The Rise Of Wayfair
Consumer spending in the U.S. has fallen off a cliff. Shelter in place orders have pressure travelers to cancel spring getaways and forced families to cut back on pricey purchases like new cars. As demand for clothing and appliances has nosedived, some retailers like J.C. Penney and Neiman Marcus have been forced into bankruptcy. But one segment of the market is thriving, shopping for furniture online. And that has been great news for Wayfair. Any commerce, you don’t find that many companies at scale doing these types of innovative, creative things that require merchandising, marketing, and operations, all backed by technology. And I think we’re pretty unique in that way, when you think about it was a scale player who stands out. Wayfair is a relatively young home decor and online furniture store. It’s like the Amazon of furniture and home accessories, connecting shoppers to over 18 million products. Since Covid-19 struck, shares at the company have skyrocketed.
I think Wayfair may be benefiting more from Covid-19 than almost any single other company except for like an Instacart. While the doors of Williams-Sonoma, IKEA, and Pottery Barn remain firmly shut because of stay at home orders, Wayfair is open for business and it’s a great time to bein the online furniture game. If you have your digital marketplace in order. With people spending more time at home than ever before, furnishing home offices and upgrading living rooms has become a top priority for shelter in place shoppers. In May 2020, Wayfair announced first-quarter sales grew almost 20% from a year ago. Shares surged toa 52 week high. But the company also has its share of problems and detractors.
A business model of nightstands, credenzas, beds, sofas, sending them free shipping, guaranteeing the fact that the customer is going to like the products and it’s going to come not damaged is a high-risk business. In 2019, Wayfair generated more than $9billion in annual sales, but the company also lost almost a billion dollars that year. Wayfair is burning through profits to speed up growth. In 2019, the company spent over a billion dollars on advertising alone. Investors have become increasingly skeptical of Wayfair’s path to profitability.
So as the country slowly reemerges from lockdown, the question is, will Wayfairfinally report a profit? And can the company thrive? After shelter in place, orders are lifted? The home goods market in the U.S. is a $296 billion industry, with only about 14% of products sold online. According to a March 2020 IBISWorld Industry Report, the biggest home goods stores in the U.S. were Bed, Bath and beyond, HomeGoods, Williams-Sonoma, Restoration Hardware, Crate and Barrel, and Pier One imports. The remaining stores, 39% of the market area mix of small to medium-sized companies. But while home goods is a growing industry, it has also faced major headwinds, not least of which are stay at home orders that forced retailers to shut their doors.
Pier One has been struggling for years. Sales growth has fallen every quarter since 2017. In February 2020, the company filed for bankruptcy and announced in May it was winding down the entire business, due in part to the coronavirus pandemic. Bed, Bath, and Beyond temporarily shut all of its retail banner stores across the U.S. and Canada in March 2020. For the quarter that ended February 29,2020, the company reported a net profit loss of more than $65 million. And said same-store sales growth was down 5.6%. Its stock has also been falling since the outbreak began. IKEA, the Swedish furniture maker, also closed its doors in March and said hourly workers would be furloughed.
The retailer’s online marketplace is running with longer than usual delivery times. IKEA is a private company and doesn’t report its financials. Williams-Sonoma, which operates PotteryBarn, West Elm and Rejuvenation, closed all of its U.S. stores on March 17th, though the company has since started to open back up as lockdowns ease. The stock dropped to a low of $26the day after it announced the closures. But Williams-Sonoma had a strong online business before all the COVID related store shutdowns. The company claims to be one of the biggest e-commerce retailers in the U.S., and says 56% of revenue in 2019 was derived from e-commerce.
That online business has helped Williams-Sonoma weather the storm, but Wayfair may have benefited the most. Well, the internet has really opened up the market for home furnishings sales. It’s lowered the barriers to entry ina lot of ways though it has also introduced some further complications. And Wayfair is just one of the entrants into the home furnishings market. According to 1010data, an analytics firm that tracks online sales, Wayfair and Amazon together make up63% of online furniture sales. Wayfair had the largest market share with 33.4%. Amazon followed with 29.7% and Walmart had a distant third of 4.7% of the online furniture market.
Pottery Barn, Costco, Overstock, Target, and a number of other stores each had less than 4%. If you think about the internet, the internet’s a brutally competitive environment. You know, whoever wins in a given segment tends to win very big. And whoever comes in third, fourth, or fifth, there tends not to be a lot of room. Wayfair stock fell to a low of $21 on March 19th after stay at home orders were announced, but skyrocketed to one $197 by May 12th. The furniture business is a competitive one, and Wayfair’s challenges come from every corner of the market. Traditional furniture stores like RaymourFlanigan’s, big-box retailers like IKEA, department stores like Macy’s, specialty retailers like Pottery Barn, and online retailers like Amazon.
Wayfair’s business model stands apart from the competition for a couple of different reasons. The company sells more than 18 million items. Way more variety than IKEA. It also offers a lot of convenience, think easy returns and free shipping on orders over $35. But the company had a late start to the furniture business, only launching operations in 2002. Management realized that if it was going to dominate the market, it would need to get its name on the map. Wayfair had its IPO at the NewYork Stock Exchange on October 2nd, 2014. At the time, only about 7% of U.S. home goods sales took place online. Investors saw an opportunity.
The stock open at $29 and surged later that day to close 30% higher. But the online retailer faces a number of hurdles. As of May 2020, the company has yet to turn a profit, and it’s spending an enormous amount of capital to build the brand. The problem for Wayfair as with many other e-commerce or startup players in general, is their profitability. It’s not there. They have never made money. If you look at the business of Wayfair, what is it? It’s a bunch of overhead. Much of it is to build a website and manage the sales. Some of it actually supply chain logistics. So that’s the biggest source of money that goes out.
And then the second one is advertising. So essentially, it’s a bunch of people trying to get sales. Some of them trying to help the process of getting deliveries. And a lot of advertising money, trying to pump in getting customers to purchase products as well as brand building. By 2019, Wafer had 20 million customers and sales of 9.1 billion dollars an almost 600% increase from 2014. But acquiring those new customers is costly. Wayfair has been spending more to bring in new customers than those shoppers have been spending on furniture. They’re losing about $10 for every customer that they acquire. So they spend about$69 to acquire them.
They make back about $59incremental profitability after they’ve been acquired. And so because they’re losing money, the fact that they’re growing can actually destroy value. In 2019, Wayfair bet big on advertising again, spending over a billion dollars, almost double the amount it spent in 2017. That spending helped raise the profit made on seven billion dollars worth of goods sold. If the amount that they’re spending to acquire customers is more than the amount of value that they’re getting after those customers been acquired, there’s no amount of growth that will ever allow them to become profitable. Wayfair declined to be interviewed for this story.
As of June 2020, Wayfair has a market cap of over $17 billion which dwarfs many of its biggest competitors. The company sells more than 18million products through its five retail sites. Wayfair.com, Joss & Main, AllModern, Birch Lane, and Perigold’s. But Wayfair doesn’t make all those sofas and tables. It acts as kind of a middleman. Although it has a significant logistics network. The majority of products ship directly from its network of over 12,000 suppliers. The fulfillment and delivery are different. These are big, bulky items. They get set up in peoples homes or they’re prone to damage. There’s all kinds of things that you need to handle them differently than perhaps if you’re, again, selling batteries and books and the like.
Shoppers buy furniture less frequently than things like t-shirts and toys. And unlike books, shipping furniture is expensive, and can easily be damaged. For a long time, there was a lot of pushback to the idea that you could even sell a couch online. How could you sell an item like that? That’s expensive. That’s heavy. That takes up space that a customer never had the chance to sit in. Wayfair tried to lower the barriers to some of those issues by offering free and fast shipping, by offering tools like augmented reality. So you could visualize that couch, for instance, in your space
There’s a reason there’s thousands of small furniture companies out there, retailers that still exist, because people like taking the time to go and look for that special item of furniture. They don’t want something that they know could be in every other household. According to Teixeira, who wrote a case study on Wayfair for the Harvard Business School, Wayfairco-founder Niraj Shah thought that shipping furniture was actually a huge opportunity precisely because it is such a difficult thing to do. Wayfair decided to say, you know, that will be our competitive moat.
That will be the reason why we can actually be a big player in this market, because we can create our supply chain or infrastructure operations to handle big, bulky items in which you have to have minimal amount of shipping and re-shipping because of the inherent difficulties in shipping furniture. The study claimed Amazon was somewhat hesitant to make a big push into the space. Everyone competes with Amazon-don’t get me wrong I’m not saying we don’t compete with them but there’s really, home is a pretty unique category that I think consumers think about differently than grocery or consumables and paper towels and their TV where they all want to buy the same items and then mainly replenish those items. In-home, you want unique items, its very visual in nature, there are no brands, the retailer needs to do all the merchandising and product discovery work.
And I think because of all of that and the fact that the logistics are different, you’re talking about big bulky items where damage is an issue. You’re talking about in-home deliveries, all of a sudden, we have an opportunity to build something pretty unique that’s really tailored to this particular category. At the end of fiscal year 2019, Wayfairreported a loss of almost a billion dollars, nearly double the amount lost in 2018. Investors were spooked and share tanked on March 19, 2020, the stock plummeted to $21. It’s basically that they’re spending so much money to acquire customers in the first place, relative to the amount of value that they were getting after those customers have been acquired, that they had a structural and profitability issue. Covid-19 may have changed all that.
On March 19, 2020, the company and the country experienced a seismic shift. California was among the first states to issue a stay at home orders following the coronavirus outbreak. Since most of the U.S. entered lockdown mode, almost all of Wayfair’s brick and mortar competitors have shut their doors and it’s online rival Amazon began prioritizing shipments of essential goods. Wayfair was essentially the only game in town for home furnishings. Covid-19 basically gave them two gifts. The first gift was it wiped away almost all of their competitors. So again, about 87% of furniture is sold through stores. All those stores are shut down. So that’s all, if anyone needed to buy a piece of furniture and they were going to buy from a store, now they have to buy from somebody like Wayfair.
One of their other major competitors is Amazon. But essentially Amazon’s been saying we are going to prioritize essential items. With shoppers flocking to the website to redo their bedrooms and to build home offices, sales surged 20%in the first quarter of 2020. By May 12th, 2020, the stock had risen to $197 per share. And suddenly we’re at home. We’re at home with our kids. We’re working from home. We’re doing all these things. And we’re cooking from home because we’re afraid of taking out or going to get meals. And we realized that-Americans realized that-our homes are not equipped for what we’re having to do. But as the lockdown eases, industry insiders are beginning to wonder whether the habit of buying furniture online will stick, or if consumers will return to brick and mortar retailers for future home makeovers.
The Rise Of Wayfair