Wayfair: German Market Challenges

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It's nice to meet you. I'll give you a quick background about myself and my interests. I manage an investment partnership and have been following Wayfair for quite some time. I'm aware that they've performed worse in Germany compared to their other markets, and I believe their performance has been worse than their expectations. The question I'm trying to answer now is about their long-term prospects in Germany. I have some Germany-specific questions and some broader Wayfair-related questions. A good place to start would be if you could tell me about your background, your time at Wayfair, and your role there.

The importance of these cost targets lies in the pricing model used at Wayfair, which was a cost-plus model. The price to the consumer was divided into three components. First of all, that's just a cost. So how much we buy it for, how much we give the supplier. The second one is what we would call shipping cost, which would basically cover shipping, returns, broken stuff, all of that; pure logistics cost. Then our margin, which was a percentage.

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Since you mentioned pricing, let's discuss that now. I understand the three components of the pricing model you described. The product cost is where Wayfair and the supplier may not align, as Wayfair wants to keep this cost low while the supplier would prefer it to be high. The second component, the all-in logistics costs, including damages and returns, is where everyone has an incentive to keep costs as low as possible. Wayfair often mentions how, through CastleGate and their supplier services, they can reduce these costs more effectively than their competitors. This allows them to offer lower retail prices and help suppliers reduce damages and returns, while maintaining their margin. Do you agree with Wayfair's statement?

This leads us back to our initial question which is, are you going to get the demand that's needed in order to have that supply as efficient as you want it? And here my short answer: I am not extremely optimistic about the European market.

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They believe that customers in the UK, Germany, and eventually Austria, Ireland, Italy, and other countries will shop in the same manner as North American customers. Do you agree with this assumption? Or are there significant differences, whether competitive, cultural, or otherwise, that suggest it might not be as lucrative an opportunity?

Firstly, I believe the willingness to purchase furniture online in Germany is lower than in the US. We found it challenging to encourage people to make purchases. When they did buy, most of the spending was on smaller items, such as lamps. These are items where the difference between buying online and offline isn't significant. Unlike a bed or sofa, if you purchase a sofa and it's uncomfortable, you're stuck with an 800 to 1,000 euro piece you don't like. I believe this propensity is much lower in the US.

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