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Can e-tailer Zappos demolish the brick-and-mortar model?

Making a play to attract fashionistas, the Amazon-owned online retailer tries its hand at social experiments in a bid to convince shoppers to abandon brick-and-mortar outlets for the Internet.

Donna Tam Staff Writer / News
Donna Tam covers Amazon and other fun stuff for CNET News. She is a San Francisco native who enjoys feasting, merrymaking, checking her Gmail and reading her Kindle.
Donna Tam
6 min read
Zappos Labs Director Will Young shows off the team's fashion "inspiration room." James Martin/CNET

In April, Will Young led a group of his fellow Zappos employees on a trip to the nearby Westfield Mall in downtown San Francisco for an afternoon of people watching.

It was more than a social outing. Young, the director of Zappos Labs, has been busy trying to figure out ways to lure more shoppers away from brick-and-mortar stores and into the realm of e-commerce. Though online retail has seen incredible growth in recent years, it accounts for only a small piece of the retail pie. Young wants to change that.

So, visiting the mall and other shopping destinations in the area has become a regular occurrence. Instead of relying solely on user interviews, Young's team goes to malls to observe the social aspects of shopping, in hopes of creating the same experience online. This includes noting how people shop and how they interact with things like kiosks and directory boards.

Zappos Labs Director Will Young. James Martin/CNET

Zappos may have a friend in the trend, given the sharp growth in e-commerce. Online retail is going to be a $200 billion-plus business this year, ComScore estimates in a recent study. In the first six months of 2013, consumers have already spent $100 billion online. Mobile shopping dollars are up 24 percent from last year, and desktop spending is up 16 percent.

Still, shoppers aren't yet flocking to online stores. Industry specialists estimate that about 90 percent of all shopping is still done at brick-and-mortar outlets. Zappos Labs was created to move that percentage more in its favor.

"How do we get people out of brick and mortar?" Young asked while chatting in his office just several blocks from the mall. "I think fit is one obstacle, but social is a part of it: How do we make online shopping feel more social?" That question drives his team's mission.

So far, they're still in the experimental phase, coming up with ideas on how to make shoppers feel like they're a part of a community even as they buy their products by way of an inanimate device.

Located hundreds of miles from the Zappos headquarters in Las Vegas, Zappos Labs is the company's research and development arm. But you won't find 1,500 employees there, or the center of CEO Tony Hsieh's tech wonderland.

Sandwiched between startups in a brick building in San Francisco's tech-centric South of Market district, the office of Young's 10-person team has its own scrappy, startup vibe.

The walls are covered with whiteboard scribblings and ideas scattered across sheets of tacked-up paper. Multicolored plastic balls are grouped together in the corners and along the windows of each room. These bounce-house balls, left over from Young's unrequited dream of having a ball pit in which to interview potential employees, give the office a sense of whimsy. (The pit didn't work out because Young underestimated the amount of balls needed to fill even a portion of one room).

The colorful plastic balls that grace the Zappos Labs office. James Martin/CNET

The office exudes a leanness -- seemingly just what Zappos, or any large brand, needs for innovation. The company, owned by e-commerce giant Amazon, found success selling shoes by delivering top-notch customer service and offering free shipping. But now it carries 150,000 products, and it's not just shoes anymore.

"People still tend to think about Zappos as shoes. Our business was built on shoes, but we're really trying to push apparel," Young said after showing off the Labs' inspiration room, the walls of which are covered with fashion-shoot photos of clothes, accessories, and, of course, shoes. The collage projects the image Zappos wants its customers to have: Zappos as a place to go for fashion not only convenience. Going beyond shoe sales has been a longtime goal for the company. It's tried to build up its fashion presence by participating in New York Fashion Week and striking an exclusive deal with Betsy Johnson for its clothing line.

It's a good move. In the second quarter of the year, "apparel and accessories" was among the top categories for e-commerce sales, according to ComScore. Better yet, it was the highest-grossing category for mobile sales, with more than $700 million in sales between April and the end of June.

In other words, fashion sells.

Zappos knows it. And it's a category that parent company Amazon doesn't do well.

"Amazon is pretty freaking good at running warehouses," Young said. "Zappos transitioned our warehouse to be fully run by Amazon. [But] things like fashion -- they're still figuring it out."

Amazon is good at customer views and bringing shoppers back, but it doesn't catch the eyes of fashion brands, according to Scott Tilghman, senior consumer analyst at investment firm B. Riley & Co. He said Zappos is "still small relative to the overall Amazon pie," but Zappos has the potential to make itself social and, therefore, fashionable, thanks to its loyal yet smaller set of customers.

"I think it is wise for Zappos to move further into the social experience, because we've continued to see that many fashion purchases are socially motivated -- just walk through any high school...I think any brand that has a loyal following has the positioning to make a social experience work," Tilghman wrote in an e-mail to CNET. The key, according to Tilghman, is personalizing the shopping experience without overloading customers.

Members of the Zappos Labs team at their office in San Francisco. James Martin/CNET

Zappos needs to build a fashion community online while appealing to its broad range of customers. It's a task that's easier for niche communities like the craft-centric Etsy or the vintage-focused ModCloth, but how does Zappos build a thriving community? And, how do you replace the act of rifling through sales racks with friends or asking sales people for recommendations?

Young and his team dream up online-shopping experiments in hopes of creating a social shopping community. In the last two experiments, Zappos Labs has launched a dozen products from a trove of 30 ideas and builds.

These range from simple social products, like a Zappos Tweet wall and a map of real-time Zappos purchases, to some that are more personalized. Zappos Weather suggests purchases based on local weather conditions, and PinPointing gives you shopping recommendations based on Pinterest pins. The PinPointing feature isn't always accurate -- sometimes it matches up things that aren't really related -- but Young said the team is still working out the kinks. He said it's been hard to keep users coming back to PinPoint.

"It doesn't convert to 'buy this,' but it's fun and discovery," Young said.

Glance, a weekly fashion roundup from Zappos. Screenshot by Donna Tam/CNET

The most recent experiment is Glance, a weekly online fashion magazine that showcases products available on Zappos. It's like a fashion look-book, grouping products by theme, like a recently released movie or a holiday weekend.

Obviously, there are failed experiments. The team has put a hold on some products that mimic key shopping experiences -- asking your friends what you should wear to an event, for example, or if you should buy a specific product. It was just easier for people to IM each other, so the labs team will have to figure out a way to improve that process and make it a part of the Zappos shopping experience.

None of these products is making Zappos any money yet. But Young said the initial results for Glance are encouraging. Users who are signed up for Glance are definitely making more purchases than before, but the number of users is really too low to give a clear indication of whether that would be the case on a larger scale, he said.

For now there's not much urgency to make sure these social products take off. Everything is an experiment, and Zappos has the luxury to figure it out. It's got loyal consumers and the immense resources of Amazon behind it, even if the retail powerhouse doesn't have a clue about fashion.