With QVC's help, no more one-night stands for Zulily

When QVC's parent company announced last month that it would acquire online retailer Zulily for $2.4 billion, the obvious implication was that Zulily—which targets a younger shopper than QVC—could help the storied brand broaden its customer base.

But there's another, less-talked-about synergy that Zulily stands to gain from its predecessor: how to better attract repeat buyers.

After Zulily's second-quarter earnings call last month, management admitted that over the past two years it became too focused on quickly growing its customer base. As a result, it ended up recruiting consumers who had a lower-than-expected retention rate, and a lesser lifetime value.

Although QVC CEO Mike George said Zulily is already making strides in learning how to attract a more loyal customer, it's something his company, which generates 90 percent of its sales from repeat customers, can help accelerate.

"What I think we've learned over the years is, how do you earn that new customer who's going to stick with you, [and] who's not just there to buy the item on sale," George said.

Mike George, president and CEO of QVC Inc.
Ramin Talaie | Bloomberg | Getty Images
Mike George, president and CEO of QVC Inc.

One way QVC has done so is by targeting its advertising and marketing toward shoppers who aren't just looking for a quick deal on a particular purchase. Though George acknowledged that the most effective spending will always be paid search on a popular brand, QVC's approach is to instead focus on the platform and stories behind its brands.

"You know that you're making a bet that that spend will give you less attention initially … but over the course of that time period you'll start to earn that highly loyal, high-quality repeat customer," George said.

That strategy stands in marked contrast to transaction-based retailers, including Amazon, which thrive at filling impulse purchases, George said. But it's also what he said made Zulily so attractive. Despite catering to vastly different consumer groups—a recent report by RW Baird said that only 6 percent of Zulily's customers made a purchase on QVC last year—George said both companies strive toward a loyalty-driven model.

Last month, Zulily management spoke about a recent analysis it ran on shoppers visiting its site, who got there via one of two advertisements. One ad featured a well-known shoe brand; the other showed "uniquely styled but unbranded women's dresses."

The shoe ad generated twice the amount of customer activations on the first day; however, two and a half years later, the amount of spending attributable to those who clicked on the dress was significantly higher. The brand has since shifted its strategy accordingly.

"Traditionally, our marketing spend has been primarily on customer acquisition with only modest attention towards customers who had stopped purchasing from us," CEO Darrell Cavens said. "As we better understand the impact different types of ads have on lifetime value, we also see greater opportunities to tailor our messaging to customers post-acquisition."

Despite its missteps, Zulily still generates 88 percent of its sales from repeat buyers.

On QVC's end, George said he has yet to identify the synergies that will come from the Zulily acquisition, though he expects they will be more on the revenue than profit side. It has also not yet been decided exactly how the two brands will work together to leverage a combined customer base, and expose each brands' customers to the other platform.

One idea being tossed around is bringing QVC's deal of the day to Zulily's site. George said that exposing the products QVC sells could help it overcome its reputation as a dated shopping model. Another idea is treating Zulily's sellers like a "farm team"—a baseball term for a team that provides training for young players. Similar to farm players, small vendors that perform well on Zulily could potentially get "called up" to the big leagues of QVC TV, George said.

Although Zulily and QVC tend to cater to different demographics—Zulily shoppers tend to be young moms, whereas QVC's clientele typically fall into the 35- to 65-year range—there is some overlap at the lower end of that range, George said.

He added that QVC has become increasingly relevant to younger shoppers through partnerships with millennial-friendly brands including BaubleBar and C. Wonder, and upgrading its iPad app to simplify the buying process for people who want to watch QVC on TV, but order through a digital device.

Forrester analyst Sucharita Mulpuru cautioned that QVC will not be able to rely on the Zulily name alone to attract new customers, pointing to the fact that many customers are not aware that Banana Republic and Old Navy are run by the same company (Gap).

"Just because you own two different companies doesn't mean that the customer knows," she said.

Other challenges facing QVC in the modern world include cord cutters, an ability to obtain and hold onto premium channel placement and adjacencies, and keeping the attention of shoppers who are constantly consuming multiple forms of media at a time, Mulpuru said.

She added that while QVC shoppers likely aren't as obsessed with free shipping offers as the broader consumer base, the company does face a headwind in that it still charges shipping fees on many products, and returns cost between $6.95 and $10.95 for nondefective items, depending on their weight. That could deter new customers from shopping on the site, Mulpuru said.

Despite these hurdles, George said one advantage QVC holds is its experience as a direct-to-consumer retailer, at a time when most bricks-and-mortar retailers continue to struggle with digital. Not only does the company have experience engaging consumers with video, George said, "you can't underestimate" that it ships 170 million packages a year.

This logistics experience is another area in which Zulily stands to benefit from a QVC acquisition. In the third quarter of 2014, RW Baird analyst Colin Sebastian noted that the average order-to-ship time from Zulily fulfillment centers was a lengthy 11.6 days.

"Since Zulily does not pre-stock inventory, it typically has long order-to-ship times," he told investors.

Aside from the Zulily synergies, George said QVC is also focused on international growth. The company recently extended its reach into 109 million homes in China, making that the largest market in terms of reach. And last month, the company launched in France, its fourth European market.

George is also keeping his eye out for other "amazing" buyout opportunities—though he expects to spend most of his time realizing the synergies between QVC and Zulily.

"I certainly wouldn't rule out more acquisitions, but we have a lot to do get the full benefit out of the Zulily combination," he said.