CEO Letter

The following email was sent to our employees today:

Date: Wed, 06 June 2012
From: Tony Hsieh (CEO -
To: All Zappos Employees
Subject: Kentucky Update

Important announcement from Tony on behalf of FACT (Fred, Arun, Chris, Tony):

Please set aside 20 minutes to carefully read this entire email.

Today is another big day in Zappos history.

We've made a strategic decision for Zappos that will surprise many people. In thinking through all the possible scenarios for how to best grow the Zappos brand and business over the next 10 years, we've come to the conclusion that in the long term, it makes more business sense for Amazon to oversee our Kentucky operations so that Zappos can focus on all the other things that differentiate our brand and culture in our Las Vegas headquarters and SF office. The goal is to transition all of our Kentucky operations (except for our 6pm outlet store) to Amazon by September 2012.

It's been over 13 years since Zappos was founded in San Francisco, and there have certainly been a lot of changes and surprises during that time, including:

2003 - Zappos walking away from the drop ship business during the early days

2004 - Zappos moving our headquarters to Las Vegas

2009 - Zappos being acquired by Amazon

2010 - Zappos announcing our future headquarters will be Las Vegas City Hall in downtown

With our plan to move our headquarters in 2013 to the former city hall to help revitalize downtown Las Vegas (which will ultimately help us attract and retain more employees) and our 2011 integration with WMS (Amazon's warehouse management system), we took a long, hard look at where we should concentrate our efforts and resources over the next 10 years.

Back in July 2009, when we announced the Amazon acquisition, I wrote about the reasoning behind the acquisition:

"We think that now is the right time to join forces with Amazon because there is a huge opportunity to leverage each other's strengths and move even faster towards our long term vision. For Zappos, our vision remains the same: delivering happiness to customers, employees, and vendors. We just want to get there faster."

As many of you know, we already are operating two physical warehouse buildings and will soon be out of room in those buildings due to our growth. As we started looking into the possibility of opening up a third warehouse building in Kentucky to hold our inventory, we realized that Amazon was already running 69 warehouses around the world. I've been *reminded* by our lawyers that I'm not allowed to make forward-looking statements because Amazon is a publicly traded company, so let me phrase things this way: In the next 10 years, if Amazon continues its rapid growth rate, they will be running over 69 gazillion warehouses across the entire universe (which, by my estimates, will collectively require over 1.21 gigawatts of energy to properly operate).

The more we thought about it, the more we realized that it probably was not the best use of our time to reinvent the wheel and learn how to run a network of warehouses just for Zappos (which is a lot more challenging than just running one or two warehouse buildings, just like running Starbucks is very different from running just one or two coffeehouses that are across the street from each other).

Although we will be sad about no longer being able to refer to our KY friends as "part of the Zappos family" from a legal perspective, they will still be a part of our extended family through Amazon. (And, for those of you wondering, the total compensation package will actually increase an average of 5% for each KY employee under Amazon's compensation structure, which will include receiving AMZN stock.)

Craig Adkins, who has been overseeing our KY operations, will be transitioning to a new role at Zappos to help with our efforts to revitalize downtown Las Vegas, and Al Ondreka will be overseeing the Kentucky operations.

There will be some other exciting changes: We will be opening up a photo studio in Las Vegas for all apparel as well as for all of our product videos, because we think it makes more sense to have these activities located more closely to our merchandising and technology teams. And we will continue to grow our merchandising and buying teams for certain brands that are sold on both Amazon and Zappos web sites (but are managed solely by the Zappos teams instead of by Amazon). This is all part of our strategic plan for Zappos to help transform downtown Vegas into a hub for entrepreneurs and what urbanist Richard Florida refers to as "the creative class".

Over the next few months, there will be a number of employee town hall meetings in KY to help answer any questions and to address any concerns. The truth is that a lot of the details are still being worked out, but we'll do our best to answer questions as quickly and as accurately as possible.

I've included a Q&A section below for what we thought might be some of the most frequently asked questions. If there are any questions that aren't addressed that you'd like answered, please email me and we'll make sure someone gets back to you (either individually, in a follow-up Q&A email, or at a town hall meeting) once we've had time to do some research if we don't have the answer readily available.

I still remember when I first drove across the country with Keith in his beat-up white pickup truck almost a decade ago, and I lived out of a hotel room for 5 months to help set up our first warehouse in KY. At the time, our super secret special method of putting multi-orders together was to make big squares on the warehouse floor out of masking tape, and that's where we would consolidate and stack all the shoe boxes for multi-orders. It made it look like Keith and I were playing a game of either extreme hopscotch or super-sized bingo.

Our warehouse operations have come a long way since then thanks to Craig, our amazing team in KY, and the many other folks that were part of our journey from hopscotch to today. Today, I feel what it must be like for parents to send their kids to college: bittersweet, proud of how much has already been accomplished, and hopeful about how much further they can spread their wings. It's never easy letting go, but now is the time to move on to the next stage of growth.

-Tony Hsieh



Q: Will every KY employee still have a job, regardless of department?

All employees based in Kentucky will have the opportunity to retain their jobs through the transition. There are no lay offs or terminations associated with this transition. We know that some jobs will change in terms of the details of their specific functions, and we will work with Amazon to communicate those changes directly to the small percentage of employees affected.

Employees that are shooting apparel or video in KY will be given the opportunity to move to Las Vegas as part of the transition. If they choose not to move to Vegas, there are other photo-related jobs in the two buildings as well as other Amazon locations in the greater Louisville area. Photography for non-apparel categories such as footwear and bags will not be transitioned to Vegas. Instead, those teams will merge with Amazon's photography teams in KY.

As mentioned earlier, the 6pm outlet store will remain open and will not be transitioned to Amazon.

Q: Will the compensation for KY employees change?

Amazon has a different compensation structure from Zappos, which includes ownership of AMZN stock. Base pay will not be reduced for any KY employees, and when taking the total compensation into account (including base pay, bonuses, benefits, and stock grants), the average KY employee's compensation will actually improve by more than 5%!

Q: Will the benefits for KY employees change?

Yes, but as mentioned earlier, the total compensation package (including pay, bonuses, stock ownership, and benefits) will actually improve on average by more than 5%.

Amazon offers 4 different medical plans so that employees can select the best health care program that fits their needs. There are different pros and cons for each program. For example, some of these programs require higher employee contributions, while another one of Amazon's programs has no deductibles. In another one of Amazon's programs, Amazon is planning to temporarily waive deductibles for at least the first 6 months. The ultimate choice as to which of the 4 different medical plans to join will be up to each KY employee, and these will be covered in more detail in the coming months.

As far as the free food and drinks program that Zappos started, the plan is to continue to offer those even after the Amazon transition. The plan is to also continue the fun cultural events that are unique to the two warehouse buildings in KY, including the family picnic and holiday party.

Q: Will the culture in the warehouse buildings change?

Each building within the vast Amazon network of warehouse buildings actually has its own unique culture that is different from other buildings in the Amazon network. Each culture includes the Amazon core values and leadership principles, but will also include whatever twist the employees of that warehouse decide to incorporate. My hope is that the two special warehouse buildings in KY that are transitioning don't lose the Zappos team and family spirit, but whether that ends up happening is really up to the employees that work in those buildings.

Company culture can't be forced from the top down. It needs to be organic and driven from the front line employees.

Q: How will I find out what my new pay, bonus program, stock grant, and benefits in KY will be?

Since every individual case is different, each KY employee will receive a personalized compensation statement so you can understand what this means to you specifically. Again, no KY employees will have their base pay reduced, and everyone in KY will be eligible for annual AMZN stock grants. On average, the total impact of all of the changes will be an increase of total compensation of more than 5%.

Q: Will Las Vegas and SF Zappos employees become eligible for annual AMZN stock grants as well?

Even though Zappos will continue to be run independently of Amazon, we've had a number of Zappos employees in Vegas and SF ask about being able to receive AMZN stock. This is something that we are considering and we hope to have a final decision within the next few months. If you are a Vegas or SF employee and have any thoughts or opinions on this, please let me know so we can take everyone's feedback into account.

Q: Does this mean Amazon will be taking over the Las Vegas and SF operations of Zappos in the future?

There are no plans for this to happen. If anything, this is being driven by the fact that Amazon is extremely excited about our efforts to revitalize downtown Vegas and set the stage to ultimately bring more technology and innovation to the Vegas community which will only help Zappos in the long run.

I've included below the writeup I presented at our December 2011 Management Committee meeting (the equivalent of a board meeting for Zappos). The Management Committee was intrigued and excited because creating a hybrid between corporation, community, and city had never been attempted before in human history. The KY transition is meant to pave the way for us to focus even more resources on figuring out what it means to do well in business while doing good for society.


Research from "Good to Great" and "Tribal Leadership" has shown that there are two important ingredients that separate the great companies in terms of long-term financial performance from just the good ones: (1) a strong company culture and (2) a higher purpose beyond profits, being #1 in a market, or beating the competition. The research has shown that engaged and inspired employees are more productive employees, and one of the best ways to engage employees and strengthen the company culture are through values alignment (between the company's values and the employees' personal values) and a higher purpose vision.

Our business strategy since 2005 has been to invest in company culture, with the belief that the culture will ultimately drive employee productivity, customer service quality, and brand strength.

Over the past year, with our impending campus move to the old city hall building in downtown Las Vegas, we believe there is an opportunity for our culture to make a quantum leap and set the foundation to scale our culture for the long term.

Research has shown that on average, when the population of a city doubles, productivity per resident increases by 15%. However, as companies grow in size, productivity per employee generally decreases, as does the strength of the company culture. The laws of physics prevent animals from scaling beyond a certain size, yet most companies are organized in ways that are analogous to an individual organism. We believe that company of the future should be organized more like a city, and less like an organism. We believe that the best way to scale our culture and lay the best foundation for the future is to invest in our network, our community, and our ecosystem. The 15% increase in productivity in cities is an accidental historical average. We believe by being thoughtful and purposeful in our interactions and contributions to the community, we can achieve significantly more than that, with many of the benefits ultimately being captured by Zappos.

With our move to downtown Vegas, our goal is to increase the number of serendipitous interactions amongst employees both inside and outside the office, not only with each other, but with other members of the community. There are analogies in the co-working and open source worlds that have shown that accelerating serendipity and collisions results in accelerated learning both on an individual and an organizational level. We've also found that the move to downtown Vegas has reinvigorated much of our employee base due to the higher purpose vision of helping to revitalize downtown. In fact, we've added a 4th C to our original 3 C's in terms of how we think of the Zappos brand: Clothing, Customer Service, Culture, and now Community.

In the past 2 months, we have been successful in recruiting several technology startups from other states to downtown Las Vegas, and we believe we have the right community DNA to create what we anticipate will become a vibrant technology startup scene downtown. We believe that improving the ecosystem on the technology, small business, education, and community fronts will ultimately benefit our employees and our culture by significantly increasing our ability to attract, retain, and cultivate talent near our headquarters. We believe this is the most important area of focus due to its long-term implications if done correctly (or incorrectly).

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