Our interest in the furniture industry is driven by three main factors: a high fragmentation of suppliers, selling mostly unbranded products, and a global market of over $800bn. In Europe, Ikea has ~11% market share, the next 9 retailers own ~6%, and ~83% is owned by small independent suppliers.

The large, fragmented unbranded supply base presents retailers with the chance to add value by curating the assortment and helping customers discover products. In this respect, given the infinite online shelf space, online retailers can arguably add even more value than offline retailers. While Wayfair is focused on building a brand for the global mass market, Made and Westwing are two European businesses focused on serving a niche, design-led customer.

We interviewed a Former Made.com Director, who launched the brand in Germany in competition with Westwing, to discuss how MADE curates an assortment. We've also shared thoughts on the potential limitations to growth for niche online furniture brands.

In 2010, MADE was founded with the mission to become the destination for design-led home and lifestyle products. The company is vertically integrated and has pioneered agile furniture design and production; nine new product collections are launched every week and the average concept-to-product process is 4-6 months compared to the 18-month industry standard. MADE is like an asset-light version of Inditex or a premium Boohoo for furniture.

MADE employs ~150 designers and exclusively licenses designs from third-party designers. Design is embedded in the company’s DNA and the bespoke assortment defines the company’s brand equity:

“It comes down to their DNA. Design and purchasing departments are traditionally separate in this sector. You have revered designers, similar to fashion, who make a design, then the purchasing department find the right producers to make it and look at the sell-throughs, and the following season design come up with new ideas. At made.com everyone intimately sat together. The head of purchasing was a brilliant lady, with decades of experience, and would be thinking about margins during the design process. She would get feedback from the manufacturing process to realize additional gross margin gains, without compromising on the design integrity. That agile design process is quite unique and difficult to replicate.” - Former Managing Director at made.com, DACH

Similar to online fast fashion companies like Boohoo or ASOS, MADE focuses on rapidly testing small batches of designs before committing to inventory. This leads to over 59% of products being sold in-transit, with a lower, single-digit average markdown per item relative to competitors, and all without much inventory risk. This bespoke, made-to-order model is important to free up capital to invest in marketing online.

The working capital profile helps explain the differences between MADE and a service like Wayfair.

MADE runs with ~80 days of inventory which is financed by ~200 days of payables. Even if we normalise working capital, MADE has ~100 days of cash to finance the business. All of this capital is pumped into marketing to further grow order volume.

Over the last 5 years, Wayfair has run with an average of 2 days of inventory and consistently ~50 days of negative working capital. It’s incredible that Wayfair has scaled to $15bn in sales without taking a dime of inventory risk.

If Wayfair is aiming to maximise availability, it seems MADE is engineered to minimise availability.

Rapidly testing small batches of products can work in fashion where Boohoo or Zara can manufacture garments in Europe within hours and ship to the customer directly within days. In furniture it seems more difficult as products are mainly sourced from the Far East and are more complicated to manufacture than garments. This can result in lead times for MADE that run in months not weeks.

Such long lead times highlights the potential limits to scale of such a bespoke online furniture model. To grow beyond such a design-focused audience, it’s likely that MADE needs to increase product availability or increase the selection of drop-shipped 3P products on the new MADE marketplace.

However, higher availability results in higher inventory risk. This will increase working capital and reduce the cash available to finance the marketing required to grow. There is also a risk that an increase of 3P marketplace products could dilute the brand which is MADE’s source of differentiation in the first place.

This also leads to another interesting aspect of the home category: most furniture goods are unbranded. This results in retailers using the same furniture designers and manufacturing suppliers:

“The key difference was always on the design spectrum. You have to deliver quality within a price level, although average price points even among more premium offline competitors seem to be quite similar, which has to do with global sourcing. Everyone has access to the same producers so it comes down to brand differentiation. Made were focused on being a design-led organization, which remains a key indicator in all marketing materials.” - Former Managing Director at made.com, DACH

In the long-run, how much is furniture design really an advantage?

It certainly means something, but arguably Wayfair has all the ingredients to curate a similar assortment under one of their house brands. Perigold could work with the same designers to create a similar product, sourced from similar manufacturers with similar raw materials. Selection and quality could be very similar at MADE and Perigold.

However, the service quality will be very different. Perigold will likely be in-stock whereas MADE would be on a long lead time. It seems to us that Wayfair’s CastleGate is solving the real hard problem in the industry: delivering large items efficiently.

In the long run, it may be difficult for bespoke brands like MADE to compete without improving the service quality. This requires higher inventory risk or a wider drop-ship selection which increases the fragility of the original model.

This gets to the question of what really drives the terminal value for niche, internet businesses like MADE?

Design and service quality are important, but owning the customer is even more important. A low repeat rate destroys a low frequency, transactional business like furniture.

This is where Westwing looks somewhat unique.

Westwing is a German-listed online furniture retailer with a repeat order rate of over 80%, higher than Wayfair at 75% and MADE at 48%. The one statistic that amazed us about Westwing is that 85% of sales are from customers who visit the company on average over 100 times per year. This leads to 94% of the traffic being from organic channels.

This highlights the power of Westwing’s content + commerce model. Westwing claims to be a ‘curated shoppable magazine’, which also offers products, rather than just an e-commerce destination. This reminds us of Adore Beauty, the Australian e-commerce retailer whose beauty podcast ranks top 10 in the UK despite the fact the company only operates in Australia and New Zealand. This is what we wrote about Adore a few months ago:

"The power of integrating content with commerce already shows up in Adore’s LTV economics; CAC is paid back within one year and the LTV / CAC is over 6x by Year 4. If BeautyIQ can continue to scale an audience at a similar relative pace as Call Me Daddy, Adore could prove to be one of the most unique vertical e-commerce businesses globally."

Westwing’s Daily Themes is a daily "inspirational" email showcasing a selection of discounted overstock products from third-party brands. It’s similar to a flash-sale but with richer editorial content. This format drives daily engagement and higher direct traffic than competitors leading Westwing to only spend ~8% of revenue on marketing compared to 20% for MADE.

Just like Adore Beauty, the combination of content and commerce results in best-in-class economics. In 2020, we estimate Westwing’s CAC was ~14 EUR for a new customer order at an AOV of 123 EUR. Even at a conservative 25% contribution margin, the payback is immediate.

The products offered in Daily Themes are mainly cross docked which reduces lead times and inventory risk relative to MADE. Just as MADE may realise the limitations to growth with a niche, bespoke model, Westwing realised the limitations of a flash-sale model and has launched a fixed, design-led private label range, 'Westwing Collection', which was nearly 40% of sales last quarter.

MADE and Westwing are evolving into more traditional retailers, taking slightly more inventory risk to offer more selection and better service to customers. This injects more complexity and risk into their models but expands the growth opportunity beyond the original niche markets.

Westwing certainly has superior unit economics. We wonder how much the Daily Themes format can grow from here and how much of an advantage it provides for the fixed collection in the long run. In the last 9 months, Weswting's marketing spend as a percentage of sales has increased to 9.4% from ~7%. We will be following Westwing's LTV / CAC closely as the company scales the private label offering and takes more inventory risk.

MADE could also see more challenging times as the company reduces lead times and expands the 3P selection but the brand is one of the strongest in Europe. Both companies are interesting, however we can’t help but notice Wayfair as a big elephant in the room focusing on the most important problem. There is also an even larger Swedish elephant in the room that we will be studying in H1. We will also starting coverage on RH so please do reach out if you have any specific angles of interest.