Wednesday, July 22, 2009

Amazon Is Buying Online Shoe Seller Zappos

. Wednesday, July 22, 2009

By stockOzone team

Amazon.com is trying the shoe retailer Zappos.com on for size.

The companies announced on Wednesday that Amazon was acquiring Zappos, based in Henderson, Nev., for 10 million shares of Amazon stock, worth nearly $900 million at its current level.

Amazon also said it would give Zappos employees an additional $40 million in cash and stock.

The acquisition is the largest in Amazon’s history.

Online shoe sales hit $4.3 billion last year, up from $3.3 billion in 2007, according to Forrester Research.

Zappos, a private company founded 10 years ago, has won fans with perks like free shipping and personalized service. It is the largest player in that market.

Amazon has tried without much success to burnish its shoe offerings in the face of competition from Zappos. In 2007, it introduced a separate site, Endless.com, to sell shoes and handbags. But while Zappos received 4.5 million visitors in June, Endless.com got 777,000, according to comScore.

Amazon also sells shoes on its main site and allows outside retailers to sell them there as well.

“I don’t think Amazon has gotten much traction” with Endless, said Sucharita Mulpuru, an analyst at Forrester. “People will go to Amazon to purchase a lot of their core media products and consumer electronics. But it is not thought of in the same light when shopping for apparel, accessories and footwear.”

Zappos, Ms. Mulpuru said, “is one of the few sites out there that people think of first when they think of footwear.”

The companies said that the management team of Zappos would remain intact and that Zappos would continue to operate as an independent division of Amazon from its offices outside Las Vegas. Zappos, whose backers include the venture capital firm Sequoia Capital, also said it planned to maintain its shipping facility in Louisville, Ky.

The companies had held conversations about a deal over the years, but they took on a serious tone a couple of months ago, a person briefed on the matter said. Amazon initially sought to pay cash, but Zappos asked for an all-stock deal, this person said.

The extra cash and restricted stock for employees is meant to keep them on board and preserve the company’s culture, the person said. The deal is expected to close in the fall.

On the Zappos blog on Wednesday, Tony Hsieh, Zappos’ chief executive, said that the decision to accept Amazon’s offer was a difficult one. This was in part because Amazon focuses on low prices and convenience, while Zappos has carved out a favorable reputation among consumers for personalized service, free overnight shipping and a policy allowing buyers to return any pair of shoes free.

“We plan to continue to run Zappos the way we have always run Zappos — continuing to do what we believe is best for our brand, our culture and our business,” Mr. Hsieh wrote.

Jeffrey P. Bezos, Amazon’s chief executive, said in a video clip about the deal that Zappos “has a customer obsession, which is so easy for me to admire.”

He added, “I get all weak-kneed when I see a customer-obsessed company.”

Zappos appears to engender friendly feelings even among some of its smaller competitors.

Korey Buzzell, who runs the independent site Shoe-Store.net, said Zappos had been an amicable competitor in the past, sending customers to his site when it could not fulfill their orders.

“They have sent a lot of business our way over the years, and in return I myself refer people to Zappos if I can’t help them,” he said. “Amazon is different. I don’t use Amazon that much for shoes, in fact I try to avoid them. I hope Zappos doesn’t change with an acquisition like this.”

Amazon was advised in the deal by Lazard, and Zappos by Morgan Stanley.

Disclosure: Author does not own any of the stocks discussed here.





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