Wayfair (the “Company”) is a high growth, online-only home furnishings and home goods retailer that offers a selection of over 7 million products from more than 7,000 suppliers. The company operates under five distinct online brands: Wayfair.com, AllModern, Birch Lane, Dwell Studio and Joss & Main.
Wayfair is a great example of a company that has developed a compelling business model and then supported it with a strong operating model.
Wayfair’s business model is simple: create a one-stop shop for consumers by offering one of the widest selections in the industry, currently with more than 7 million SKUs available.
The core thesis behind Wayfair’s business model is that people shopping for furniture and home goods are searching for the right aesthetic – a specific “look” – rather than a particular brand. By providing a vast selection of products, Wayfair reduces the need for customers to shop around at various online and brick and mortar retailers searching for something that fits into their vision for their home.
According to equity research reports, the Company has been successful in its goal of offering a broader selection of products than its competitors:
This broad selection also allows Wayfair to compete for a far wider range of consumers than traditional home furnishings and home goods retailers.
The key to Wayfair’s operating model is its “asset-light” strategy. Under this strategy, the Company’s 7,000+ suppliers are fully integrated into the supply chain and over 90% of all customer orders are shipped directly from the suppliers. In other words, Wayfair carries little to no inventory.
Order Management System
Wayfair’s proprietary Order Management System (“OMS”) is what makes the Company’s asset-light strategy possible. OMS serves as a pipeline that guides orders placed through the company’s online storefront through the Wayfair supply chain process. The OMS is integrated into the existing systems of Wayfair’s 7,000+ suppliers and helps them manage customer orders. The OMS also feeds supplier inventory data back to Wayfair, allowing the Company to monitor and adjust supplier inventory levels to meet forecasted demand. With the help of the OMS, customer orders are typically shipped in 2-3 days after the order is placed.
One Day of Orders:
Customer / Market Analytics
Wayfair analyzes consumer browsing and shopping patterns to present customers with a personalized shopping experience on the Company’s websites. The Company also employs sophisticated, proprietary pricing algorithms aimed at matching real-time pricing shifts in the overall home furnishings ad home goods markets. These processes are aimed at increasing customer retention and lifetime value.
Wayfair’s business model relies on the Company being able to offer the broadest selection possible at competitive prices. Its current operating model supports this goal by nearly eliminating the need for Wayfair to carry inventory on its books. This allows Wayfair to grow its product selection more quickly and to a far larger scale than traditional competitors. Adding new suppliers to Wayfair’s websites has little to no cost to the Company. Conversely, traditional competitors are constrained by both their storage capacity and access to capital when they seek to expand their selection.
Wayfair CEO Niraj Shah highlighted this advantage in a recent interview with Jim Cramer:
In fact, Wayfair is so adept at managing its supply chain through this asset-light model that the Company actually has a negative cash conversion cycle! This means that Wayfair typically receives payment from customers before it pays its suppliers. This is extremely rare. A common challenge among high growth companies is the constant need for additional capital to fund growth. Because of this unusual cash conversion cycle, Wayfair is well-positioned to continue to grow its supplier and customer bases into the future with relatively few constraints.
This unburdened growth is especially important for Wayfair, as the Company’s business model benefits from powerful network effects. Wayfair’s large selection creates value for consumers; Wayfair’s large customer base creates value for suppliers. As the Company acquires more customers, its platform will become more attractive to suppliers. And as the Company adds more suppliers to its sites, its selection and value proposition to customers will also increase.
These aspects of the operating model allow Wayfair to increase the size of its customer base. By also focusing on customer analytics, Wayfair has positioned itself to extract more value from each customer as well.
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