Investor Dialogue: Wayfair

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I think a good place to start would be on online furniture, more broadly. One question that I’ve been exploring is, how competitive is the online furniture model, versus offline players?

Analyst 1: My view is, Wayfair’s ecommerce penetration level is low for the category. I think that Amazon is really the only material competitor for what they do. Large parcels are really hard. I also own RH, by the way, and I have studied the furniture for many years. Every time a box is touched, I think there is a 1% breakage fee, at every link of the chain. The more times you touch a box, after you unpack it the first time, from a container, you start breaking stuff and Gary Friedman talked about that a lot.

Online is hard; it’s hard to be a drop-shipper because the service levels are so low and the return and breakage rates are high. Also, the return rates increase as the breakage rates increase, so you need to control the middle mile and last mile logistics, which is difficult to do. I think the category has all kinds of potential, if you do it right and you have the right service level.

There aren’t that many guys that do that. I wouldn’t consider Macy’s omnichannel a very good comp for what Wayfair and Amazon are trying to do. Obviously, if you have brands like RH or Pottery Barn Westholme, it’s different. Here, we are talking about unbranded furniture goods, across the pricing and quality spectrum. There is just not that much direct competition in the hybrid marketplace model that Wayfair tries to do; not pure drop-ship and not pure owned and operated 100% infrastructure, including owning the supplier relationships.

Honestly, I think it’s pretty wide open. For me, in my work, this is a big, open TAM; there are many hundreds of billions in it. I don’t worry about TAM at $14 billion of revenue. I haven’t really spent any time on TAM because it’s so big and there is so much spend in the category. If they want to, they could continue tacking on more categories. I don’t think they need to. If you look at the wallet share that they currently have, it’s probably under 20% of the average customer, in the category. That’s with the customers they have today. They could increase wallet share with the existing customers and could also increase penetration of new customers, which they continue to do.

The thing that really matters to me, which is the real leverage point for the whole model, is the repeat rate. That 76% repeat rate just drives so much CLV down the line. The company and the management talks about the fact that you might buy a couch one year, but you might buy blenders and toasters other years and they can fulfil all of that. It doesn’t mean you are spending in each sub-category every year, but they can capture more wallet share for all customers, in all categories.

If you don’t worry about TAM, what do you worry about?

Analyst 1: I worry about execution. They were moving very quickly, a couple of years ago and I worry that they’ve slowed done on a lot of things that they’ve done. I worry that they will let others compete and get scale in these other countries, before they get there and that they care too much about margin, today. For me, once you’ve proved the unit economics model, you should just invest in growth, 100% and don’t let the margins expand too much. You should just reinvest that into every other country in Europe.

I’m in Barcelona, Spain right now; I just bought an apartment here. Furnishing it was a real pain in the butt; it would have been nice to have something like Wayfair here. It would have been nice to have things shipped here and have someone open the door and bring them in. Going to these local shops here is a real pain; there is a real pain point to solve.

They should go into France, Spain, Portugal, Belgium and Switzerland. They should hit all these countries right now. They already have the supplier relationships on the continent. They need to build the logistics infrastructure but I don’t understand the logic for why not. They have proven that the model works in these other countries. Yes, they are lagging in the US but, as a public company, I feel as if they are managing a little too much to Wall Street expectations and not wanting to kill the margins forever. I can understand and appreciate that but once you get an investor that agrees with the unit economics of the business, you should go.

It’s kind of like Carvana. We talked about Carvana and they have been happy to suppress current earnings for a long time. If there is a big open TAM, you should be going for it. To me, either maybe the model isn’t proven and they still have questions that need answering, and that’s a problem, or they are caring too much about the near-term margin.

Wayfair requires less capital than Carvana, even to scale. How do you look at the competition for online furniture players and even more specifically for Westwing?

Analyst 2: It is funny because when I speak to the CEO of Westwing, he is a relatively brusque German, and I always ask about competition and he tells me it’s the wrong question. We have a €120 billion TAM and we’re €500 million in revenue right now; competition doesn’t matter. It’s all about whether we can continue to delight our customers.

Obviously, there is going to be competition for online savvy customers among the various online players but Westwing is unique in that it is a much smaller curated selection, with far fewer SKUs than Wayfair. But it’s really aggressive with content; they own all their studios; they’re doing emails with incredibly high user engagement rates. They are really focusing on almost being a shoppable glossy magazine for these customers.