Zappos: Where Did All the Sales Go?

(MoneyWatch)  The Wall Street Journal found something interesting in the Amazon acquisition of Zappos -- a consideration that all tech companies should keep in mind when doing acquisitions. When the topic of money comes up, people often lie, and even more often stretch the truth. And that explanation is good to remember when considering the numeric dance that Zappos execs are currently undertaking.

In this case, the question is exactly how much was Zappos selling? It's a key consideration as annual revenue becomes one of the key drivers of how much a business is worth. Just last week when Amazon announced the acquisition, the number tossed about was in the $1 billion range. But today, when Amazon filed its paperwork, suddenly the amount was down to $635 million, or roughly a third short. It turns out that Zappos was fond of talking about gross sales, not net. That included all sales, although returns of up to 40 percent were apparently not unusual. As the Journal noted:

Forrester Research e-commerce analyst Sucharita Mulpuru said that she didn't find a potential return rate of 35% to be surprising. It "could've been a lot worse given they have free return shipping," she said. She said the average return rate for online clothing retailers is about 20% -- but she's seen companies with rates as high as 50%.

Color me naive, but I've been in the direct marketing business and a return rate that high would have been complete disaster.

Supposedly the Zappos management team will "to run independently and grow the Zappos brand and culture," but I don't see how an organization as operationally buttoned down as Amazon is going to put up with a revolving door on the shipping bays. I'd expect a major change in policy in the near future. Otherwise, I don't see how the company can ever hope to gain significant profitability, unless their margins are so incredibly high as to make an Apple blush. And that doesn't seem so likely.

Image via stock.xchng user Marzie, site standard license.