Good morning, ladies and gentlemen, and thank you for joining us today to review the year 2017 and to look ahead into 2018. As usual, with me today are Ruben Ritter, one of our 3 co CEOs responsible for the Zalando core business and Birgit Hader, SVP, Finance. Both will be available for Q and A following today's call. Also as usual, this call is being recorded and webcast live on our Investor Relations website, and a replay of the call will be available later today. With that, I now turn the call over to Ruben.
Yes. Thanks, Patrick, and good morning, everyone. I'm very happy and looking forward to present another year of successful development at Zalando. As always, our call has 4 parts. We'll start with the business highlights.
We'll then talk about the performance in more detail. We then will look at our outlook. And then of course, last, we'll have your we'll focus on your questions. So let's start with the result highlights and business update. Clearly, 2017 was another year of major strategic and operational progress as we continue to deliver on the trajectory that we have described in the IPO back in 2014.
We were able to keep our promises and delivered on our goals. Specifically, we have been able to deliver on our sales growth targets in the upper half of our corridor of 20% to 20 5% with a growth of 23.4% in revenues where we have once again outperformed the overall market and gained market share. Actually, our CAGR since the IPO is at about 26%. So I think this has been really a great progress over the last years. At the same time, we remained at a solid level of profitability with EUR 215,000,000 adjusted EBIT, which corresponds to a margin of about 4.8% despite continued investments into future growth.
Working capital was slightly negative at year end and CapEx increased to 2 Working capital was slightly negative at year end and CapEx increased to €244,000,000 Also these were in line with our guidance. But even more important to us than a very strong financial performance is what we have been able to deliver for our customers in 20 17 and the areas where we have been able to invest. So on the following pages, I want to talk about the improvements in the areas of assortment, digital experience and convenience. So our assortment clearly is at the core of our value proposition, and I think we have been able to drive a number of important improvements in 2017. We always strive to expand our offering to give our customers access to an almost unlimited choice.
We offer our customers about 2,000 brands 300,000 SKUs SKUs across different styles and price points. And one of the most relevant drivers of having and that we where we are out of stock. Actually, the Partner Program has been able to double in size in 2017 and therefore has been a great driver of our assortment quality. At the same time, we want to offer our customers a highly fashionable and entertaining selection. And therefore, we always focus to bring on new exciting brands.
In 2017, we have been able to add 350 brands to our selection, which means that we almost add a new brand every day including weekends. I think some highlights are the Inditex brands, Pull and Bear and Stradivarius that we have been able to add to our selection. The same is true for weekday from H and M Group, Dry Corn, Sandro and the sports brand Jordan have been other exciting additions to our assortment, which make it even more unique. As a third area, we are always focused on the freshness of our assortment. So we want to show the most up to date styles and most up to date trends.
We continue to be fully focused on in season merchandise. We continue to increase our fast fashion offer. Actually, we activate every day on average 1300 SKUs, which I think really creates a lot of reasons for customers to come back frequently because every day there are more than 1,000 styles new styles that you can discover. The second important area of our proposition is clearly the digital experience. Actually, in the Q4, we have been able to reach a new all time high in terms of visits.
We had more than 700,000,000 visits on our sites. That brings us to a run rate of about 3,000,000,000 visits per year. And clearly, it is our aspiration to show to all of these people really the most exciting digital experience when they come to our web shops or our apps. There are many areas where we drive continued optimization. Those are very specific and tangible improvements for our customers that help us to drive growth.
So some examples are an improved search, which yields faster and better and more personalized results a new PDP that we have launched, which has led to improved conversion in many markets improved sizing advice, which starts to have a positive impact on our return rates also to invest into scalable systems. And so we had another stress test with Black Friday where in the peak minutes, we were we had 2,400 transactions per minute, which really show that our systems are highly scalable. And all of these efforts combined just yield very positive development across all on-site KPIs. At the same time, we have kicked off the next gen project, which will be a big focus especially in 2018. Our goal is to redefine the on-site experience and create new ways for customers to interact with the assortment.
And the entire team in this area is really fully focused on making this project happen. It has 2 major elements. The first element is to create more interesting and inspirational assortment entry points. A first important proof point in the Q4 has been the launch of the outfit section called Get the Look where customers can see a stream of outfits, which are combined by our stylists or by external influencers and where we already see a great impact on conversion rates but also time spent on-site. And the second big element is that we aim to create a significantly more personalized experience for our customers.
We are convinced that customers won't be recognized content and to find the right product in our increasingly broad assortment. And over the last years, we really laid the technological basis for this. And we believe that in 2018, we will be able to bring a lot of this potential to life and show really specific personalized elements for our customers, which we know from experiments have a really significant impact on their browsing behavior and also their conversion. Of course, mobile continues to be a big focus area as it has been over the last year, specifically the app. Here, we continue to see great traction with more than 70% of visits coming from mobile devices and also mobile transactions approaching 60%.
So we see that we can also more and more close the conversion gap that existed between desktop and mobile. We continue to drive a lot of app installs, on average 1,300,000 installs per month with an overall install base of now more than 40,000,000 installs. And this continues to be an area of great focus and also a big driver of growing the business, with respect to frequency, which we'll come back to later in the presentation. Now as you know from all our previous earnings calls, clearly, convenience and specifically logistics has been a big area of investment and big area of focus. 2017 was a year where we significantly increased our investments with 3 main priorities.
The first priority was to increase our capacity and efficiency in the network. We are building a pan European fulfillment network that is ready to support more than €10,000,000,000 in revenues to allow for our planned growth over the coming years. In terms of capacity, we are ramping up more projects in parallel than ever before. So just to run you through the list to give you a flavor, in Sertin, our first Polish location, the ramp up is progressing as planned and the location will be fully ramped up by summer 2019. We are launching a second project in Poland in Lodz.
Construction has started in November 2017, and manual operations are planned to start at the end of this year. In Verona, we have started the construction or we are about to start the construction of our Italian hub, which is planned to go live in fall 2019. In Milan, our current satellite warehouse in Italy, we are in the process of doubling capacity by adding additional building segments until fall of this year. Paris is ramping up as planned, already has 50% fulfillment share for local customers. In Stockholm, we are operating our Nordics satellite warehouse in an interim set up and will move into the permanent set up by the end of this year.
Also for the Zalando Lounge, which continues to grow very nicely, we are adding a new facility, which also will be located in Poland close to Danzig. So I think this is a very impressive list, and it gives you an idea on how busy we are in this area to really ramp up capacity for future growth. In parallel, we are investing a lot in automation. So we clearly want to get faster and more efficient in our processes. LA, warehouses.
So also this is a big area of investment. Clearly, a second priority in this area has been to scale further fulfillment options. So same day delivery, we are now enabling in 12 cities. We have rolled out return on demand to all customers in Germany and Netherlands. We are introducing a dynamic and more precise delivery prediction, which results in narrowed delivery windows for the customers and therefore will yield not only higher satisfaction but also higher conversion.
And as you know, we have launched our loyalty program Zalando Plus, which is still at a small scale but shows positive customer KPIs from the 1st month. The 3rd priority in this area is really a strategic piece of our puzzle, which is to launch and extend Zalando Fulfillment Solutions, which is a product that allows partners to leverage our fulfillment network once they're using our partner program. From this, we see very positive impact both on customer satisfaction and also on unit economics. We already have 14 brands live, including some large accounts like BF Group. Already in December, we were actually delivering 10% of all Partner Program orders through Zalando Fulfillment Solutions.
And our goal is until the end of this year to actually deliver 20 percent of the Partner Program outbound volume. So I would like now to continue with some comments on our financial As always, starting with growth. So clearly, 2017 has been a big success in terms of growth. We have been growing 23.4 percent in revenues. Actually, when we look at the GMV growth, we have been able to grow 26.5 percent for the full year, which indicates once again that the Partner Program is really gaining traction and is supporting our growth quite significantly.
Especially when we look at DACH, we have seen a strong reacceleration of growth from 14.8% growth in 2016 to 18.3% growth in 2017. And also, the 4th quarter has been particularly successful to drive growth in the DACH region. And I think here, we really have been able to make the right investments to drive growth. When we look at Rest of Europe, the region continues to grow even faster at about 26% for the full year and about 23% for the Q4. In the Q4, we saw slightly less momentum in Southern Europe in a, I think, also very warm winter.
However, structurally, we still see a lot of growth opportunity for the seasons to come, and we rest of Europe to continue to grow significantly faster than the more mature DACH region. Now I think very interesting, as always, is to look at the drivers behind the growth. And here we see once again really strong results on active customer acquisition. So when we look at quarter over quarter growth, we have been able to grow active customers with 900,000 additional active customers, which is particularly strong. When we look at year over year, actually active customers have been growing 16% on absolute numbers, 3,200,000 additional active customers, which is significantly up compared to the growth we had in 2016, where we grew 2,000,000 absolute additional active customers.
And this acceleration in active customer growth is really driven by both accelerated new customer proposition really continue to pay off. Now this shows that we have been able to have more and more customers. I think the great news is that they also come more frequently. We have a new all time high in terms of purchase frequency with 3 0.9 purchases per year in the last 12 months, also related to mobile, also related to fast fashion, also related to younger customers, which in turn has an adverse effect on the average basket size. So I think here we see an effect that is comparable to what we have discussing in previous quarters.
To us, what is most important is that the GMV per active customers, so the combination of frequency and basket size continues to grow with 9% to a level of EUR 253 per active customer. Actually, we looked at the IPO presentation and there it said €180 per active customer. So over the last years, really very step by step, we have been able to grow revenue per active customers quite substantially. Now if we look at profitability. As mentioned, we kept absolute EBIT around constant compared to last year at €215,000,000 adjusted EBIT, which corresponds to a margin of 4.8%.
In the Q4, we were able to increase absolute EBIT to €113,000,000 When we look at the different regions, we already commented in previous calls that after the very strong margins in 2016 in the DACH region, we ramped up our investments to margin level in the DACH region, which we still consider to be very healthy, but slightly lower than in the year before. At the same the margin in Rest of Europe actually has improved. We have clearly reached breakeven for the full year and I think at the strongest or one of the strongest margin levels in this region ever in the Q4. And I think going forward to drive additional growth, also here we see opportunities to reinvest and to continue to really drive growth in those markets where we still have a relatively low penetration. Now if we go through the major cost lines, starting with gross margin.
Here we see we are 0 point 6 percentage points below the prior year. There are predominantly 2 drivers. On the one hand, we have made pricing investments to create a more attractive offering as an investment to drive retention and purchase frequency, which we think has fully paid off. On the other hand, we have some negative mix effects with Rest of Europe segment growing faster than the DACH region. When we look at fulfillment cost, here we see a quite significant impact by the higher investments we have been doing into our convenience proposition.
I have described that we have been ramping up and are ramping up several new warehouses. So this takes quite a lot of investment, also everything we do around automation with more locations ramping up than ever before. Out of 8 warehouses that are operational right now, 6 in ramp up mode. So this typically leads to temporarily lower efficiencies, and we went through this list earlier on the call. The second driver are the investments that we make into the improved convenience proposition.
So the local satellites, return on demand, same day delivery, Zalando Plus, Zalando Fulfillment Services. So all of this obviously takes additional investments. And we also see that the other economics that we mentioned earlier, so the reduced slightly reduced basket size, of course, also has an impact on the efficiency of our logistics network. On the other hand, in marketing cost, we continue to see a very favorable development. We see continued operating leverage, which as we have discussed earlier, we choose to reinvest into investments in gross margin and continued growth, especially in DACH.
We see great active customer growth. We see improved frequency. We see improved spending per customer. So I think these shifts and these investments we have been making along the P and L really are showing a positive effect. So to quickly finish off on the year, which is slightly negative and therefore in line with our guidance.
And on CapEx, we see €244,000,000 predominantly from logistics investments with €68,000,000 in the Q4. Also, this is clearly in line with our guidance. And a quick comment on our liquidity, which stays at very high levels of more than €1,000,000,000 So with this, I would like to move to our outlook. And we spent some time now discussing particular KPIs. So I think we'd like to start with taking one step back and taking a more long term view.
And here, very clearly, our focus will continue to be on market share. We are targeting a particularly attractive market, which is very sizable with EUR 4 20,000,000,000 in size. And actually, we can add another EUR 80,000,000,000 in our target market after the launch of the beauty category. We think it's particularly attractive in terms of gross margin and customer frequency. It is a market that is very fragmented on the supplier side and is the market that continues to move online very quickly.
And we think that actually this trend from offline to online will continue, and we see even scenarios where it may further accelerate. So we think in targeting such a market, clearly, the winning strategy for us is to go for share. And we have done so very successfully since the IPO in the DACH region that we have been able to double our market share to now about 2.8%. In Rev Europe, we have actually increased our share by 4 times in those years to 0.8%. When we look at Zalando overall, we have grown our market share by a factor of 2.5% to now 1.3%.
And we will very clearly continue to focus on growth because we think there is significantly more potential. We want to reiterate our long term ambition of a 5% market share across the European fashion market. And we have, as you know, shown that this market share is possible because we already have reached it in the shoe category in the DACH region, which is where we started the business initially. And we continue to believe in the benefits of driving scale and driving market leadership long term. Now what does this ambition mean for the midterm outlook?
We have doubled the company in the last 3 years. And as we said on the Capital Markets Day, we have the ambition and we have the aspiration to double again until 2020. So our number one priority will continue to be growth. We will continue to target a corridor of 20% to 5%, potentially with revenue being more towards the lower end of this range and GMV being more towards the higher end of the range, continue to grow the partner program over proportionately. This growth target is clearly very ambitious.
It will mean that we have to continue to outperform the overall online fashion market by a factor of 2% to 3%. And we also want to reiterate like on the Capital Markets Day that we do not expect a significant or a margin expansion in this very high growth phase. I think this is a point that is again and again important to highlight. I think we need to be realistic, and we have to acknowledge that the continued need for investment if we want to reach these very ambitious growth targets. So what do we plan to invest in?
I think we have an impressive number of initiatives for 2018 that we are driving in parallel across the entire proposition. On assortments, we will continue to focus on brand launches. Actually in the first quarter, we already have launched exciting brands like Swarovski, Tory Burch and Massimo Dutti. We are ready to launch the beauty category. We intend to do this in March, which means we will significantly expand our target market in a very complementary category.
But really to crack it will also require additional investments going forward. We actually intend to launch 2 European markets this year, which I'm particularly excited about because the last time we launched a new market was in 2013, and I think the entire team is looking forward to launch new markets again and bring our service also to these potential customers. On the digital experience, I already app in terms of design but also in terms of continue to invest into the app in terms of design, but also in terms of convenience and customer flow. For example, we are planning to launch a One Tap Express Check out, and we have a project that we call Allo Phone. So we want to offer more languages to our current countries.
So for example, we will bring an English version of the site to Germany, which we expect to drive additional customers. In terms of convenience, this will clearly continue to be an area of investment. We have talked about the long list of logistics expansion projects both to scale our network and also to make it more efficient and bring it closer to the customer. In terms of payment, we'll continue to roll out deferred payment methods to customers in more and more countries. And Zalando Fulfillment Solution, we already discussed that we want to actually double the share of of Partner Program volume where brands opt to use our fulfillment network to bring their goods to the customer.
And then underlying all of this, we will continue to invest into platform and emerging businesses. I have mentioned that the launch has been growing quite substantially, and we intend to continue to invest into this very attractive off price business, which both helps us to sell off leftover merchandise, but it also is used by our partners to clear leftover merchandise into the markets. We'll continue to invest into integration services because we think this is an interesting topic in the platform world with the acquisitions of TradeBite and Anoatwine, which we continue to scale. With the London Media solutions, we are targeting the very attractive online marketing market, which has very strong margin potential and is already scaling profitably. We'll continue to grow Zalon, our curated fashion service, and there are actually a number of new initiatives that we have lined up for 2018.
So let me finish the presentation, as always, with our specific 2018 financial guidance. For the 5th year in a row, we aim for a strong 20% to 25% revenue increase, which is roughly 2 to 3 times the growth rate of the online fashion market overall. This translates into about EUR 1,000,000,000 of additional revenues at the midpoint of the range. This is clearly our biggest absolute growth ever. To reach these very ambitious growth targets, we have made it clear today that we will continue to invest along many dimensions.
Nevertheless, we expect to remain at least constant or even grow in absolute profitability with an adjusted EBIT of €220,000,000,000 to €270,000,000,000 This range actually implies a margin level between 4% 5% and a 15% growth of absolute EBIT at the midpoint of the range. As in prior years, we also want to say for 2018 that if in doubt, we will prioritize growth over profitability because this is what is in line with our long term strategy. Please also keep in mind that the increased CapEx investments which, if you do the math, implies a 0.3 which, if you do the math, implies a 0.3 percentage point change in the margin at the midpoint of the top line range compared to the previous year. As already last year, we anticipate net working capital to be slightly negative at year end. And as a consequence of our outlined growth strategy, CapEx will increase to a level of around €350,000,000 The investments will be mostly going into logistics and technology similar to what you have seen in the previous years.
In addition, I would like to make a brief comment on our Q1 trading. While we see that the sell through of the fallwinter season is going well, we observe a delayed start into the springsummer season compared to last year. This trend is likely also impacted by the cold temperatures that we experience currently across Europe. While the short term trend does not impact our full year outlook, it likely has a negative impact on Q1 growth and profitability. And with those comments, I would like to conclude the presentation.
And I would now like to take your
The first question is from Andrea Farras of Morgan Stanley. Please go ahead.
Hi, good morning team. I have two questions please. The first one is on the beauty rollout. I know you said you would launch in March, but is it going to be a staggered rollout where you may be starting Germany and you'll only sort of roll out to Europe next year? Can you give us a little bit more guidance as to sort of what the ramp up process will be for that product?
And then the second question is your CapEx guidance for this year is $350,000,000 which is quite a bit higher than the below 5% you talked about at the Capital Markets Day. Can you help us understand whether this is about sort of bringing investments that you'd already thought you would do forward or whether it's about sort of new areas which require incremental investment relative to what you thought a year ago? Thanks.
Sure. Thanks for your questions. So on Beauty, yes, we will have a staggered approach. So we will start in Germany and first launch and roll out. And then we will also, I think, have a period of really optimizing the offering.
And then over time, we have the option to also bring it into other markets. But focus for now will be on launching in Germany. With respect to CapEx, you're right that our sort of investment level increases once again in 2018. I think this is really related to the sheer number of projects that we also went through in terms of logistics, of course also in terms of technology, where we really, I think, now see the opportunity to accelerate the build out of our capacity to make sure that we already now can secure the space that we need for the continued growth over the next years. And in terms of doubling the business over the next 3 years, we also have to make sure already now that we have sufficient capacity.
I also commented on Zalando Fulfillment Solutions, which I think is really perceived very well in the market by our brand partners. So also here, we want to make sure that we really have sufficient capacity to drive this part of our platform. And this is also reason for us to actually accelerate our investments. When you look at it at CapEx in percent of sales, I think you're right with your comment with respect to the 5%. On the other hand, I think when you also look at some of our competitors, I think our CapEx as percent of sales is still at a pretty good level if you consider the magnitude of investments that we are able to drive
with it. Does that mean that you might be comfortable also sort of keeping up slightly higher level of CapEx for the next couple of years?
I think that really depends on the projects, right? So if we in 2 years say, okay, for the next 3 years, again, we want to double, then for sure, we will also need to keep investments at a high level. And as long as we see that they have a great ROI, I think this is a good thing. But clearly, again and again, we will also challenge our teams to make sure that the investments that we make and the money that we spend really have a very specific plan behind them and have also very good ROI in terms of long term growth. So I think that is really those are really the parameters that will drive our decisions for the right CapEx level also in the coming years.
The next question is from Falko Bosser of Baader Bank. Please go ahead.
Yes. Hello, Falko Bosser of Baader Bank. Yes, first of all, congratulations. I think especially strong sign that you also moved now Massimo Dutti to the Zalando webpage. So do you see also a chance that even the Inditex core brand, Zara, could be offered by Zalando sooner or later?
Are you in talks there? Any indication from that front? And the second question would be, could you please share your experience with us the implementation of the stationary retail partners as you did with some Schuhb stores into your business platform? Recently, you announced 2 expenses offer. So how is the progress?
And how are the learnings out of that initiative here? And also one last question on the Beauty segment. Could you give us a bit of range quantity in sales contribution in absolute terms and progression from the plan going forward? And am I right that this ramp up costs are all implemented in or included in the guidance, so no extraordinary one offs out of that to expect in the 1st or second
Thanks. Sure. So on your first question with respect to adding additional vertical brands, I think also over the last years, we have always said our aspiration is to serve our customers with all brands that are available and of course including also the very effective vertical brands that are out there. And that is really our aspiration. That is what we are working towards.
And that is also where I think we're making great progress. On the other hand, I think we also shouldn't get ahead of ourselves. So we are really building great partnerships. But we also want to give these partnerships the time that they need to evolve. But as you can see from our progress, we are actually, I think, every quarter able to show again great progress in terms of attracting more and more leading brands.
With respect to stationery retail, so right now, we have 30 stores integrated that are able to deliver from their local merchandise to our customers and to bring additional traffic to their stores through our site. And that is something we continue to do. But as we also said previously, it is also something that takes time because integrating offline stores, especially those that don't have a digital infrastructure, also takes a lot of effort. With respect to beauty, so clearly beauty has the potential to add several 100,000,000 to our top line in the long term. However, I think when launching a category we have launched many categories in the past.
We have also launched many markets in the past. And to be very honest, it is difficult to predict really the sales level in the 1st year. So what is important to me is that we do a launch that is convincing to customers, that we do a launch that is convincing to our brand partners and that we really figure out how to serve beauty well. And I think if we achieve that, then really for the coming years, beauty can be a substantial driver of our growth. And the cost that we need to launch the categories are included in our plans and therefore also in our guidance.
The next The next question is from Andreas Rehmann of Commerzbank. Please go ahead.
Yes, good morning. Two questions from my side. First one on private label. I think you're managing 18 own labels at present. So can you name the 2, 3 most relevant private labels at present?
And what's the strategy here? Are you also using external partners to promote these labels? And the second topic, the effectiveness of logistics investments. Can you provide some specific examples how these investments did improve sales or net promoter score? Any insight on the effectiveness on these investments would be highly appreciated.
Sure. So on private label, you're right that we serve our customers a pretty broad range of private label brands. We do not disclose specific sales numbers for individual brands and therefore also not which brands are more successful than others. But each brand, of course, is serving a different target customer. And of course, we have this broad portfolio.
We also challenge from time to time all the brands performing according to plan. But overall, really, ZettLabels has been able to add, yes, great selection to our assortment and to also add exclusive styles to our assortment, which is important to us. In some cases, that label also has chosen to market these brands externally, which is in line with our strategy and which allows us to even further increase the depth that we order on individual items. With respect to With respect to the effectiveness of our logistics investments, I think that some of the numbers we have given on this call with respect to improved retention, with big picture. And when we do our customer satisfaction surveys, we always see that the convenience that we offer clearly yields one of the highest satisfaction levels across the different satisfaction drivers.
What we do is that we challenge the teams in terms of any investment, if it is return pickup or if it is same day delivery or if it is a local satellite to really test these improvements and to show us tangible impact in terms of customer KPIs, but also ultimately in terms of payback and in terms of financial return. And in many cases, that is actually possible, right? So on same day delivery, we have tested this in Berlin in an AB test setup. And from that, we were able to infer what is the uptake that we can expect from customers where we are able to deliver same day. And these are metrics that we then use to able to deliver same day.
And these are metrics that we then use to evaluate all of these different projects.
The next question is from Charlie Muirsen of Deutsche Bank. Please go ahead.
Good morning. Yes, I've got four questions, please, but all quite short, I hope. You mentioned some new adjacent markets you're opening in the year ahead. When I look at the map, they all generally seem to be quite small other than Russia. I wonder if you could say whether Russia is one of those 2 markets.
Secondly, on Zalando Fulfillment Solutions, can you clarify whether you expect that to be gross margin and or EBIT margin accretive? 3rd, you mentioned over €40,000,000 app installs, but obviously only around half that number in terms of active customers. I wondered if you what your interpretation of that gap is. Is it that people have multiple devices? Referenced your shoe market share in the DACH region of 5% for some time.
I just wanted to clarify, is that then stabilized? Or are you saying that it's well over 5% now?
Sure. So on your first question, I personally don't consider Russia to be adjacent to our current markets. So I think that hopefully answers the question. On Zalando Fulfillment Services, if I understood the question correctly, so on those fulfillment services, we are charging the partner a fee, which I think yields a lot of benefit to the partner because they're able to use many of the efficiencies that we have in our system, but at the same time also allows us to earn a margin on the service. With respect to the gap between active customers and app downloads, I think that's a very fair question.
To be honest, also I thought before the call that at this level maybe the absolute number of app installed base becomes less meaningless over time because obviously you do have the effect that people change phones and not in all cases we can account for that in the numbers. However, I think the speed at which we increase this down road base still gives you a very good hint that we are continuing to drive growth through app installs by having close to 1.5 1,000,000 installs every month. So some of these apps have become inactive, but also others still remain to be activated. So customers are using it and it can be an acquisition channel to then turn these customers with an app download into active customers. With respect to your last question, so yes, we continue to reference to the 5%, which we have achieved in Germany.
But the truth is that in this particular market, we are still growing, obviously. And therefore, our share is by now actually above 5% in shoes in DACH.
The next question is from Simon Urban of Credit Suisse. Please go ahead.
Good morning, gentlemen. A couple of questions for you. First of which is just talking about marketing leverage. Obviously, that has been significantly higher than what was guided to at the time of the IPO. Is there a natural limit to the amount of marketing leverage you think you can put through the business?
Or is it simply that the kind of cost of customer recruitment or that you're recruiting in different ways that don't necessarily kind of flow through that line? If you can just discuss that a little bit? And secondly, given that you've just invested in an automation company, where do you see the potential? I mean, in 5 years' time, would you expect to see a significant amount of your picking being fully automated?
Sure. So with respect to marketing leverage, you're right that at the time of IPO, the target model, I think, indicated a range of 8% to 10%, if I remember correctly. And then at one of the following Capital Markets Days, we communicated that we will likely actually increase our investments in convenience but see an even lower level for the target margin for marketing spending. So there we communicated 6% to 8% in the target model. And you're right that we have been making even faster progress towards this target than we originally anticipated, whereas at the same time, we have even further increased our investments in convenience and also to some extent as investments into pricing.
So I think the progress has been fast. Of course, the operating leverage is not unlimited. So marketing, it will not go to 0. On the other hand, when I look at some other e commerce competitors, we also see several examples where the marketing spending is significantly below the 6% to 8%. So I think there still is leeway going forward.
And over time, we will reevaluate again and again what is the right strategy, what is the right level of investment for each cost line. And there could also be a scenario where we say it's time again to increase marketing costs as percent of sales. I don't think that's likely, but we will do whatever yields the best outcomes. And I think over the last years, we really have shown that we since the IPO have been able to drive growth, which I think went beyond any expectation at that time. And we have been able to do so with margin levels that also went beyond expectations at the time.
So I think that indicates that we have been able to take the right decisions in terms of where to make the investments. Your second question touched on automation. So clearly, we see potential to further automate processes in our warehouse. We also see potential to use digital tools to automate other processes in the company, which clearly is beneficial both from a financial perspective but also from a customer perspective and also in terms of avoiding repetitive tasks. So we will continue to potentially invest into companies that develop automation technologies, across our logistics footprint.
The next question is from Anne Critchlow of Societe Generale. Please go ahead.
Thanks. Good morning. I've just got one question on the EBIT margin outlook, medium term, but also maybe a bit longer term as Because you said again that we shouldn't expect the EBIT margin to rise above that 4% to 5% guidance corridor to 2020. But I'm just wondering if 4% to 5% might actually be a bit too high, if we consider, say, Zalando Plus, ZalandoZett rollout and then the gross margin mix pressure from Young Fashion. So just wondering what your thoughts are on that.
Well, I think our thoughts in terms of midterm trajectory are pretty much around the points that I was making around our midterm outlook that our focus will continue to be on growth. And for the face that we are growing at such high levels, which are actually 2 to 3 times the market levels, we do not growth as long as we feel that these are necessary to drive this growth as long as we feel that these investments have a positive return on investment long term. So that is, of course, always the benchmark. And I think if we come to the situation where these investments are not yielding these ROIs, then we should stop. But we don't see that coming anytime soon, and this is why we'll continue to be really focused on investing.
I think that when we look at the market and when we look at the industry, I think you are right that with this 4% to 5%, we are operating at a pretty healthy level of margin. And I think that is true. And we have been able to show a great combination of growth and profitability in the past. And our aspiration is to do so also going forward. But as we always have said, if in doubt, we would prioritize continued growth as long as the ROI is right for the long term.
The next question is from Jurgen Kolb of Kepler Cheuvreux. Please go ahead.
Thank you very much. On your expansion into 2 new countries, maybe I have missed it, but could you just give us an indication which country you're talking about? And also in terms of potential that you see in these two countries, what and when you can really reap these benefits? And in this context also, will you deliver then this country from your new distribution or new warehouse in Poland? Or how is the delivery going to ramp up here?
And lastly or secondly on personnel, you're adding or you're targeting 2,000 additional employees this year. Obviously, the personnel cost ratio will further increase here. Maybe any indication as to where we should look at this ratio going forward? That would be helpful. Thank you.
Sure. So on the new countries, we have on purpose, we have said we will launch 2 adjacent markets, along along or during the year. In terms of how we deliver to those markets, well, that will depend on which markets we go into. And as always, we will deliver to those markets not only from one warehouse but from the entire footprint and naturally from those ideally from those warehouses that are closest to the customer. In terms of personnel growth, I think growing the business also means to hire more talent.
And with the goal of more than 2,000 new jobs, We just wanted to indicate that we continue to create new jobs both in logistics and also in Berlin. And when you actually look at the base that we have of 15,000 and then if you put 20% to 25% growth on top of that, I think you even get to a higher number. So I don't see that we are I wouldn't expect that we necessarily have to grow over proportionately relative to sales. So also our personnel to sales ratio, I think, should not increase in 2018.
The next question is The next question is from Andrew Ross of Barclays.
Please go ahead. Good morning, everybody. I've just got 2 left, please. The first one is on the partner Can you give us a sense in Q4 how big it was as a percentage of GMV? I think you said high single digits in the past, so if we got up to 10 now.
And can you give us a sense as to how big it is in DAC versus the rest of Europe? Then second question is back to Zalando Media Solutions, which I think you said is now scaling profitably. Can you actually give us a sense as to how big that is in revenues?
Yes. So I think those are 2 valid questions, but I'm afraid that I don't have a lot of additional information that I can disclose at this point. In terms of Partner Program, the share is growing quite substantially, as I indicated, and the share continues to be higher in the DACH region compared to the rest of Europe region, even though we are also this year making an effort to really grow the Partner Program, particularly in the markets where they're still lacking share. With respect to Zalando Media Services, we don't disclose specific numbers for this business. In general, we don't see it as a major revenue driver.
We see it as potentially particularly profitable area of the business. But in terms of revenue growth contribution, it is only a small part and it will also only be a very small part given the nature of the business.
The next question is from Georgios Pilakiches of Exane. Please go ahead.
Good morning, everyone. The first question is just could you expand on what the profitable sourcing deals were that supported profitability in the other segment? And then the second question is, in the presentation you referenced the positive unit economics from the Zalando Fulfillment Solutions. Could you potentially just expand on this? What do you mean by positive unit economics?
Is this in a relative sense as units being sold through a more traditional channel? Or is this more just kind of on an incremental sale, there's a contribution
there? So I did not fully capture the first question. It was around profitable sourcing deals, but I didn't Yes.
The year to year profitability, the shift in the margin was explained in the annual report as benefiting from profitable sourcing deals. So I just wondered whether you could expand on what this was?
Yes. So I will elaborate maybe I will start with the second question and then Birgit can will answer the first question, which I still haven't fully captured. But Birgit got it, so she will take it. On the unit economics for Zalando Fulfillment Services, there are several sources of that economic benefit. So I think the first big advantage is that we typically have customers that order several items in one order.
And if we consolidate the merchandise for the partner program, we are able to send all of those items in the same parcel, which clearly generates cost savings. The second is, of course, that we have built a very big network, so gaining typically, we typically, we will operate a fulfillment network that is tailored to fashion and that is operating at a very high level of efficiency, also driven by the scale and automation that we have in the system. And that is also something that we benefit from if we take over the fulfillment services for the brands. So all of this combined creates a very good economic benefit, and we are able to share this benefit with brands, which makes it attractive for the brands to work with ZFS and for us to turn ZFS into a good addition to our business.
And And on your question on the lounge business and the profitable sourcing deals we're referencing in the annual report. In the end, the lounge business is working in the opposite direction of the sort of the wholesale business. So if there surplus merchandise available in the market, Obviously, the price for that merchandise comes down. And as such, the lounge has a better chance of sourcing merchandise in very profitable terms, which then obviously drives the growth as well as the margin profile of the lounge business.
The next question is from Ben Hohman of Citi. Please go ahead.
Yes. Good morning, guys. Two questions from me. First of all, on the gross margin, can you give some sense of what you expect gross margin development to be over the next couple of years? Do you expect continued pressures through mix and pricing?
Or should we start to see some positive impact from scale or the partner program? And then second one, just on the CapEx. Can you just give the split of what you expect PP and E versus intangibles for 2018, please? Thank you.
Sure. So on your first question on gross margin,
so as
you know, we don't give guidance on specific cost lines and I think for good reason because we should have some flexibility in terms of how we allocate the investments over the years. I think on gross margin, we will see both positive and negative impacts. So positive impact, as you mentioned, improved negotiation successes, improved scale and the like, but also maybe the opportunity to make additional price investments to drive growth and drive retention. And I think we cannot say today with certainty how that specifically is going to play out over the next years. On your second question, the CapEx has roughly a split that is comparable to last year.
So I would expect roughly 80% to go into PP and E and roughly 20% to go into software development.
The next question The next question is from Andreas Endas of Macquarie. Please go ahead.
Yes, thank you. Good morning, everyone. Two questions. The first one on your full year 2018 EBIT guidance range, which is quite wide. What are the swing factors to get to maybe to the lower end and to the higher end?
What is in your hands? What is due to external factors such as the recent cold weather, which should impact the entire industry? My second question on Inditex and its decision to extend the offering on Zalando to 3 plants now including Massimo Tutti. In your view, why did Inditex actually choose Zalando and not other online retailers in Europe to do that job. A quick reminder would be helpful here.
And in this respect, is the new collaboration with Massimo Tutti for Germany only? Or is it across Europe? Thank you.
Yes. So on your first question, with the 20 18 guidance range, yes, some people say it's a wide range. Some people feel it's a narrow range. But I think like in the previous years, we do arrange because clearly, we want to reserve leeway to figure out along the year what specific level of investments we want to make. And that will be a function of many things.
You mentioned external factors, which is true. I mean there is things like weather and other industry specific things in our business. And then of course, there's also internal factors, which relate to how quickly are we going to be able to launch all of these initiatives, what our eyes do we see throughout the year and how do we see the business trending? And do we think it makes sense to double down on some investments? Or do we think it makes sense to hold back a little bit?
And those are decisions that we want to make throughout the year. And we think the business long term would not benefit if we would put ourselves into a range that is too narrow. On your question on Inditex, I think they have chosen Zalando because it's a great channel for them to drive their business digitally and where it's also a great channel to reach customers additional customers. So I mentioned already that we had more than 730,000,000 visits in the Q4. I think that's just an enormous amount of traffic and enormous amount of reach.
And it is unparalleled in the European fashion industry to have one channel where you can reach so many customers. And I think Massimo Dutti has a great offering. I think it's super relevant for our target customer group. So I think it's a win win situation that we can allow them to tap into this broad reach, and they bring very attractive product to our platform. So I think that has been driving their decision making progress process.
The next
A couple of questions and then just a clarification, please. First of all, just on the gross margin, I understand that you sort of reluctant to give an outlook, but just to perhaps help in our forecasting in terms of understanding the bridge for this year. I mean, on my numbers, the partner program would have been adding something like 90 basis points to the gross margin this year. If you could just comment on the sort of magnitude, that would be helpful. The second question on pricing investments in DACH, obviously, being sort of heavily weighted into branded product, there's a bit less leeway for you to kind of change pricing.
So I'm just really wondering what you mean there. Do you mean on own label product? Has it been going in? Or do you mean on more promotional activity rather than headline pricing? And then my clarification question, I'm not sure if it was only me, but as you were talking about your Q1 comments, my line actually cut out.
So would it be possible just to give us a reminder of those in case that was for anyone else as well? Thank you.
Sure. So I think on your first question, you're right that the Partner Program drives additional gross margin. On the other hand, scaling the Partner Program also requires investments in terms of building the sales force, in terms of building the systems, in terms of scaling things like set up ads and bringing those into the market. So I think this is also something that we should consider when we think about the margin impact of the about the board. So it's really about creating an offer that is attractive to the customer that can drive retention, that can drive additional conversion.
And of course, we are also very mindful to make these decisions in a way that they also they need to have a positive ROI. But these investments can involve offering products at more attractive black prices. It can involve bringing brands in that have a very attractive price offering to begin with. It can also mean to make strategic red price adjustments. There are different levers that we can play on that side.
With respect to the Q1 trading comment, so sorry to hear that the line was down. Like it wasn't me hitting the mute button. So I'll just repeat them for you. So we said that while we see that the sell through of the fallwinter season is going quite well, we observe a delayed start into the springsummer season compared to the last year. This trend is likely also impacted by the cold temperatures that we experienced across Europe.
While this short term trend does not impact our full year outlook, it likely has a negative impact on Q1 growth and profitability.
The next question is from Rocco Strauss of Arete Research. Go ahead.
Yes. Hi. Two questions for me.
I mean, one is on the 2 new markets that you mentioned that you are marketing spend, given that historically you had entered markets running larger TV campaigns? And the second one, a bit more in general. I mean, you have added several high end brands in 2017. You now mentioned Massimo Mututti and Swarovski in particular. I mean with YOOX or with the whole YNAP thing, company, most probably be taken over by Richemont now and several brands signaling that they aren't really happy that YNAP isn't this independent player in the market anymore.
Do you think you will gain more on the high end potential here and also using high end brands with better unit economics per parcel, I guess, as well as the partner program ramping. Could that also help you to expand into markets outside of Europe? Thank you.
Sure. So with respect to new Sure. So with respect to new markets, you're right that whenever we launch a market, they tend to have elevated marketing costs at the launch, especially marketing costs relative to revenues because in the beginning, you start without any active customer base. And clearly, we expect that also to be the case for the market that we intend to launch in 2018. On your second question, clearly, the premium segment has been very attractive for us in the past and also has been growing quite nicely.
And we also see more and more demand from higher end brands to list with us, which I think is also related to the more and more improved brand image that we have been able to build and the reputation that we have been building in the market. So this is clearly a very positive trend for our business because obviously, the premium segment is quite an attractive segment. With respect to the Parqar program, yes, I think it gives us flexibility in all directions. It gives us us flexibility to onboard more brands, to show more assortment without taking additional risk. And it may also help us to go into new markets more efficiently.
Although we have also shown in the past that also with the wholesale model, we can expand quite quickly into new adjacent
markets. The last question of today is from Michelle Wilson of Berenberg. Please go ahead.
Hi, good morning. Thanks for taking
my questions. Just one question really and a point of clarification. There's a lot of talk in terms of e commerce businesses and offering a try before you buy proposition. I know that's something you've already been offering through payment by invoice. Could you give us an indication of what proportion of sales are paid for using that method, using the invoice method?
And whether you'd ever consider outsourcing that rather than using your own balance sheet to improve cash flow. And then the point of clarification, just on in terms of the capacity from the distribution centers, you mentioned CHF 10,000,000,000 in revenue. But I noticed in other areas of guidance, you've talked about GMV. So just wanted to clarify that that's definitely a revenue capacity. And if that's the case, could you give us the GMV capacity?
And then also when you talk about 5% market share target based on GMV, is that still assuming a 20% share from the partner program?
Sure. So on the first question with respect to Try Before You Buy, you're right that this is a mechanism that we have been using for a long time. In the DACH region, it is very popular also in some other markets. And DACH makes up more than half of our revenues that are paid through that mechanism. And we also have started to bring this mechanism to other markets and we see a very positive customer response.
Of course, it is an investment on the net working capital side, which given our cash balance and given our financial strength, we are happy to make as long as we see also here positive ROI from this payment method. With respect to capacity, well, when we talk about capacity of a warehouse, it obviously includes everything that is shipped from this warehouse. So we have expressed it as a revenue number. And it also then coincides, of course, with the GMV potential if you just put the VAT on top of it. And we will need some of this capacity also for additional GMV as we will fulfill more and more orders from the partner program also through fulfillment or Zalando fulfillment services.
But of course, any GMV that we that is not fulfilled from our logistics footprint could come on top because there the capacity is, in theory, almost unlimited. In terms of GMV share in the future sorry, in terms of Partner Program share in the future, I think we continue to see the Partner Program growing to a level of about 20%, maybe a bit more. There, we are really open. It could be 30%, also could be 15%, depends on also what the brands want and what the customers want. But our best guess is that the Partner Program will exceed that level over the coming years.
I hand now back to Mr. Kofler.
So thank you all for joining us today. If you have any follow-up questions, do not hesitate to contact us. We wish you all a good day and see you soon then. Thanks. Bye bye.