We recently discussed how Wayfair has committed to building a next-day fulfillment network for home goods. The more inventory that Wayfair warehouses in its CastleGate network, the higher the product availability, faster the delivery times, and higher the conversion rate. The company believes owning the full supply chain is one of the most important drivers of repeat buying, a metric that is fundamental to Wayfair’s unit economics.
However, Wayfair reported Q4 2021 results last week and the numbers tell a slightly different story: the absolute volume of inventory delivered through CastleGate declined in 2021. Also, as a percentage of sales, CastleGate accounted for 18% of large parcel volume in 2018 and only 19% in 2021.
We've been researching Wayfair's supply chain services to understand why the uptake of CastleGate has been relatively slow by suppliers and how this could change over time.
Last week, we interviewed two former Wayfair executives who were involved in building CastleGate forwarding, Wayfair’s digital freight forwarding service, and CastleGate fulfillment, Wayfair’s warehousing network, and hosted an investor dialogue to explore Wayfair’s strategic positioning.
Historically, the furniture industry has followed a drop-shipping model where the retailer owns no inventory and merely facilitates the sale between suppliers and end customers. Asian suppliers work with third-party freight forwarders to organise the ocean freight, drayage, and custom clearance in the origin and destination ports. This is the ‘first-mile’ of the supply chain.
Once the product reaches the supplier’s US warehouse, the product is listed in a retail channel for end-customers to purchase. Post-sale, LTL trucking firms operate the middle-mile of the supply chain by collecting the parcels from suppliers and delivering to a UPS or Fedex hub for the last mile journey. In some cases, there can be multiple LTL trucking legs to ship the product across the US.
It doesn’t take a rocket scientist to figure out what the motivation of these platforms are, whether it be Amazon, Wayfair or Shopify. The motivation is that you’ve got to keep the cost down. If it’s a type of a relationship where the seller brings it in, you sell it and you turn around and buy it, there’s a wholesale markup. If you can’t control any of the miles – but the first mile in my case – and if you can’t keep transportation costs down, especially in today’s environment, the wholesale cost goes up. That means your sale price goes up – or it doesn’t – and it all flows to the bottom line. - Former VP, CastleGate Logistics at Wayfair