Zappos CEO Tony Hsieh has kept his promise and revealed full details about the Zappos layoffs , first noticed on the online retailer’s official employee Twitter page Thursday.
In a new blog posting, Hsieh confirms he had to let 8 percent of his crew go and may be closing some of his outlet stores as well. The underlying reason, Hsieh explains, is a cutting back of expenses by its investor, Sequoia Capital.
Zappos is paying all the affected employees through the end of the year, and longer for veteran workers who had been on-board for three or more years. The company is also reimbursing the cost of COBRA — the short-term health insurance available for people between jobs — for six months for those affected as well. Hsieh says that move will actually increase his costs for 2008. Despite the unfortunate reality of the situation, we commend him for this honorable move. It’s a far more compassionate gesture than the phony, PR-driven moves some other CEOs have made ( Gannett layoffs , anyone?).
The full memo sent to employees follows.
To all Zappos employees:
Today has been a tough, emotional day for everyone at Zappos. We made the hard choice of laying off about 8% of our employees. The layoffs will affect almost every single department at Zappos. In addition, we are also looking at closing some of our brick and mortar outlet stores in Nevada and Kentucky.
This is one of the hardest decisions we’ve had to make over the past 9.5 years, but we believe that it is the right decision for the long term health of the company. The rest of this email will explain why…
We feel fortunate that we have Sequoia Capital as an investor who had the foresight to see the ramifications of the tough economic times that lie ahead for all of us. On October 7, Sequoia held a meeting for all of their portfolio companies (including Zappos), with one very clear message: Cut expenses as much as possible and get to profitability and cash flow positive as soon as possible.
Here is a link to an article that talks about the Sequoia meeting:
http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-valley-in-trouble/
Jason Calacanis also has a well-written email that talks about avoiding the “death spiral”, which I highly recommend reading:
http://calacanis.com/2008/10/28/good-news-for-people-who-hate-bad-news/
Fortunately for Zappos, we’re in a much better position than many other companies. Unlike many other companies, we are still growing and already profitable and cash flow positive.
And we are also fortunate that we have a revolving line of credit from Wells Fargo, US Bank, and Keybank. This line of credit has given us a lot of financial flexibility. However, given the current economic uncertainty, we believe it’s prudent to reduce our reliance on debt financing.
We’ve decided the right thing to do for the company is to be proactive instead of reactive. We are proactively cutting back some of our expenses today so that we can take care of our employees properly, instead of being reactive and waiting until we are forced to cut expenses.
Because we are still growing and are already profitable, we do not have to take as drastic of a step as most other companies of our size. Last year, we did $840 mm in gross merchandise sales, and this year we are forecasting to do about $1 billion in gross merchandise sales. However, when we first put together our 2008 plan at the end of 2007, we were expecting our gross merchandise sales to be even higher than $1 billion.
Because of all this, we are reducing our staff by 8%, but because we are being proactive instead of reactive about it, we are able to take care of our employees and offer them more than the standard 2 weeks severance (or no severance) that most other companies are giving.
We are offering to pay each laid-off employee through the end of the year (about 2 months), and offering an additional amount for employees that have been with us for 3 or more years.
In addition, because our regular health benefits cover 100% medical, dental, and vision for employees and 50% for spouses and dependents, we decided to offer to reimburse laid-off employees for up to 6 months of COBRA payments.
In doing all of this to take care of laid-off employees, we expect that it will actually increase, not decrease, our costs for 2008, but we feel this is the right thing to do for our employees. It will put us in the position of having a lot more financial flexibility in being able to respond to potential changes in the economy in 2009.
Ecommerce growth has slowed compared to its growth rate a year ago, but the good news is that even in this tough economic environment, ecommerce overall is still growing.
Within the footwear category, we are the online market leader. When times are tough, the strongest players in any market have an opportunity to gain even more market share, even if overall growth may be slower. Historically, we have actually grown faster than the overall ecommerce market, and we anticipate for that to continue in 2009.
For the rest of 2008 as well as for 2009, we anticipate continuing to grow year over year. Our current forecasts are that we will continue to be profitable and cash flow positive, as long as we are proactive instead of reactive in managing our business and financials.
I know that many tears were shed today, both by laid-off and non-laid-off employees alike. Given our family culture, our layoffs are much tougher emotionally than they would be at many other companies.
I’ve been asked by some employees whether it’s okay to twitter about what’s going on. Our Twitter policy remains the same as it’s always been: just be real, and use your best judgement.
These are tough times for everyone, and I’m sure there will be many follow up questions to this email. If you have any questions about your specific job or department, please talk to your department manager. For all other questions, comments, or thoughts, please feel free to email me.
Tony Hsieh, CEO
