Wayfair – Growing with little inventory

How Wayfair quietly became a $1 billion plus online retailer

Company Introduction and Business Model

Wayfair is an e-commerce retailer that sells a variety of mid-range furnishings and home décor products through a family of brands. It currently has 4 million active customers and offers 7 million products across different styles and price points. Recognizing the highly fragmented nature of the brick-and-mortar market for home goods as well as consumers’ dissatisfaction with the buying experience (e.g. the need to shop multiple stores spread across multiple locations in order to compare prices and styles or to mix and match furniture), Wayfair created a one-stop online shopping experience with a wide assortment of products for the mass market.

Alignment with Operating Model

At a quick glance, Wayfair may seem like a loser. It is currently operating at a loss and does not actually make anything. In fact, it barely owns anything (except for servers), and it doesn’t design anything.  However, Wayfair’s topline is growing at 44% and its share price has risen 60% since its IPO in October 2014. It has a 24% gross profit margin and its operating loss results from its decision to invest 22% of sales in marketing.  What Wayfair does is it acts as a curator for other products manufactured by mom and pop operations. Its competitive advantage derives from its drop shipping operating model which aligns very well with its business model of a frictionless shopping experience with more choices. Unlike traditional furniture stores such as Crate and Barrel that face challenges of high inventory carrying costs and showrooms / storage space in order to hold a vast selection of products, Wayfair has little inventory and overhead as its suppliers ship 90% of the company’s orders directly to a customer.  This model further supports Wayfair’s value proposition to host a large selection of products as it is able to pay its suppliers after it receives money from its customers. Not only do these unique capabilities give Wayfair a sustainable competitive advantage versus physical retailers but also compared to other e-commerce players such as Amazon, which owns its goods and ships them out of its own warehouses.

Wayfair’s operational platform requires that it maintain an extensive supplier network. Wayfair creates value for its suppliers by offering real time demand and inventory data, a technology and logistics platform to help sell their products, and its 4 million customer base (most of its suppliers are family run operations without easy retail access to customers).  It incentivizes suppliers to deliver on volume by providing them with rebates upon the shipment of goods. How does the site work?  Suppliers upload or email data about their current stock to Wayfair.  An algorithm then manages the 7,000 suppliers and fulfils customer orders, checking to see whether an item is available, where it is located, and how long shipping will take. Once an order is placed, the system notifies the supplier and decides on the shipping partner and packaging options.

Wayfair’s business model which stresses merchandising and a customer discovery experience also relies on its technology skills for its customer acquisition and retention strategy.  Tracking customers’ preferences allows for a personalized search and recommendation engine that helps users sort through the more than 5,000 brands.  Although this is not novel for e-commerce players, traditional competitors such as Target do not offer merchandising, and since the internet is a young distribution channel for home goods (compared to electronics, for example), most of Wayfair’s competitors are still brick-and-mortar.

Points of Improvement

One drawback of Wayfair’s fulfillment model is that furniture can take days or weeks for customers to receive.  For this reason, Wayfair has a few of its own warehouses to store certain items that customers demand arrive within a day or two. These items, however, make up a small fraction of Wayfair’s portfolio.  Aside from slow shipping, the other main challenge is that Wayfair does not currently control the shipping process; yet, when customers receive a broken lamp, Wayfair is the first to blame.  To address this, Wayfair is moving to dedicated delivery operations where the operator (whether Wayfair or a partner) is committed to Wayfair orders only and thus follows its service level rules.

Conclusion

Wayfair’s unique model has allowed it to grow into a billion dollar plus e-commerce business, not a small feat in a post-Amazon world.  While competitors may try to catch up, Wayfair’s first mover advantage positions it well to benefit from the consumer behavioral shift towards ordering furniture online.

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Sources

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2 thoughts on “Wayfair – Growing with little inventory

  1. Wicked post JRW! Interesting that a company that sells roughly $1Bill in home decor and furnishings has almost nothing to do with the product. A tech company at heart, Wayfair simply connects the manufacturer with the end seller and removes intermediate warehousing and selling expenses. I imagine that Quality Control must be an issue for them with such a wide range of suppliers and Wayfair ultimately holding responsibility for defective products. I wonder how they manage this dynamic with their suppliers. I know that Wayfair is a dotcom company, but I also wonder if they would benefit from having a few flagship brick and mortars in major shopping areas. With so much of their expenses consumed by advertisement and marketing, and the large barrier to purchase expensive furniture sight unseen, I could see it being beneficial to open up a store in NYC, San Francisco, LA etc.

  2. The entrepreneur in me could not help but wonder as I read this about what other fragmented industries could have their sales consolidated through a tech-only interface like Wayfair. I’ll be honest, I had no idea what Wayfair did (besides make irritating TV commercials) until I read this article.

    On one hand, it’s hard to deny they’re delivering some real value here. Many people hate shopping, and there is a great deal of friction involved in roving all over to brick-and-mortar places to look at furniture. On the other hand, I have a hard time believing that Wayfair is successful because it is doing something others CAN’T do but rather was simply the first company to get in this game. Barriers to entry in this space seem so low; I have to imagine that other players will emerge and compete with Wayfair on something (be it price, service, terms for suppliers, etc.). I suppose that maybe their merchandising efforts have essentially locked up the supply?

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