money. And till the time of the IPO, I have always delivered on that. Before About You, I have built B2B businesses. I would say, all my clients are happy. Even if things went wrong, I think we always showed that we did our very best to save the project, and things went wrong very little. But I mean, in agency business in technology, sometimes things are delayed. But we had a crazy high satisfaction rate. Every investor that invested with me has made money. And now I’m in a situation where a lot of people have lost money, theoretically, on the paper today. Hope they have not sold it, but on paper, they have lost money. This I find very, very unsatisfying. And I hope we can change that.
“Depressed Mr. Market”
[00:22:22] Tilman Versch: Welcome to the psychopathic world of the stock market. You are meeting Mr. Market right now, who’s manic depressive, who’s doing wild things, which is not rewarding. It’s the feeling that we…
[00:22:33] Tarek Müller: Mr. Market loves oil now. He hates tech. Mr. Market has changed his mind quite fast. He loved tech a year ago. Now he hates tech. He hates loss-making growing companies. He loves oil. He loves all the shitty stuff in the world that everyone believed we left behind us. Being profitable and delivering cash, it’s a good thing. I personally, always, at my companies that… For example, we’re a bit bootstrapped instead of with high capital intensity. So, I’m not a believer in let’s make losses forever and grow, as there’s no end. As mentioned, in the phase when nobody cared about breakeven, we communicated, “Guys, in ‘23, we are breakeven.”
As mentioned, in the phase when nobody cared about breakeven, we communicated, “Guys, in ‘23, we are breakeven.”
And then we also communicated, on the other hand, in parallel, we look for more pockets of growth because I think it always needs to have both things. You need to show that you can deliver profits with this business model. We are showing this on a country-by-country basis. We say, after three to five years, a country is a breakeven. So, the question of breakeven on a group level is just the result of the age of a country. We have shown this in the DACH region. We have shown this in the rest of Europe. We have actually also published how many countries are already breakeven. The one that checks… when has the country been started, whereas how is it doing — they see we always were right. So, I believe it is super important to show that a business model makes money.
On the other hand, I also believe it is important to show where the next pockets of growth are coming from. That’s why we have, for example, launched our global shipping platform. As I’ve outlined we are already gathering data in countries beyond Europe. That’s why we have started Scayle on our TME segment. That’s why we are in constant category expansion. That’s why we have just recently published our initiative around the Metaverse of starting a marketplace for NFT fashion. That’s why we started our outlet. I think there’s a lot of fantasy around where the next pockets of growth are coming from and at the same time, we want to show that our core is profitable and can be profitable. All of that had already been communicated at a time when nobody cared about it.
I think that also shows that we are not basically coming up with a new strategy now because the capital market wants to see something else. But we are actually very aligned with what the capital market now also believes, as we believe you will need to show profitability in our core. We already showed, but you need to show profitability, basically, on everything we start after a certain period of time. I’m strongly convinced that at some point, we have enough credibility that the capital market understands that this is the way how we do it. We start new things, we invest into new pockets of growth, quite heavily in the beginning as for our market entries, and then we make them profitable after a certain period of time. And in parallel, we start new things.
[00:25:31] Tilman Versch: And you also have this as another de-risking thing, this €500 million in the bank.
[00:25:37] Tarek Müller: It’s also not a bad thing to have at the moment.
[00:25:40] Tilman Versch: Talk about what is your plan to do with this relatively big cash position? I think one-third of the market cap is currently cash. How will this develop over time?
[00:25:53] Tarek Müller: I have to admit, I don’t have the exact number at hand. So, I can’t confirm the 500 million now. That again is something that Hannes could say by heart. But we have a significant cash position, that’s right. First of all, we are burning money this fiscal year. That’s for sure. And being EBITDA breakeven doesn’t necessarily mean you are also cash breakeven. But it means you’re close, at least. We have not guided on our cash. I don’t want to say we won’t be cash breakeven. I’m just saying that’s not what we’ve been guided for. We have not given any guidance on cash for the next fiscal year, just for this current fiscal year.
Being EBITDA breakeven doesn’t necessarily mean you are also cash breakeven. But it means you’re close, at least.
That being said, I believe it’s wise or it’s rational to have a cash buffer. And that’s what we have built at the time of the IPO. Every plan we had ended up with us having a cash buffer. And also, in every scenario we calculated for, things can go worse. In some areas, they actually went worse. The pandemic went longer, war, inflation. So, things have worsened a lot. So, we are happy that we made scenarios for a bad environment. We always ended up having enough cash in a bank account. I think that’s important. And also, it gives us flexibility if an opportunity comes across. I believe it’s always good to have a bit of cash at hand to be able to move fast if there’s an opportunity. That’s the rationale behind us having raised more than we actually need at the time of the IPO. It’s also not unusual, every tech company holds cash buffers.
The customer journey
[00:27:40] Tilman Versch: At this point, I want to go back to the charts on cohorts. We already discussed a bit and I think you gave already partly an answer to my question on why the customer spent more and more every year, nearly all the cohorts. But maybe let’s talk about this again. And I’m also interested in this. I went for your shopping process and listened to a lot of podcasts for the preparation of ours. There’s this saying that often comes up, “retail is detail”. I want you to walk me through a bit about the customer journey and your love for detail. And maybe where you put a lot of focus on details that also allow that these customer cohorts are interested in buying more and more every year. How do you make About You a great shopping experience, so the customers love to buy there and spend more there?
[00:28:38] Tarek Müller: I think people that look on e-commerce, I see that a lot on corporate groups that are offline retailers or catalog players, or something thinks about going online, and the first thing which they believe will be the main reason for success is building USP. Then they think about what can be our USP and they put a lot of resources into building that USP. The reality is in retail, nobody gives you credit for the things everyone expects to be right but actually, these are the hardest things to manage.
The reality is in retail, nobody gives you credit for the things everyone expects to be right but actually, these are the hardest things to manage.
So, what is this? It is having the products available at the right price, at the right size, at the right discounts, and voucher levels, which also means no voucher, no discounts – most of the time. A smooth checkout process with all the payment methods available, having the ability to choose your favorite carrier, it is an immediate confirmation email, it is a track and trace that gives you transparency on when the parcel is coming. It is a forecast on your delivery that is actually then also being delivered on that date. It is communicating transparent and fast when something goes wrong when something is not in stock. It is sending the right product to the customer and making sure that the product, even though it might have been returned by another customer before, is in very good condition. It has to look new. It is, if you then return something, to refund your money as fast as possible. To give you transparency about where your product is. To give you an answer when you ask a question, ideally via WhatsApp for example. It is to send you the emails after the order process at the right time. It is saying sorry if something went wrong.
I could go on for ages, where I can guarantee you, for none of these things a customer tells you, “Wow, I’m so happy, About You, because you delivered your parcel on time.” It is what the customer expects. Because the customer expects the Amazon experience in terms of frictionless process. But that is much harder to deliver than people think, especially at scale.
Think about it. Sometimes if it rains, or the sun comes out, it changes the number of orders we get on a weekend. We’re talking here about millions of orders. We’re talking about physics. It’s not services that are scaling. It is people, packaging, and packing staff. And you, as a customer, don’t care whether we thought it’s raining, and then the sun comes out. If you order something on Sunday, you want that stuff delivered on Monday or Tuesday or whatever, or at least you want to know when it’s delivered. So, you don’t care about these problems as a customer. But handling physics creates problems and friction. Handling millions of orders creates friction. Handling millions of returns creates friction.
So, by “retail is detail”, we mean what we see in our NPS, for example, we ask every customer how happy they have been after the order. It is the baseline for the customer, to get a customer on a neutral level everything has to go right. And then you are adding something to make the customer happy and create USP.
In our case, it’s a great smartphone experience. It’s entertainment, shopping, inspiration and it’s personalization. These are our USPs. But in our organization, probably 10% are actually working on these USPs and 90% are working on the old boring stuff I just mentioned at the beginning. And I believe most companies are actually doing the boring stuff wrong and focus too much on the USPs. Because if you do the boring stuff wrong, nobody cares about your USPs. Actually, people are just looking at your USPS, if they are sure that the boring stuff is managed correctly.
And that we mean with retail is detail. Having any friction in the process creates massive unhappiness and creates churn. And that costs a lot of money. You have usually acquired this customer at a very high price. You don’t want that customer to churn out. That’s why we are always making sure to eliminate every friction, every incident that might happen along the process. And that we track really on a daily basis, on an hourly, actually on a second basis. Basically, we try to find out are there any frictions in our process?
[00:33:20] Tilman Versch: Then let’s look at some parts of this process or the system you have built. How do you make sure that you have a great inventory with a great selection at hand? How is this inventory process working?
[00:33:34] Tarek Müller: We have three inventory sources. One is the traditional model of wholesale. That actually means we have a buying department. The buying department goes to a brand, let’s say Tommy Hilfiger, and then looks at a collection usually nine months in advance and then says, “Okay, I want to have thousands of this t-shirt. 500 of that t-shirt.” And then we are paying Tommy Hilfiger nine months later, we get it delivered, it’s on our own stock risk. It’s in our own warehouse, on our balance sheet. If we don’t sell it, it’s our problem. And we have full margin, that’s the wholesale model.
Then there’s a marketplace, 3P as it’s called in our reportings platform, there are a couple of words for that. 3P is split into two models:
There’s the direct shipping model, where actually the supplier usually has an e-com warehouse and pushes the product data to our website. Says, “Guys, I have hundreds of this t-shirt here”, we display it, and the customer orders the t-shirt. We route the order to the supplier and the supplier sends it directly to the customer in an About You parcel with an About You delivery note etc. So, the customer actually doesn’t seem that it’s coming from the supplier, feels like a second warehouse.
And then there’s a second model within 3P and that is called fulfillment-by. That actually means the suppliers putting stock in our warehouse but on their stock risk, not on our stock risk, so the supplier is using our fulfillment actually as a service. They are putting the t-shirt in our warehouse; we charge them for warehouse space. It’s their stock risk, they can pull it out whenever they want, and so on and so forth. And if the order comes in, we are doing the fulfillment, basically, on behalf of our supplier. Legally, it’s a bit different. I’m kind of explaining the process now, not the legal process, but the process of how it’s working. And then basically, we send it to the customer out of our own warehouse, even though it was on the stock risk of our supplier in the beginning.
So, these are the three stock sources. And with these three stock sources, we tried to build a perfect assortment. So that means the short tail, where we assure, we’re going to sell it, we’re going to sell hundreds or thousands of these products, we buy them in wholesale because we know the stock risk is no risk. We very well know how much we will sell. And we have full margin on that.
On a mid-tail, this comes also products that want to be pushed by the supplier where maybe we have not the same confidence in the potential of the product as the supplier. The supplier believes this is going to be great or this is a category I want to invest in, I want to have maximum visibility, and maximum customer experience, then they put these products in our warehouse, but they hold stock risk.
And then on the long-tail, that is being covered through our drop-shipping model, where the supplier keeps the product in their warehouse and we’re just routing the orders through. And that is how our assortment is built.
This works quite well. You can also see in our numbers, that roughly 25% of our assortment is actually in our warehouse bought wholesale, but the 25% is generating roughly 75% of our revenue. So here you see, it’s the short tail that’s turning fast. And then the other way around.
These are not the exact numbers now, but to give you a rough idea, roughly 75% of our assortment comes in 3P, either fulfillment-by or direct shipping generating roughly 25% of the revenue. Again, these are not exact numbers, they are changing seasonally. But just the rough concept of 3P.
Onboarding & keeping standards high @ About You
[00:37:32] Tilman Versch: In this 3P system, how do you ensure that the quality stays high? Is there a tight onboarding process for a supplier? And also, do you have them churn that sometimes it doesn’t work that well?
[00:37:48] Tarek Müller: Yes, there’s a tight on-boarding process. But more importantly, there is rigorous tracking. So, we ask for the track and trace data, we want to know whether the customer received their parcel, and when we told the customer that he or she will receive the parcel. We let our partners sign an SLA, service level agreement, on how fast they have to deliver, how many mistakes they are allowed to do, and so on and so forth. And if they don’t deliver on these KPIs, they are being thrown out.
Supply chain issues
[00:38:25] Tilman Versch: How are the supply chain problems? We are currently talking a lot about affecting you at the moment. And how much drag is this on you?
[00:38:33] Tarek Müller: Yes, we have moderate supply chain issues. For the ones that are super interested in that, maybe we can also show slide 14 in our presentation, where we have outlined basically how much have we ordered and would have expected to be delivered and how much has been delivered. So, the delivery ratio is being shown actually and here we see that we are seeing supply chain issues and delayed deliveries. Yet, it is not crazily significant. And it’s actually concentrated on a few categories. So, it’s especially footwear and sports where we see a significant impact. We see a moderate impact on fast fashion apparel kits and accessories. We see the low impact on regular apparel, underwear, and swimwear. So, it is manageable, I would say.
[00:39:30] Tilman Versch: Another part of this system we are trying to describe here is the number of 11.5 million active customers you have. But you also have 135.7 million user sessions per month. We already talked a bit about active customers and the target groups you’re addressing. So maybe let’s talk a bit about the relationship with these user sessions. Why are there so many sessions with this only 11 million active customers? How are people using your app? How are they interacting with About You?
[00:40:08] Tarek Müller: Yes, the average active customer or the average customer is visiting us every second or third day, so we have a very high frequency of visits. People are also browsing around, basically, the same reason why you would visit Instagram or TikTok. In former times, probably, people read a fashion magazine. So, it’s pretty much similar usage sometimes people are showing here.
The average active customer or the average customer is visiting us every second or third day, so we have a very high frequency of visits.
Anecdotally, I was sitting in the waiting room of a dentist, and at least in Germany, you always have these magazines on the table. I remember, 10 years ago, you entered the waiting room of a doctor, and you found these free magazines, and then you read them. Everyone was holding a magazine. Now, you can really see a difference. The very old people still grab a magazine, and the young people pull out their smartphones. I saw a young lady entering the waiting room, she looked on the magazine table, checked out what magazines are available, sat down, took her smartphone out and opened the About You app, and was literally randomly scrolling around.
So yeah, I think we had a perfectly competitive situation because it was a free fashion magazine. There are usually people in fashion magazines there. So, it was for free, it was there, it was available. It would have been even faster to grab the magazine, and yet she preferred About You. If even in that situation, people prefer About You, in a normal situation where the fashion magazine would need to be bought, costs money, obviously, I think there are even more reasons to use About You and you’re bored, and you want to get entertained in the fashion context. That is actually one reason for our very high user visit frequency, which is a very good thing because we keep being top of mind for our community because they’re using us on such a regular basis.
And then another reason for high sessions is the market entries. In the phases of the market entries, for us, it’s not so much about converting the customer directly. In the beginning, you’ve already mentioned this funnel. We are very much at the beginning of a country launch, we are not so much around: we need to acquire as many customers as possible. We are much more around: we need to fill or to pack the funnel as much as possible. Because we know if someone is in our funnel, the user will convert at some point.
In the phases of the market entries, for us, it’s not so much about converting the customer directly. In the beginning, you’ve already mentioned this funnel. We are very much at the beginning of a country launch, we are not so much around: we need to acquire as many customers as possible. We are much more around: we need to fill or to pack the funnel as much as possible.
And for us, it’s always best if the user checks out our website, even if they don’t buy anything. But the chance of them buying something six months, 12 months, maybe two years later is very high if they have visited our website once. That’s why we always try to fill the funnel with people being aware of our brand, considering our brand, and visiting our website. Because they will convert at some point and that leads to higher sessions in phases where countries are quite new.
[00:43:37] Tilman Versch: So maybe then explain a bit how you’re filling this funnel. What are the things you do to fill the funnel?
[00:43:45] Tarek Müller: Yeah, it is mostly marketing campaigns and marketing stunts. So, when we are launching a new country, we always shut down our website before. So, the website is usually already online for six months or so. We call it the soft launch phase, where we are optimizing all the processes etc., making sure everything runs smoothly. Then we are shutting down our website for one week, in this week we are doing teaser campaigns. And on the website, there’s just a countdown, not more, and you can insert your email address. And then we are doing a teaser campaign not mentioning who we are. We’re just saying the neighbors will talk About You and then “About You” is in logo font. The campus will be curious About You, or Amsterdam will go crazy About You and then always communicate the starting date, the 10th of October or whatever.
So, we create a huge curiosity for one week. And then on the day of our launch, the date we have communicated we are releasing who we are, the most inspiring personal fashion online shop in Europe. And then we are doing four weeks of crazy marketing, all kinds of events, marketing campaigns, social media stunts, and so on and so forth. But it’s all not around “buy fashion at About You”. It’s more really about getting inspired, visiting us, exploring, being free, express yourself with fashion, it’s brand communication. That creates a lot of awareness, and a lot of people actually visit our website and just check it out. This is how we are actually filling the funnel. We try to make sure that people are brand aware. And then because we know that if they know us already in a positive context, performance marketing will make sure that we convert them at some point in the next two years.
But that also means out of the people that know us, 18.4 million have not bought at About You yet. And even 8 million are already saying in market research, “I consider About You”. So, they are pretty close to buying. So, this has huge potential to convert in the next years to come.
What is the result? The result is under slide 10 you have shown. Here, we are outlining Nordics and Southern Europe with a total population of roughly 200 million people. Out of this 200 million, roughly 80 million are in our core target group and roughly 20 million are aware of us. Just 1.6 million have already bought at About You. I mean, 1.6 actually is quite a large number, I would say, after a couple of months. But that also means out of the people that know us, 18.4 million have not bought at About You yet. And even 8 million are already saying in market research, “I consider About You”. So, they are pretty close to buying. So, this has huge potential to convert in the next years to come.
Penetration rate outside of DACH
[00:46:24] Tilman Versch: With the data from DACH, to which level could you bring this 1.6 million, roughly?
[00:46:35] Tarek Müller: I mean, we have countries where we have penetration of 50% already. This is not the DACH region now, because we have higher penetration. We have higher penetration rates in some countries outside of the DACH region. But the penetration rate within our target group, I believe can go up to 50% actually, at least. I’m not sure about the penetration rate of Zalando. But at the end of the day, I always say, if someone asked me who’s our target group? Literally, theoretically, it’s everyone that’s not running around naked. How many people do you know that are running around naked? I don’t know a lot. So actually, everyone can be our customer.
We have countries where we have penetration of 50% [in our target group] already.
Also, people that are outside of our age group. Within our age group – I love our business model for that: Literally, everyone can be our customers. And I mean, how often do you have a business model where literally everyone will find something? I mean, we have customers that are 60 years old. And we know that it’s not a fake age. We know that’s their real age. They also find stuff on About You. Because also age doesn’t play such a big role anymore.
So actually, saying that out of the 200 million population, just 80 million are our target group, it’s kind of a market research thing. I actually believe our target group is 200 million.
So actually, saying that out of the 200 million population, just 80 million are our target group, it’s kind of a market research thing. I actually believe our target group is 200 million. But okay, let’s say it’s 80 million. And then from that 80 million, our theoretical reachable penetration should be 100%. Because: Why should anybody buy anywhere else? We have every brand, we have every style, we have every size, plenty. Then we have a smooth delivery, it is hassle-free, it is free shipping, you can pay on invoice, and you can return within 100 days. So, if you’re stupid and lazy, you have 99 days to decide whether you want to keep that or not, and then send it back for free. You have not paid any money.
I mean, what speaks against us? That’s the question. We have a lot of products you don’t find anywhere else, which are very cool and compelling. So, I would say, the goal should be a 100% penetration rate. Obviously, that’s just a theoretical goal. Never reach that. But I don’t know a reason why we shouldn’t try to get as close to 100% as possible. And as mentioned, we have countries where we are already at a 50% penetration rate.
[00:48:46] Tilman Versch: 50% of the product target group, 16 to 49?
[00:48:51] Tarek Müller: In this case, female. So, for women 16 to 49, there are countries where we have a penetration rate of 50%.
Role of influencers for About You’s model
[00:49:02] Tilman Versch: To access these customers, what role do influencers play for you?
[00:49:07] Tarek Müller: Big role. It’s a big part of our marketing strategy, working together with influencers. We actually started it quite early when the term influencers didn’t even exist. Because we found out that the number one question under Instagram posts and Facebook posts were usually, “Where did you get this dress from?” Or “What kind of dress is it?” And so, on and so forth.
We actually started [working with influencers] quite early when the term influencers didn’t even exist.
In the very beginning, actually, influencer marketing for us started as a service. Because we told the people with a lot of followers with no word for it, we told them, “Hey, guys, look, we have a cool idea for you. You can order for free at About You. And then, every time someone asks where’s the product from, you can always answer, ‘It’s from About You because everything I wear is from About You.’” So that was actually pretty cool in the beginning, because the influencer was like, “Wow, cool. I can order for free.” We were like, “Yeah.” Followers of these influencers knew everything they wear was from About You. So, this is how it started actually in 2014.
Very quickly, we found out this is an amazing marketing channel and structured it. By structured it, I mean, we built a tool, we crawled all social media channels, we are looking for new influencers on a daily basis with technology, and we’re filling our database with new and upcoming influencers. And we are doing more than 2500 collaborations every month, with influencers across 26 countries.
We are looking for new influencers on a daily basis with technology.
Marketing steering: Where to spend money?
[00:50:45] Tilman Versch: Besides influencers, walk me also a bit through your marketing system and how you make customer acquisition very efficient, and what other partners you’re to get customers?
[00:50:56] Tarek Müller: Yeah. So maybe start with the marketing steering. So how do we think about where to spend money? In the first year of a country, it’s really all about filling the funnel. But afterward, it is performance marketing, and it is steered on the question of how much does the customer cost us and how much is the customer’s lifetime value over a period x? And then the question is, on an acquired customer, how long does it take to become breakeven with that customer? And what is the ROI after let’s say, two years, three years, four years, and so on, so forth? So actually, this is how we steer the question of where to spend the next Euro?
In reality, it actually says, “Okay, we have a channel. Let’s take a Google AdWords, Google Ads.” We know there’s a keyword, let’s say dresses. And the next Euro we spend there because we always think on a marginal level, and the last Euro and the next Euro, we try to calculate. So, the next Euro we spend, we know we’re going to acquire a customer, that customer costs us 30 €, and the customer will most likely have a 10 € profit per transaction. So that means after the acquisition, obviously the customer has had one transaction, and we are down at 20 €. 30 € acquisition, 10 € first transaction. In other words, means, we need two additional transactions until we hit breakeven. And then we try to progress. Okay, how long will this take including churn probability? And then let’s say the result is 14 months.
Then the question is, and that is always a question we ask ourselves on a daily basis, what is our investment horizon? Are 14 months still okay or not? And we also try to calculate what is the ROI after two years, three years, and four years. Then we know maybe, after two years we have a positive profit contribution deducting the acquisition costs and reactivation costs of plus 6 €. So, then you can calculate 6 € divided by 30 €, this was your initial customer acquisition costs and divided by the time and then you actually end up at an IRR. It’s very much what an investor would do as well. It is calculating basically the return on investment in period and time period x for an additional Euro spent.
And ultimately, we think about IRR. We think about what our target returns that we’re looking for on the money we spent. And that is being steered on a country-by-country basis. So, in new countries, we obviously have a larger investment horizon. We are saying we want to invest more in grabbing market share. As it’s also about land grabbing basically, in new countries, the breakeven period is longer, and the IRR expectation is lower. And the more mature the country gets, the IRR expectation increases because we want to increase profitability on that country. This is basically how we steer.
We’re very much thinking like a PE or VC or investor or whatever, where we find, they would say assets, we say customers, which have a positive ROI and above target IRR.
And then really, the job of our performance marketing team is to find channels to spend money efficiently. We’re very much thinking like a PE or VC or investor or whatever, where we find, they would say assets, we say customers, which have a positive ROI and above target IRR, basically. And we actually test everything every day and question everything every day to find new sources.
[00:54:53] Tilman Versch: So, it’s not like Tarek is waking up one morning and saying, “Oh, we have to do more marketing.” It’s a clear system you have in place there.
[00:55:01] Tarek Müller: Yeah, it is very less cool than people think. It’s actually not Tarek sitting in front of an apple tree waiting until the apple falls down and then saying, “Influencer marketing.” With my great visionary mind, I realized influencer marketing is the thing. It is not like that. It is really us testing out every kind of stuff we find. Then Tarek looks at excels the whole night, trying to see patterns, and then trying to find things that have a positive ROI and can be scaled. And then usually, it’s X plus rationalization where you tell a great fancy story around the things you do. But the reality is really, it’s testing and learning, and analyzing and scale. And that’s what we do on a daily basis.
And then post rationalize and put it into a nice story that you can tell. But the reality is in our marketing, I would say, we have maybe let’s say, 20% people I would consider as creative, and 80% that are either project managers, executing staff, or the majority is actually data people looking in excels, not at apple trees.
Day-to-day improvements to the fashion platform
[00:56:13] Tilman Versch: You call yourself a fashion platform. In this element of your business, or your business model you described as a fashion platform: Where does your business get better every day? Where’s your moat expanding, in the sense, is there a certain flywheel you’re kicking with more data, for instance?
[00:56:34] Tarek Müller: Yeah, I think so. Personalization gets better every day because it’s technologically optimized and we have more data, that’s for sure. Entertainment inspiration, I also hope gets better. Because we learn how things are working. We are also extending our assortment. The larger we get, obviously, the more access we have to brands. The larger we get, the more exclusive products we can launch. The larger we get, the more clients we win for our technology solution, Scayle. So, there are a lot of advantages in being large. We also get better conditions, obviously. The larger you are, the better your negotiation position gets to your suppliers, so you become more profitable.
The larger we get, obviously, the more access we have to brands. The larger we get, the more exclusive products we can launch. The larger we get, the more clients we win for our technology solution, Scayle.
We also see the larger you are, the more likely it is that people recommend you because people tend to recommend household brands, i.e., brands that everyone knows. It’s easier to recommend a brand where I don’t need to explain to you what they’re actually doing. So, if you ask me, “Where can I buy fashion?” I tell you “About You”. It is easier to recommend About You if I can assume you already know About You; than if you ask me, “Where can I buy fashion?” and I say, “Yeah, look, there’s this new fashion platform, it’s called About You. They’re selling fashion. It’s very personalized.” Makes a recommendation very tough. So, the higher your brand awareness is, the easier the recommendation gets and more viral you go, basically.
But to be also fully honest, there are not these networking effects like a social networks, which I believe is actually good. I’m not sure whether it’s good, but I mean, for a fact, this business model has less networking effect. That’s also why we believe it’s not going to be a monopolistic market, like a search or social network where the network effects are so strong that nobody else can actually exist. But on the other hand, we also see huge advantages of being scaled up. So, we also don’t believe that it will remain as fragmented as it is today, but our hypothesis is that this market will evolve to an oligopoly of, let’s say, five large-scale players making the majority of the market. Because there are scaling advantages, but there are fewer networking effects than with a social network, and that means fragmented won’t work out, monopoly probably won’t be possible. So, it will be an oligopoly.
Profit contributions of new customers
[00:59:17] Tilman Versch: You had this nice chart in your last presentation. Not like the recent one, but it gives an idea about the scaling of profit contributions from new customers. Are the reasons you described just now the same reason that these charts look more attractive with your scale? Or are there also other reasons behind this?
[00:59:41] Tarek Müller: Yeah, that chart basically shows the development of, on the left-hand side, the revenue per citizen, basically and on the right-hand side, the net contribution margin after all variable costs, i.e., after marketing logistics and so on and so forth. As you can see here, with every new country cluster, we have scaled revenue per inhabitant faster. And on the right-hand side, you see we did all of that at a much higher capital efficiency with every new country class that we started.
There are two reasons for that. The first reason is our overall platform is getting better and better. So back then, in 2014, when we started the DACH region, we had very little assortment. It was all kind of a bit shitty. And now, it is a great product, great assortment, great personalization, great inspiration, great entertainment, great smartphone, and great everything. Great prices, great overall experience. So, the platform is getting better and better. And that obviously makes it more efficient to scale and you can scale faster.
The second reason is competitive reasons. Especially in Central Eastern Europe, these are the two more recent lines here on that chart. The chart is already one year old. So, at that time, we have not been to Southern and Nordics. There was very little competition. So, we could grow very, very fast. Probably as fast as Zalando grew in a lot of European countries at the time. They expanded into other countries, the DACH regions, the most competitive region in the world had already been competitive back then in 2008. Now, in a lot of countries, DACH and, for example, BeNe (Belgium and the Netherlands) are also quite competitive. And CE had been less competitive. So, we managed to grow much faster there actually. And if you look on Nordics and Southern, they are also around Belgium, Netherlands line, sometimes a bit better. So, this is basically the line for a… platform is better than a DACH region, the competitive situation is as it is in most mature Western countries.
About You’s platform model
[01:01:55] Tilman Versch: It’s interesting. Coming back to the platform concept, how do you play the platform idea? There are different platform models out there, if you think about Amazon that also uses the data, they get to push their products and their brands. Are you more neutral like Switzerland? What is the way I should understand the idea of a About You platform?
[01:02:22] Tarek Müller: Yes, so we are having our own label products with About You label and EDITED, but these are fairly small. Our strategy and our label are more around incubating exclusive brands and collections together with influencers. It’s not so much around the question on what worked. So, we’re not copying the bestsellers of any brands. It’s really more about what does the influencer like to wear and we are kind of the individual tailor of the influencers, maybe. It all starts with the question of what does the influencer want? What is the influencer wearing? And then obviously, we also use data on what colors, what shapes, what sizes, what quantities, etc., to order to make it right.
Our strategy is not around copying our suppliers. I think that would be a very stupid strategy.
Our strategy is not around copying our suppliers. I think that would be a very stupid strategy. For us, it’s important and we have basically three mission statements. We have one vision statement of becoming global number one in online fashion. And then we have basically three mission statements:
The first is digitizing the online fashion store for Gen Y and Z. And the second one is creating incremental revenues for our fashion brand partners.
So that already shows that we are very much committed to making sure that our partners make money when we make money, and not to scam or basically try to kill our partners by copying them or something like that. I think that is a very short-term strategy to fuck up your partners.
And I strongly believe, as I have mentioned in my statement before, I strongly believe in long-term value creation, I strongly believe in reputation, I strongly believe in finding the right partners and making sure you’re always working with the best people and the best companies. And that also means live and let live basically and not fuck up your partners by copying whatever they did right. So, this would never be our strategy because it goes against our moral understanding of doing business.
[01:04:34] Tilman Versch: That’s interesting to hear. With morals, we also have to think a bit about sustainability because I think in the markets, you’re present, and you also need to be sustainable to win. How sustainable do you think about fashion at About You? Why do you also want to get better?
[01:04:58] Tarek Müller: Yeah, we do think that the whole topic around sustainability, or ESG, as the capital market likes to call it, is a very important topic. Not because the capital market asks for it, but we also believe it is really important. It is important because we believe that companies at a certain size have responsibility. I mean, we are all living on one planet and one society, and I don’t think it’s good to not take the responsibility that you have as a big company with a big impact. So, we are embracing our responsibility.
I also believe that in the long term, companies that really don’t care about this topic will have problems. In the beginning, will have problems finding employees and the second place, customers. At the moment, also customers do care about it, but they’re actually a bit louder in their voice and the media coverage than probably their customer behavior. But also today, you’re missing customers if you don’t care about the topic. But I think in the future, it will be even more. But today for sure, you’re missing young employees, because they want to work in an environment where they have the feeling it is embracing the responsibility the respective company has.
I also believe that in the long term, companies that really don’t care about this topic will have problems. In the beginning, they will have problems finding employees and the second place, customers.
That being said, what are we doing? We just recently published our ESG report. For the ones that are interested, you can check it out on our IR website. And then we have also updated our company presentation alongside our full-year presentation. And there we also have a chapter on ESG.
We have basically three areas of activity. We call it a planet, people, and progress.
- The planet is, mainly, to highlight three topics around the planet, that’s being carbon neutral; since one and a half years already, trying to lower the carbon emissions of the orders of the operations-basically, and then offsetting the remaining carbon footprint that we generate, but also decreasing waste, increasing share of recyclable material and so on so forth.
- The second area within the planet is increasing the share of more sustainably produced products within our revenue mix. In our last fiscal year, 22% of the revenue we generated was from products that are considered more sustainable. And products are considered more sustainable if they meet any of our sustainability criteria that are more or less standardized in the industry. So that depends on the certificates you need to have. This share is constantly increasing.
- The third area is circularity. So, pushing second-hand products, we are selling second-hand products on our website, we have more than 400,000 products in the second-hand area on our website. We are running this as a not-for-profit unit. We are about to introduce a service where with the return process, you can also give back products that are lying around in your wardrobe. We sell them on your behalf, we pass you all your earnings minus the variable costs. So really pushing the topic around circularity with the goal of making sure that the usage of a product basically is being increased. These are the three topics around the planet.
Around people, it’s around creating transparency within our supplier base. It’s about gender equality, it’s about data standards, and so on and so forth. It’s about diversity and inclusion, obviously.
And then in progress, we bundled topics around organizational questions on… Progress basically means how we can, as a company, make sure we create impact and push on that topic. And that is around having ambitious targets, setting standards, embracing frameworks, tracking everything, having sea level oversight, and establishing strong partnerships. So, these are the areas of activity. I mean, our ESG report has 100 pages or so. So, there’s much more. I just tried to highlight the most important ones or which I consider the most important.
[01:09:15] Tilman Versch: Maybe give me a bit more detail on the second-hand option you’re trying to roll out and why is it a non-profit organization or non-profit part of the business?
[01:09:23] Tarek Müller: Yeah. When you think about second-hand in two ways, first it’s about selling second-hand products and making sure people understand that as an alternative to firsthand, you can also buy second-hand. And in our case, actually second-hand is being sold with free shipping, free returns, the same payment methods, and the same delivery speed. So basically, the same proposition as first-hand. And also, the second-hand products are quality proven, they are washed, and it really feels like first-hand. I try to buy one-quarter of the things I buy at About You; I actually buy second-hand. You can really see, that I’m always very happy with the quality of second-hand products. So that is one aspect of circularity.
And in our case, actually second-hand is being sold with free shipping, free returns, the same payment methods, and the same delivery speed. So basically, the same proposition as first-hand. And also, the second-hand products are quality proven, they are washed, and it really feels like first-hand.
The second aspect is a lot of people have dead assets in their wardrobe, products they never wear. What do you do with it? Most people don’t know what to do with it. I mean, it’s not cool to throw it away, because it doesn’t get recycled. There have been recycled containers in the past in most countries. They are now do not existing anymore. You can obviously go to the flea market, but that’s a lot of effort. You can use these second-hand services like Vinted, that’s a big, big effort.
So, most people actually don’t know what to do with these clothes. And we want to give them a service. So, we say, “Look, buy at About You. In the checkout process, you tick a checkbox saying I want to give back stuff.” And then you get two extra bags in your parcel. One is for donations, and one is for reselling. Then you can decide, do you want to resell the stuff, or do you want to donate the stuff? If you put it in a donation box, we try to donate it. By “try”, I mean sometimes you can’t even donate stuff, then recycle it at least or liquidate it basically. So, we try to make use of the products in the best way possible, which is the donation usually or recycling. And on the resale bag, we resell it on your behalf in our second-hand section and pass you all your earnings minus the variable costs.
Why are we doing this as a not-for-profit service? Because I believe it’s the right thing to do to push the topic. And I actually see it as a service. Because let’s assume you want to buy your jogging pants. And then there are two retailers. Both say it costs €50. But we say it costs €50, and by the way, if you wear it and at some point, you don’t like it anymore, we also take it back, we sell it on your behalf. So basically, if you buy it at About You, it doesn’t lose its value completely. And I believe actually that’s a pretty strong proposition.
Because ultimately and unfortunately, in that market, 90% we are selling the same stuff as our competitor. Not 90, but let’s say, 50% overlap with our competition. So, a lot of times we are in a situation where we are selling the same product at the same price. But About You has this value-add service of saying I take it back. By the way, we also take back products that have been bought anywhere else. So theoretically, you can also buy it anywhere else and then resell it over our platform. But I believe actually, customers do appreciate that service. And I think a lot of customers will actually buy at About You.
[The second hand option] keeps money within our ecosystem.
And the second reason is actually it keeps money within our ecosystem. So, if you do the reselling part over our platform, you send us your Hugo Boss shirt, we resell it for you and we say, “Look Tilman, we have €30 for you now. We sold it for €40. Here’s our cost base. It cost €9 for logistics and all kinds of stuff, payment and so on and so forth. There’s €31 left.” We will tell you we can transfer your €31, or you can get a Euro voucher of €35 to spend on About You. I believe a lot of people actually will take the money and immediately spend it on About You again. So, it basically keeps money in the ecosystem as well.
That being said, I believe that is one of these beautiful examples where ESG goals go hand in hand with things that actually also really make sense for the customer and are positive for our business.
Optionalities in About You’s business
[01:14:12] Tilman Versch: If you think about the About You ecosystem and the ways to monetize it, you have this platform and if you look at other online e-commerce businesses, there are other options like targeted advertising, more selling of third-party stuff. Is there anything you think with the scale, like reaching the 5 billion you have as a target, that there might be in material streams of interesting revenues that come over time for About You?
[01:14:43] Tarek Müller: There are already a couple of interesting revenue streams that have been developed in the past. So, media is one where we are selling media inventory and advertisement inventory on our website, we are already doing that. I think last time we reported that segment, it was even more than 2% of our commerce revenue that we are generating just with marketing.
We are selling media inventory and advertisement inventory on our website […]. I think last time we reported that segment, it was even more than 2% of our commerce revenue that we are generating just with marketing.
It is a fulfillment service. As described in the beginning, the three stock sources. One was fulfillment by About You, where we basically do fulfillment services on behalf of our merchants. So obviously, we do a margin on that.
At some point, it might also make sense to sell data to our suppliers. Not customer data, but insights. Insights can be, “Hey, we know that the color blue will be increasingly interesting next season, or yellow will be less interesting,” because we can find out this data within the data we have at hand.
Because we know that there is a certain customer group that actually is a fashion-forward kind of. So, we know that whatever a certain customer group is doing, the masses will do next year. We already see that in our data. So, we actually could give the fashion industry great insights into what will be trending next year. And in a 450 billion fashion industry, just Europe, and a multi-trillion-dollar industry worldwide, that is pretty valuable information to know what will be trending next year. So, this could also be a revenue stream that we have not even touched today.
And there is also kind of services for our customers that have not yet been established. So, we have just recently published that we are opening an online outlet. If you look at the numbers of Zalando, the Zalando Lounge is highly profitable doing, I think, 11% of their overall revenue. It’s a business model we haven’t even started yet. It’s 11% or 12%, I don’t know. It’s above 10% of their revenue. A very interesting extra pocket of growth and profits. Also, it makes the liquidation process a bit more efficient.
We have not yet started a curation service similar to Stitch Fix, or Outfittery, or Zalando’s Zalon. Also, a nice extra value adds for our customers to make them even happier.
There are a lot of other fields where we can imagine building up new profit streams within About You, equal to this whole selling inventory on our website, fulfillment thing, and also extra services for our customers to generate extra revenue and profit streams. For example, this outlet idea, and some other things. So, we’re not close to what we imagine About You will be as a business model and ecosystem in a couple of years’ time.
[01:17:47] Tilman Versch: And also, great optionality is Scayle, your software and service platform. Maybe let’s spend the last minutes on Scayle. What is Scayle? Is it a waste product of your fashion activities?
[01:18:01] Tarek Müller: So first of all, what is Scayle? Scayle is scayle.com. It is written with A-Y for About You. Scayle.com. It is our B2B brand. We call it a commerce engine, where we are licensing out our technology as software, as a service model to third-party brands and retailers. So, what does this mean?
Let’s say you are a brand. Let’s say you are s.Oliver, a recent win of us, one of the largest German fashion brands, or Marco Polo, for example. Then obviously, you’re running your own online shop. This online shop needs technology. In the past, usually, if you were an enterprise segment or you generated more than 50 million revenue, or even more than 100 million revenues as most of our clients do, then you usually went to SAP or Salesforce to get your commerce software.
Now, SAP and Salesforce commerce solutions are quite outdated. We have built a competition to that with Scayle. So, we are delivering enterprise technology to B2C companies in the e-commerce space, mostly fashion and lifestyle brands and retailers, and to software as a service model. So, it’s pretty easy.
We maintain it, we further develop it and it’s pretty easy for the customer to implement and to run their own online shop. It’s a white label. So, the customer ordering on Marco Polo, for example, doesn’t see anything about Scayle or About You. That’s a white label separate instance, technology-wise. And it’s pretty cool.
We are already running more than 100 shops next to About You on our technology. And in our full-year results for the first time, we’ve actually outlined how much revenue we are doing with Scayle. Because so far, Scayle has always been a sub-segment within TME – tech media, and enabling. There’s also the selling inventory on our website in that. There’s also part of the fulfillment margin we have in there, in the overall TME. And there’s also Scayle.
Scayle is basically this separate external business that we are running. So, let’s assume About You would go away tomorrow, then Scayle could still exist. Because it’s a separate business. And for the first time, we’ve actually disclosed how much revenue and profit we are doing. And in our last fiscal year ‘21, we generated 66.7 million in revenue. And we grew by 90%. And the profitability was outstanding. It had been profitable from day one, this business model, and last fiscal year, we generated 25 million in EBITDA. That means a profit margin or EBITDA margin of 38%.
Let’s assume About You would go away tomorrow, then Scayle could still exist.
Why is this outstanding? For those who are not familiar with tech businesses or software businesses, the investors usually, if they want to assess whether a business is good or not, in a very fast rule of thumb way, usually speak about the rule of 40. The rule of 40 basically is pretty simple. It means you’re adding the relative growth with the relative profit margin. In our case, the growth last year was 90% revenue growth, and our EBITDA margin was 38%. So, you’re adding these two numbers. And if the result is above 40, you’re a great company, if it’s above 100, you’re a crazily outstanding company and people throw money at you.
In our case, let’s do the calculation. 90% top-line growth, and 38% EBITDA, adding these two numbers gets us to 128. Above 40, you are considered as a great company, above 100 you’re considered as “What the fuck, I’m going to chase this company; let me invest no matter what in that company.” We have 128. So, this is outstanding for a technology business. It really shows the potential we believe Scayle has as a business. Because it is growing highly profitable.
This is outstanding for a technology business. It really shows the potential we believe Scayle has as a business. Because it is growing highly profitable.
It is actually a business with a crazy lock-in effect. So, if you have a customer that actually uses your technology, we always sign four-year contracts, five-year contracts. It’s very unlikely that even after five years, they change the technology. Technology, you usually change after 7 years, 10 years, because it’s a very crucial part of the infrastructure. So that means if you have a customer, actually, and you’re generating so-called IRR, and your recurring revenue, then it’s very likely that you’ll keep that customer over years. That’s why software as a service business is considered the new real estate basically.
Community Exclusive: Scayle in 5 years
[01:23:01] Tilman Versch: So, let’s take these five years and the potential, and I want to ask, where do you see the potential for Scayle in five years? You have this guidance of 5 billion. And as I looked at Scayle, I thought about it, it is a 500 million business in 2027-26 around this. Am I wrong with my thinking? Or am I diverting a lot from your thinking with what you think is the potential for Scayle?
[01:23:31] Hey, Tilman here! I’m sure you’re curious about the answer to this question. But this answer is exclusive to the members of my community, Good Investing Plus.
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Without further ado, let’s go back to the conversation.
Can Scayle attract customers outside of fashion?
[01:24:10] Tilman Versch: You’re running a bit out of time. So maybe let me try to do two quick follow-up questions. In your guidance of the 5 billion for 2027, is there already a significant revenue part for TME? Or is this just a fashion business?
[01:24:27] Tarek Müller: We have not disclosed any breakdown of our revenues of that 5 billion target.
[01:24:34] Tilman Versch: And about the customers, the last slide I have. There are a lot of fashion customers and fashion multi-brand customers you already have relations with. How can you access the market outside of the fashion ecosystem where you’re already embedded?
[01:24:53] Tarek Müller: So first of all, it’s just a selection of our customers. Actually, a lot of customers have been recently signed and or have not agreed to us disclosing it at that time towards the capital market and/or are still in implementation. So, we have a lot more customers than the logos you see here but actually looking at the logos, these are great. There are great names on this already.
As you can see the two top boxes are fashion D2C. So, these are the brands, fashion beauty brands, and these are retailers. And then there’s a multi-category. These guys are selling a lot of stuff, mostly, not fashion. And then there’s a lifestyle, selling some kind of other things. This can be beauty, home living, furniture, toys, soccer, optician, and so on and so forth.
Our win rates in other categories outside of fashion are more or less, equally high.
And we see that obviously, in the beginning, we had a lot of inbound leads from the fashion space because they knew us. But we are seeing that actually, our win rates in other categories outside of fashion are more or less, equally high. Lead times are a bit longer. The sales cycles are a bit longer because they don’t know us that well. We don’t have these good intros and access to sea level as we have for the fashion brands, obviously.
But we are very successful in selling off our software to people outside of the fashion space. And this is also where we see a lot of potentials to grow. But also in fashion, we are not even covering a fraction of the fashion market yet with our software. The majority is still in the hands of SAP and Salesforce, being the market leader for enterprise shop software.
[01:26:30] Tilman Versch: Maybe just a quick answer. So, the revenues in Scayle are licensing, and you also get a certain share of the revenues or the GMV of the shops that run on Scayle?
[01:26:42] Tarek Müller: It’s just the latter. We are charging on a take rate basis on the GMV of our customers. So, if they grow, we grow. If they shrink, we shrink.
We are charging on a take rate basis on the GMV of our customers. So, if they grow, we grow. If they shrink, we shrink.
[01:26:57] Tilman Versch: That also explains that the growth in the last quarter might not be that strong because we had a sudden blip in e-commerce that was…
[01:27:03] Tarek Müller: Yes, exactly. The dip down in the number investors saw in our fiscal Q4, which is December, January, and February, we saw a bit less growth in that. And that is also partly because especially Jan, and Feb, actually more or less every e-commerce player has decreased in revenue except for us. We have grown. But if you’re running a take-rate business, actually, if your customers are having less revenue, then you also have less revenue. We still grew a lot. But these were the new customers added.
This is an exceptional situation. I think in the first half of this calendar year 2022, most e-commerce players are actually decreasing. So that’s bad for our business. But I would say after that, I’m 100% sure the average customer in the next year will always grow. So, charging on a take rate basis is a much better business than having a stable license fee in, I would say, 99% of the normal quarters. And now we have two unusual quarters with calendar Q1 and Q2 where e-commerce is actually decreasing.
[01:28:10] Tilman Versch: At the end of our interview, I just have to thank you for your time and the great insights into About You. And thank you very much for coming on. And thank you very much for the audience listening to us.
[01:28:21] Tarek Müller: Many thanks for having me. It was a pleasure again.
[01:28:24] Tilman Versch: As in every video, also, here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says always do your own work. What we’re doing here are no recommendations and no advice. So please, always do your own work. Thank you very much.