Seguimiento de Zooplus (ZO1)

Zooplus (ZO1): We finally sold our investment in Zooplus, after three and a half years of ownership. Back in late 2016, I was originally attracted to the company as I saw a dominant pet supply retailer that was well positioned to benefit as pet owners gravitated towards online channels to purchase food for their furry family
members (carrying a 15kg bag of dog food home, especially in an urban environment / on public transportation is inconvenient).
In addition, as pets became viewed more and more as a part of the family, owners wanted to upgrade to premium options – for example, pet food geared towards their specific breed or medical conditions 14. In this world, where pet food becomes specialized and non-generic, having a wide variety of options was an
advantage, and something that brick & mortar stores would have a hard time offering with their limited shelfspace. Pet food is also a highly recurring transaction, which led to ~94% annual sales retention for Zooplus.
Up until the point of our investment, Zooplus had grown at high 20’s – low 30’s % annual rates. With them having dominant market share in the online channel at >50%, but still only single digit market share overall and thus a long runway to grow, I saw an advantaged player than could only be hindered by its own ability to
execute 15. But lo and behold, as time passed, some executional problems started to emerge.

First, over the past few years it has become increasingly more expensive to acquire customers via Google. This was especially problematic for Zooplus, who in their 20 year history, had consistently relied upon Google’s ads to generate new traffic for them (~80% of marketing spend was on Google). It made sense
when the internet was immature, and competition for keywords was lower. By advertising via Google, they could capture customers who were already searching for options to purchase pet food online, and thus had already shown intent to make a purchase.

But the internet of 2020 is very different than the 2000’s. Not only is European internet usage maturing (fewer new users going online, which means a slowing of the “inventory growth” of new ad impressions, which results in higher costs per impression), but also Brick & Mortar competitors have increased their own online sales channels and thus are competing for the same keywords. This resulted in Zooplus’ Customer
Acquisition Costs doubling from 2016 – 2019, and thus affecting these new customer economics. I had always encouraged the company to explore new marketing channels, since it was obvious that this would be a lasting issue for them going forward. I thought that this change, along with a subscription offering and enhanced mobile application design could dramatically improve their business.

I had seen other US and European online retailers face the same issue, and make a successful pivot from Google to more offline marketing channels (direct mailings, TV & radio advertisements, sponsored events, etc). Over the years, I had repeatedly brought these issues up with the company and their former CFO many times in person, and had even wrote a section in our Q4 2018 investor letter about this industry-wide dynamic of running into the “Google Wall” (LINK). I believed they needed to go “above the funnel”, and acquire customers before they even made it onto Google (later described in our following Q1 2019 letter; LINK).

By educating brick & mortar customers about the benefits of shopping for pet food online, and about why Zooplus is the superior choice, they could “pull” customers into the sales funnel, bypassing all the competitors that were out bidding with each other for customers who had already showed purchase intent on
Google. Yes, conversion rates would be lower. But if executed correctly, the lower acquisition costs would more than make up for it.
After moving (in my view) extremely slowly to address these issues, the company finally seemed to embrace the reality and began trialing offline marketing last year. They sent out direct mailing flyers to a small area of Germany last April, and created a “floating dog park” in Cologne and Dusseldorf. They even started running TV advertising campaigns in select markets last summer (but only on niche, female-focused channels) 16.

However just a couple months later, they cancelled these initiatives. This is despite their own CCO reportedly telling Cornelius Patt (co-founder and CEO) that offline brand-based marketing needs at least 6 touch-points / impressions and thus requires a longer timeframe to convert a customer (unlike Google ads, where conversion is near-immediate). From what I can tell, Patt essentially made a half-hearted effort, told investors “See, we tried!” and it didn’t work, and then threw up his hands and gave up.

To me, it seems the initiative never had buy-in from the CEO to begin with and thus in hindsight was doomed to fail. It’s ironic how slow the company was to implement these trials after years of asking, but that they would be so quick to pull the plug. It was at this point, that I in turn pulled the plug on our investment. When we originally invested, I was already aware that Zooplus’ management team was no Amazon. This was a B-level management team, but I derived comfort that upon analyzing their competitors, they seemed to be competing against D-level teams. Certainly, this was a large enough gap, for Zooplus to still create value for their customers (especially versus the alternative offerings), and with the benefit of an already large lead versus the competition, right? It turns out not…