From unicorn to bust: Inside the fall of Seattle online retailer Zulily

03 Mar 2024, 06:00 by Lauren Rosenblatt · The Seattle Times

More than a decade ago, when online retailer Zulily was getting off the ground, it had the culture, chaos and capital of a high-flying startup.

Riding a wave of interest in online flash sales, the Seattle-based company would send daily emails to shoppers advertising short-term discounts on mom-centric goods, from slippers to toys to perfume. At Zulily’s offices in Pioneer Square, tutus were all over the place, coat closets became photo studios and employees raced after UPS trucks to get more products out the door.

A few years after its launch, Zulily would be known to startup watchers for its status as a “unicorn,” industry lingo reserved for the select few ventures that reach a $1 billion valuation, and its sky-high initial public offering.

But that rise was short-lived.

Zulily began to falter just months after it went public in 2013. Analysts walked back their praise for the startup, and in 2015 it was sold to Qurate Retail, the owner of shopping network QVC. By the end of last year, the company shut down, began preparing to sell its assets and entered into liquidation, an alternative to bankruptcy.

Former employees say they saw the end coming last May, when Qurate sold Zulily to private equity firm Regent.

In December, Regent shuttered Zulily and sued one of its largest e-commerce rivals, Amazon. Regent pinned the blame for Zulily’s downfall squarely on Amazon’s shoulders, but former employees and analysts say it’s likely not that simple.

Sucharita Kodali, an analyst from Forrester who followed Zulily’s early days, said the company “always had a challenged business model.” It began when “flash sale was the darling of the retail world,” but struggled to get inventory out the door fast enough to meet customers’ demands. A 2024 analysis from Coresight Research said the online store couldn’t effectively communicate its value proposition — making it hard to attract and retain customers in an increasingly crowded market.

Jeff Shulman, a business professor at the University of Washington, added that Zulily got caught in the same market shift that led many tech companies to trim costs in 2022, cutting off Zulily’s chance to figure out what business model would set it apart from e-commerce rivals.

The Seattle Times spoke with 10 former Zulily employees about the meteoric rise and swift fall of a company they all said they once loved. Employees asked to remain anonymous to protect current or future job prospects. All said they were saddened to see Zulily’s collapse — and said things could have gone differently under different leadership.

Zulily, Qurate and Regent did not respond to multiple requests for comment, nor did the two companies now handling the liquidation of Zulily’s assets.

The last year of Zulily’s life saw empty promises of a plan for profitability, mass layoffs and so many unpaid invoices that an internet service provider cut access to one of the company’s warehouses.

“We all knew it was destined to fail,” said one former manager. “We knew what the most likely scenario was — but we all did our best to make what we could of it.”

“A new wave of e-commerce”

When Darrell Cavens and Mark Vadon launched Zulily in 2009, it seemed the future of e-commerce would be ruled by flash sales.

Cavens and Vadon — who had worked together at online jewelry retailer Blue Nile — saw an opening in the digital market to focus on moms with young kids. Vadon invested $1 million into Zulily’s launch and the startup secured an additional $3.6 million from Maveron, the venture capital firm co-founded by former Starbucks CEO Howard Schultz.

Rather than operating as a big-box store that offered shoppers a little bit of everything, Zulily curated products for a specific clientele and sent daily emails highlighting flash sales. Internally, employees would work into the night to finalize details and wake up at 4 a.m. to ensure the email blasts were delivered without a hitch.

Loyal customers would start their day “with a cup of coffee and Zulily,” said one former employee who read customer feedback as part of their job. “The first five years … there was hyper growth. There wasn’t a bad day out there.”

Among other flash sale websites, Zulily had the highest share of visits in 2011, according to a study from Experian Hitwise, a research firm that analyzes consumer behavior.

By 2012, Zulily had 10 million members receiving its daily emails, and the startup was valued over $1 billion. A year later, it went public with a $2.6 billion valuation and nearly doubled its stock price on the first day of trading.

“A new wave of e-commerce is emerging,” Zulily wrote in its prospectus with the Securities and Exchange Commission.

Zulily was outgrowing its Pioneer Square offices, where workers had to share desks. The company passed around a trophy for developers who embodied the startup mantra “move fast, break things,” according to a former engineer who started right after Zulily’s IPO and stayed with the company through 2023. The tech team would participate in “hack weeks” once a quarter, where engineers came up with ideas that would leapfrog Zulily’s to-do list.

“It was insanity,” said one former buyer. “I loved every single second of it.”

From startup to serious

Although the company had three warehouses, it didn’t use them in the same way companies like Amazon do. Instead, it asked vendors to ship products to Zulily’s facilities only after a customer placed an order. Then, Zulily would ship it back out, meaning it could take weeks to reach a customer’s doorstep.

That wasn’t unusual at the time — there were several startups operating on the same model — but other e-commerce retailers, notably Amazon, kept warehouses stocked in anticipation of sales and boasted faster shipping times.

At the time, Cavens and Vadon were willing to bet customers would wait longer for items if they offered a rare find at a steep discount. On the company’s first earnings call in early 2014, Cavens said Zulily would invest in automation to move products faster but had no plans to change its storage philosophy.

The next quarter, Zulily executives had to admit they had been wrong. Slow shipping times had created a sizable backlog. “We learned we could have planned faster and better,” Chief Financial Officer Marc Stolzman told investors in May 2014.

A year later, analysts had all but written off Zulily as a failed experiment.

Brokerage and investment firm Stifel determined Zulily couldn’t make it in the big leagues and apologized to investors for its “horrific call” on Zulily’s stock. Financial news site The Street gave Zulily a D+ rating that placed its stock in the “sell” category, and analysts from RBC Capital wrote that the “lily is wilting.”

In August 2015, Liberty Interactive bought Zulily. Liberty, which would later change its name to Qurate Retail, is the parent company behind QVC and Home Shopping Network (now called HSN).

Executives from both companies billed the sale as a merger of like-minded businesses to “reimagine shopping,” but employees weren’t sold. QVC’s demographics skewed older and focused on cable TV at a time when streaming services were starting to gain popularity. Zulily focused on moms with young kids reached through daily emails and social media campaigns.

The sale to Liberty was a “point of change” for the high-flying startup that was struggling to keep its stock price up. When Liberty executives came to tour the office, the keg was taken out. Over the years, the Christmas cookie exchange was whittled down.

“In one sense, it professionalized Zulily. It made that leap from mid-startup to ‘we have to be serious now,’ ” the former engineer said. “But where we were headed, our direction of who we were supposed to be, totally got lost.”

Keeping up with expectations

Qurate owned Zulily for eight years before selling it to Regent in May 2023. In the year leading up to the sale, Zulily had struggled to retain customers, felt the pressure of inflation and supply chain constraints and had to reduce its spending on marketing efforts, Qurate reported. Zulily lost $43 million in the first quarter of 2023, according to one of the last public reports of the company’s financials before it shut down less than a year later.

“Zulily’s performance was disappointing,” Qurate CEO David Rawlinson told investors.

Announcing the sale in 2023, Rawlinson thanked Zulily for its commitment “amidst a challenging retail environment.”

Just a few months later, Regent-led Zulily asserted its own reason for the company’s downfall: Amazon.

In a lawsuit filed days before Zulily shut down, the company alleged it was a “victim” of its e-commerce neighbor and that Amazon used “punishing” tactics to prevent its rivals from gaining a foothold in the industry. Because Amazon prevented vendors from offering lower prices anywhere else on the internet, Zulily alleged, it couldn’t compete for customers or vendors because those merchants risked losing access to Amazon’s marketplace.

The allegations parallel those made by the Federal Trade Commission months earlier in a sweeping antitrust lawsuit that accused Amazon of using unfair business practices to create a monopoly around e-commerce customers and sellers. The same judge is presiding over both cases.

Amazon denied the allegations, arguing the business practices under scrutiny actually help lower prices for consumers, are common in the retail industry and spur competition and innovation.

“The retail industry is dynamic and strong with many retailers succeeding,” Amazon spokesperson Tim Doyle said. “We’re proud of the substantial investments we make” to help entrepreneurs build and establish their brands.”

Kodali, Forrester’s analyst, said it’s possible Amazon did have a hand in Zulily’s demise — but it is just one of “so many reasons that Zulily had problems.”

Zulily always struggled to get inventory out the door fast enough to keep up with customers’ demand — the same problem that plagued many of the flash sale startups at the time, Kodali said.

“They can paint it however they want,” she said. “The truth is they really didn’t have anything that differentiated them, other than the flash sale business. But then [that] became oversaturated and the expectations were way out of line.”

Coresight Research said in its analysis that the company originally “flourished” under Qurate’s ownership but relied too heavily on one demographic of shoppers. In the end, Zulily’s unreliable shipping speeds, confusing pricing and “failure to innovate” led to its slump, the researchers wrote. “Zulily’s collapse serves as a cautionary tale.”

“Decisions in a vacuum”

Looking back on those years, former employees pointed to a host of small issues that may have contributed to Zulily’s downfall — from spending millions to buy the naming rights to the Seattle Sounders to the increased cost of Facebook advertising to unsophisticated tech processes that allowed major code errors to slip through, some large enough to shut down the entire warehouse management system.

Most of all, the former employees said, in its final years Zulily struggled to define its customer and business model. It moved away from what set it apart and instead tried to “out-Amazon Amazon,” as one worker described it.

“That’s never what we wanted to be,” added another. “That’s never what we were.”

Rather than curating products for moms and kids, it began to operate like a big box store. Instead of “boutique” finds from mom-and-pop shops, it prioritized name brands. Later, it scrapped that plan and returned to the idea of “early stage moms” — confusing customers and vendors. In lieu of daily flash sale emails, it became a 24/7 website offering the same selection day after day.

At the same time, Zulily began to stock its warehouses in anticipation of orders, rather than waiting until an order was placed. That sped up delivery but meant Zulily was taking on more costs.

The former employees didn’t agree on when the change happened, or what the company’s customer and business model should be, but nine of the 10 workers who spoke with The Seattle Times said Zulily executives made wrong business decisions.

“They would make decisions in a vacuum,” said a former buyer who worked at Zulily from 2019 to 2022. “They were misguided, misdirected.”

Co-founder Cavens stayed on board after Qurate bought the company and stepped down in 2018. He was replaced by former Amazon executive Jeff Yurcisin, who was later replaced by former Nordstrom exec Terry Boyle in 2022. Cavens declined to comment for this article. The other two CEOs did not respond to requests for comment.

Yurcisin was upbeat and optimistic, employees said, but hid how dire the company’s circumstances were. Boyle was more transparent about finances but reclusive as a leader. He never moved from California to Zulily’s Washington headquarters, by then on Elliott Avenue in Belltown.

After taking the reins, Boyle touted a plan to return to profitability, dubbed “Project Oxygen.” He was light on details but assured workers Zulily would lose less money each year.

Optimism for that plan dried up when Qurate sold Zulily to Regent in May 2023. Boyle quit in October because, according to an earlier version of his LinkedIn profile, Regent was more focused on suing Amazon than Zulily’s “core business.”

Shortly after the sale, Zulily stopped paying its bills.

“A snap of the finger”

In August, one internet service provider cut off Zulily’s Nevada warehouse after the company racked up thousands of dollars in unpaid invoices, according to the former engineer, whose name was on those bills.

Around the same time, Zulily’s vendors began reporting missing or late payments, according to a former seller and five former employees. The former employee who used to collect customer feedback found themselves collecting vendor complaints.

At Regent-led meetings, employees discussed which bills to pay and which to ignore, the former employee said.

Zulily, which once had nearly 1,600 employees, cut its workforce slowly, with layoff rounds dating back at least to May 2022. It cut the business development team, a group of 25 people responsible for signing up new brands as sellers in November 2022, according to four employees who were laid off then. One member of that team found out when they received a notice that their company credit card had been closed.

Those layoffs were previously unreported because workers had to sign a nondisclosure agreement to receive severance, the four workers said. Later, employees wouldn’t be offered severance, according to another three employees.

To save money that fall, Zulily outsourced its storefront to e-commerce platform Shopify. The engineers working on the project knew that would lead to job cuts — but the layoffs were swifter and deeper than imagined, two former workers said.

“As soon as they possibly could let people go, they did,” said a former engineering manager who was laid off. “They didn’t give it a chance to succeed.”

In December, more than 800 employees, including nearly 300 in Seattle, learned through a formal notice filed with Washington’s Employment Security Department that their last day would be in February. When the notice arrived in their inboxes, workers initially thought it was a phishing email, according to the former engineer who was impacted by those cuts.

Days later, Zulily moved the end date up by nearly two months, four workers said.

It shut down Dec. 27 and entered into an alternative to bankruptcy enabling a third party to liquidate Zulily’s assets. In January, it announced a sale of $85 million worth of inventory.

Zulily’s end came roughly 13 years after it started, eight months after Regent took over, two weeks after it circulated notice of mass layoffs and days after it sued Amazon.

That left employees guessing “what this whole thing was,” said the former engineer.