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In Practise Investor Dialogues gathers a group of professional investors to explore the value drivers and risk factors of a specific business, moderated by In Practise. Attendees are selected on the basis of the depth of their knowledge of the security that is subject of the dialogue.

Should we start with CastleGate then? Do you have any questions, any probing questions you might have about the rationale of CastleGate or how you viewed CastleGate from your previous examination of the business?

Analyst 1: Yes, I can go ahead and share my thoughts on Temple & Webster's perspective, as well as the management team's view. They are essentially the Australian equivalent of Wayfair, and they have followed the Wayfair blueprint almost exactly for a number of years now, except for investing in CastleGate. This is the one adjustment they have chosen not to make. Their perspective is that CastleGate does not provide Wayfair with a sufficient competitive advantage to justify the cost of building it. I've questioned them intensively about this over several years, including the CEO and CFO of the company. Their belief is that their primary competitive advantage is the ownership of top-of-mind status as a marketplace. So, if you need to buy a new coffee table, Wayfair instantly comes to mind and you go there. Everyone is familiar with the marketplace dynamics and the reduced customer acquisition costs for repeat purchase behavior and things of that nature.

I generally agree with them on this, although I hold this idea very loosely and I'm interested to hear everyone's thoughts. There are many positive arguments that can be made for Wayfair to implement CastleGate, such as reducing the damage ratio, faster fulfillment times, and the potential for a decrease in fulfillment expense as a percentage of sales. They generally view these as marginal or potentially negligible, a very incremental increase in competitive advantage, if at all. The primary advantage, in their view, is the ownership of demand, not necessarily the supply. I'll leave it at that because I'm really interested to hear everyone's thoughts.

Analyst 2: Can I ask, I haven't looked deeply into the company at all, so I'm not familiar with this. Do they (Temple & Webster) handle last-mile delivery, or is it all drop shipping, third-party drop ship?

Analyst 1: 75% is drop-shipped and 25% is in-house that they (Temple & Webster) own outright. This is primarily the top-selling items because they have access to the data. They know which items are going to sell the most, so they own those outright because they can collect a higher margin on that.

Analyst 2: Do you know their mix of small and large parcels?

Analyst 1: No, unfortunately, they (Temple & Webster) don't provide that data.

Analyst 3: The top-selling SKUs, I believe you mentioned 25%. If they (Temple & Webster) don't have their own logistics assets, how do they manage? You mentioned that they fulfill those orders themselves. How does that work?

Analyst 1: Yes, they do own their own logistics for the items that they own. However, that amount, which makes up 25% of sales, accounts for less than 1% of the SKUs listed on the site.

Analyst 3: Do they own warehouses? How does it differ from CastleGate?

Analyst 1: Well, they own their own warehouse as a retailer, which accounts for 25% of sales. However, as a percentage of the actual items listed on the site, it's less than 1%. Does that make sense?

Analyst 2: So it's somewhat relevant, right? Because there's a massive deviation from the 80-20 rule. It's much more skewed than that. Less than one percent of SKUs doesn't mean anything if you have 100 million SKUs? I don't know how many SKUs they have, but that's not the point.

Analyst 3: I just don't understand the difference between what you're describing with Temple & Webster and CastleGate.

Analyst 2: They don't do it for third parties.

Analyst 1: They're not a third party, right.  Apart from the 1% of the items that are not their own, they're listed on the website; that's all drop shipped.

Analyst 3: Do they own the inventory? They purchase the inventory from suppliers.

Analyst 1: Yes, that's correct.

Analyst 2: That's also quite different from Wayfair.

Analyst 1: Yes, it's fairly different. Right.

Analyst 2: That means they're competing against their third-party suppliers.

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