Boozt shows what department stores could have been
Boozt is the biggest online retailer in the Nordic countries. The fast-growing company could be considered a classic upstart with an aggressive growth mindset fuelled by a lot of investor money. However, Boozt is something really different.
Boozt is an interesting company that takes a different approach to online retailing. One of these different approaches is that the company has decided to model itself after a retail model that some seem to think belongs in the retail graveyard: department stores. According to the co-founder and CEO of the company, Hermann Haraldsson, Boozt was originally modelled after the Danish department store Magasin Du Nord.
Going against the grain: modelled after the department stores
It is always refreshing when someone goes against the accepted ”wisdom” of the industry. In the case of Boozt, it is even more refreshing as the company can produce such a good track record. One could also argue that the overall customer value proposition of the department stores is still very much alive.
Boozt annual revenue and profitability has grown robustly
The golden era of department stores was about selling in bigger volumes and with a greater breadth of assortment than smaller retailers. The growth of category killers, hypermarkets, and discount stores has made that increasingly difficult for traditional department stores. And then there is Amazon with the biggest volumes and largest assortments among the Western retailers.
Why would Boozt go after the traditional model of department stores if there is Amazon to offer unrivalled assortment and volumes?
To start, it is not a winner-takes-all competition with Amazon. In every market, some challengers can grow alongside Amazon. Additionally, Amazon is small in the Nordics (yet). And Boozt is the biggest pure-play online retailer in the Nordics. It has already carved a strong niche within which it can continue growing.
The department store’s multi-category model differentiates Boozt from many other online retailers focusing on single categories.
Online would have enabled department stores to stay competitive
Hermann Haraldsson points out that the advantages that department stores enjoyed in the past could have been sustained if they had embraced the online channel. As Clayton Christensen argued in his seminal Innovator’s Dilemma book, discount department stores were more efficient in their operations and thus could outcompete the traditional department stores.
However, online is an even more efficient channel in terms of capital usage and in turning over the inventory.
Regarding efficiency, Boozt has one centralised fulfilment centre/warehouse in Southern Sweden (compared to the competitors with tens or hundreds of stores). Around 600 employees operate the warehouse. Additionally, there are another 600 employees at the company headquarters in Malmö, Southern Sweden. This is quite a small number of people operating a company with revenues approaching 700 M€.
Boozt fulfilment centre in Southern Sweden. Image source: Boozt
“We have only one warehouse location. Everything is shipped from the same place and all returns are handled in the same place. This means that we are very efficient, and we don’t have any costs of double shipping.”
To contrast the number of people working in Boozt to its main peers, Lindex has slightly smaller revenues (633 M€ vs. 676 M€), but there are 4 300 people working at Lindex. Kappahl, on the other hand, is smaller in revenue with around 340 M€, but it has 4 000 people working in the company. The sports and outdoor specialist XXL has similar revenues to Boozt but employs significantly more people: 4,749 (in 2022).
This takes Boozt’s efficiency to another level compared to its peers. Even the great Inditex is far less efficient. However, with its vast scale and international reach, Zalando has a bit more than 10% higher efficiency than Boozt.
Online enables more flexibility with the assortment
Efficiency enables Boozt to sell at a lower cost and be more profitable. Besides the efficiency, the other problem for department stores was running out of space to expand the assortment when competing against the category specialists.
For Boozt, their warehouse has nearly limitless shelves regarding the breadth of assortment. Haraldsson says Boozt plans to expand the existing warehouse as revenues grow. Fashion specialists (online and offline) have challenged traditional department stores. They have traditionally come to the market from the low end, challenging the department stores to move upmarket.
This is illustrated in the image from Boozt’s Capital Markets Day last spring. The fashion market, especially online, has been divided into the crowded low-end side of the business and the luxury side, which has grown relatively lately. This leaves the mid-tier categories for Boozt.
Source: Boozt Capital Markets Day 2023 presentation
Then, there is the strongly growing Booztlet at the lower end of the market. Booztlet balances the cyclical risks related to consumer demand and economic cycles in different countries. Later, we will discuss Booztlet and balancing risks.
Why not go for a single category?
The online fashion pure-players illustrated in the image above are all focused on fashion and somewhat on beauty products. Boozt has taken a different approach with the modern department store strategy. As with traditional department stores, Boozt wants to serve customers from multiple categories.
One could see this as less efficient than a competitor with a strong focus on one category. However, both approaches have merits.
A critical aspect of the multi-category approach is the balancing of risks. Fashion has some fundamental risks related to online returns, sustainability and cyclicality. Being strong in multiple categories enables Boozt to balance out some of the fashion-related risks.
Hermann Haraldsson points out that the main reason for expanding the number of categories is increasing the Average Order Value for the orders. This helps to improve the efficiency through the value chain. This can be seen especially in logistics as the gross profit per order is increased, thus covering the logistics costs more sustainably.
To reach economies of scale in logistics, single-category players must expand to many countries. Like department stores, Boozt is currently not aiming to be a pan-European retailer. The company wants to focus on being very good in the Nordics, hence the vision of becoming the leading Nordic department store. This enables Boozt to focus on building a strong brand in a handful of markets rather than spreading the marketing effort thin on multiple and much bigger markets.
“We want to build a household brand in the Nordic countries instead of trying to be something in 20 countries. We shall be one of the market leaders in the Nordics and it turns out that this has benefited us, because we can focus on the categories that are most relevant for the Nordic customer. We try to make a selection of Nordic brands.”
Eventhough the Nordics is quite small part of Europe, it offers an affluent customer base with a lot of potential to grow in the rather nascent online channel. This is illustrate by the image from the Boozt Capital Markets Day last year.
Source: Boozt Capital Markets Day 2023 presentation
Boozt has expanded to cover the four main countries in the Nordics. The company also sees the Baltic countries as part of the group of Nordic countries. Boozt wants to get more revenue from individual countries and be the market leader in the four countries: Denmark, Sweden, Norway and Finland.
Thus, the differentiation for Boozt is built around taking the space left by the classic department stores, not competing with category specialists with depth, but with versatility. Besides going against the advice of advisors with multiple categories, Boozt also went against the prevailing business wisdom and built everything themselves.
Building everything in-house gives the company a lot of freedom and flexibility, as well as the possibility to differentiate. This ”old-school” control of the entire value chain, from sourcing, assortment management, marketing, logistics, and front-end user experience, gives Boozt a unique touch compared to many big online players.
Old-school approach produces long-term success
Using the concept of the department stores is not the only ”old-school” aspect of the Boozt business model. The interview with CEO Haraldsson uncovers many elements that resemble older and more established retailers than fast and upcoming pure-play online retailers. Boozt seems to be combining the best parts of both worlds.
The other elements from the established and evergreen retailers include the willingness to control the full customer experience from the back-end systems to the assortment and front-end user experience. IKEA is one of the timeless retailers that want to have great control over everything.
”In the early days when we talked to investors and industry observers, they all said that we have to do a marketplace. Then you don't have so much working capital tied into inventory, because you know, you don't have to hold any inventory. Yes, it's expensive cash-wise to hold inventory, but it also means that you control and own the store and you own the customer experience. For us, that has turned out to be very, very important.” One can't help but wonder if there is a small echo of the late great Ingvar Kamprad in the wise words of the CEO Haraldsson.
There seems to be a trend in the retail industry to outsource as much as possible to outside partners. This can be an asset-light approach to many things, but it is often also inferior in terms of customer experience. Inventory management is a classic case of outsourcing for online retailers
In stead of the marketplace model, Boozt wanted to go the other way and have full control of the inventory. This is operationally more difficult, but it guarantees the customer with one point of delivery (no packages from multiple sources within one order) and a single point of returns.
Conservative use of money produces patient and controllable growth
Another wisdom from the timeless retailing principles is the conservative but active use of money. Instead of relying on aggressive external funding, Boozt wants to rely on profitable growth. The company has been profitable since 2106. Additionally, the management team of the company is highly incentivised to use money ”if it were their own money”, as CEO Haraldsson puts it:
“The entire management team, plus second-tier management, also has a stake in the company. We have skin in the game. This means we don’t take excess risk. I think that creates this kind of founder mentality that you have to treat the company’s money as if it’s your money.”
Hermann Haraldsson, CEO and co-founder of Boozt. Image source: Boozt
Another word for this ”old-school” management style is patient and smart way to operate. You don’t need to run as fast as possible, if you do the right things. Sometimes it is not the fastest route, but in the long run it tends to generate very good positive results. This is illustrated by the relaxed comment from the CEO Haraldsson.
”There was a time when, especially in 2021, when many companies did convertible bonds. They wanted to have a war chest. They borrowed money. And now they have too much debt. And we don't have any debt.
We have also been very good at managing our inventory because we know that to be one of the biggest risks. So that's why we went into this last crisis with no major issues. Our warehouse operations are running efficiently, we don't run with overcapacity, and our balance sheet is very clean. So, we can basically focus on buying the right stuff, attracting customers, and giving good customer experiences.
And that just makes my life easier.”
The next part of the article will discuss this unique method of working and what kind of results it has produced for Boozt.
