Wayfair CastleGate Economics: Supplier's Perspective

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Could you explain the process of deciding what products to place in CastleGate? The pitch for CastleGate is that it's for your fastest moving items. By placing them in CastleGate, you get the speed badge, which increases conversion. You also get better prioritization and placement on the website. They want most of their volume to flow through CastleGate goods. Although this hasn't been the case in recent years, if you have 100,000 SKUs, maybe there are 2,000 that qualify or should go into CastleGate. Could you explain how you made these decisions at your company?

We designate items as CastleGate approved or not. The criteria for CastleGate approved items, first, I can't recall the exact sales rate it needs to hit, perhaps at least 20 a month. Then we exclude certain products that the president of each product line doesn't want to include. For instance, we call it the legacy brand, the brand that we don't want to white label or can't white label. We exclude those. We also exclude anything that's glass, anything that's two per carton, and anything that has a high damage rate. For example, there's a bar that sells really well on Wayfair, but it's made in India and needs our quality team at the warehouse to check every time because it has a bad smell. We used to send those to CastleGate, but we stopped because customers would return it right away. So, we exclude items that require more handling and work based on past experiences. If I remember correctly, our product line at that division is probably about 2,000 SKUs. I'd say we have about 300 SKUs as CastleGate approved.

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Maybe there are 200 at any given time, but 300 are approved. I understand. So about 15% of your assortment was CastleGate approved. They charge for it or pay less for your goods by getting you to participate in CastleGate with those SKUs, correct? So if they were going to pay you, say, $500 for an item, if you put it in CastleGate, maybe they'll pay you $450 for that item. I'm not sure if I'm getting the numbers right, but I think that's how it works. My understanding is that it's not a fee that they charge you directly. They just kind of pay you less for that. It comes out of the cost as opposed to being added to it.

We have one price that Wayfair sells. It's just one, no matter if it ships out of CastleGate or our warehouse drop ship. It's just one price because Wayfair cannot do two prices, if I remember correctly, because we tried to do that. So if we set this chest to be $500, it's $500 no matter if it ships out of CastleGate or drop ship.

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