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Is Wayfair THE Way?

RR WayfairHey kids, let’s start a new retail business. First off, let’s go after Amazon, the most ginormous startup in retailing history and the 800-pound gorilla that pretty much eats every other gorilla in the online zoo.

Then, let’s go after the home furnishings business, notorious for glacially slow turns, ridiculous logistics issues and an infamous absence of big brand names that would make online searches and selling more viable.

Finally, let’s do it with a team of techy wonks who would feel more at home working on the Manhattan Project than trying to sell to customers in midtown Manhattan.

Oh yeah, this has can’t-miss written all of over it. Well, in an era when the unexpected is, in fact, expected—see presidential politics, business winners and losers and Michael Phelps—you don’t count anybody out because of preconceived notions.

And you don’t count out Wayfair.

Wayfair.com is the most talked about home furnishings retailer in the business, an online pure play that will tally in the neighborhood of $3 billion in sales this year, lose its shirt by conventional accounting measures and take years to scale up to a level of genuine respectability among those people in charge of such things. Wayfair.com is also the most serious challenger to Amazon in the home furnishings space, far more than Walmart or Target or any of the other usual suspects in the channel. It is also probably a generation ahead of anybody else in the business in its technological approach to the category, be it in its pricing, its presentation or its merchandising strategy.

And Wayfair—not Amazon, not Walmart (even with Jet.com), not Bed Bath & Beyond (even with OneKingsLane.com)— is the brand that is scaring the credenzas out of every conventional retailer of big ticket home furnishings products. Not bad for a 14-year old company that began selling TV stands.

It Started With Stands

The origins of Wayfair were awkward and clumsy, at least in terms of the new tech startup era. Entrepreneurs Niraj Shah and Steve Conine began selling media stands and storage furniture out of the latter’s Boston bedroom in 2002, the dark ages of the post-dot.com meltdown era. Originally called CSN Stores—a mash-up of the founders’ initials—their first website was racksandstands.com. (That URL still takes you to Wayfair a decade and a half later.) Gradually the partners began layering on additional product-specific websites, everything from strollers.com to cookware.com even to everyatomicclock.com. In all, there were a good 200 different sites.

CSN began to get noticed when it expanded into select English-speaking international markets—Canada and the UK. In 2011, Shah and Conine renamed the company Wayfair to focus attention on a single brand. While a few sub-brands—including Joss & Main, originally started on the flash site model, All Modern and the acquired DwellStudio remain—Wayfair is by far the main focus and main breadwinner in the family.

Along with the new name came the vulture capitalists eager to get some of the action. And action there was. Two years ago, after being valued at $2 billion, Wayfair went public and while its stock has fluctuated wildly since, it has a market cap of about $3.25 billion.

The Wayfair Way

How does Wayfair succeed, and do it better than anybody else in the space? As with any business formula, there’s a certain degree of magic, timing and luck. Wayfair has made several undeniably brilliant moves in its overall plan that help put it where it is today:

Reliance on technology and mathematics unusual in retailing, not just in home retailing. Vendors who work with Wayfair will tell you the place is populated with some of the smartest people they’ve ever met, not to mention some of the youngest. If you don’t have a cum laudes on your resume, you’re considered a slacker in Wayfairland. Note: you wouldn’t have several from one college degree.

Algorithm retailing. The late Howard Lester, who built Williams-Sonoma into a modern strategic powerhouse, told me how the company used algorithms to decide on its store locations. I had never heard a retail executive use the word before, much less did I understand it. As a dumb liberal arts major, I had to look up the word to see what it meant.

Wayfair certainly knows what algorithm means. Suppliers to the company say Wayfair has developed sophisticated pricing systems that will tell it how pricing changes—up or down—will affect both sales and profitability, down to the penny. As such, Wayfair is known within the trade —if not necessarily among consumers —as a place where you won’t always find the lowest prices. Wayfair will tell you it doesn’t matter. Algorithms matter. We don’t need no stinkin’ warehouses. At last count, Amazon had more than 100 warehouses—excuse me, fulfillment centers—in the United States alone. Wayfair has three. And that’s a big part of the company’s strategy.

It takes ownership of a relatively tiny percentage of the goods it sells so it never needs a place to store them. In fairness, Amazon and other retailers work this way, as well. It’s safe to say that Wayfair has one of the leanest ownership positions of any big online retailer.

It will handle the fulfillment of many of its orders through its own facilities and set up a program under the Castlegate name that places high-turn products near the front-loading docks for faster turnaround. But it doesn’t own the goods, which means it doesn’t have to tie up working capital in inventory.

Bigger Ticket, Smaller Delivery Charges

Not just items. It’s not just back in the server room and warehouse where Wayfair makes its mark. While its arch online enemy Amazon focuses on item merchandising—it will sell you a doorknob and be happy—Wayfair has worked hard to get its customers to buy entire ensembles, even entire room furnishings. This focus on bigger sales —especially involving furniture and decorative accessories — is the same strategy that large physical retailers like Rooms To Go and Ashley have used successfully. Before Wayfair, no one else had translated the tactic online the way Wayfair has.

AI, 3D, VR, All of the Above. At Wayfair’s last vendor summit earlier this year, its suppliers came back with their mouths stuck open after seeing demonstrations of the new technologies the retailer is working on to display products online. They said 3D images, incredible videos and room-imposition software would allow shoppers to see products like the Star Trek Enterprise Holodeck, without leaving their living rooms. Suppliers were awed and terrified as to what this meant for their business—not to mention the cost of doing that business with Wayfair.

RELATED:   Is Bigger Better?

Two magic words: Free Shipping. Ask anybody in online and they will tell you the biggest roadblock to customers hitting the final buy button is delivery charges. It’s the smoking gun in e-commerce. Not so with Wayfair, which offers free shipping on most of its products. We can’t quite figure out why a few do carry delivery charges, but the bulk do not. Consumers love it.

The competition, not so much. I ran into the head of a major regional furniture chain recently and he was shaking his head, wondering how Wayfair is able to ship a $399 sofa for free when the damn thing probably costs $50 to $100 to get from the warehouse to the living room. His conclusion: Wayfair is losing money on every one it sells. You’ve got to figure Wayfair knows what it’s doing.

Amazonian Bookkeeping

Which takes us to our next point of the Wayfair way. They lose money. Lots of it. Over the trailing four quarters, net losses were about $125 million on revenue of about $2.8 billion. Not catastrophic, but certainly not anything to write to your accountant about. Wayfair uses much of the same mumbo jumbo that Amazon uses when it describes its financial picture. As with Amazon, investors are willing to play along, hoping for the same payoff—Amazon’s stock has tripled over the past three years—at Wayfair. You can’t blame them, either.

On its most recent earnings calls with investors, company founders Shah and Conine piped up. Yup, the two still run the place, remarkable considering that many tech-ups started by two people end in ugly divorces. They said all the predictable things about the company’s short-term growth and long-term prospects. And the numbers are staggering even in dot.com terms: sales up 60 percent from the last quarter, international business up 170 percent (albeit on a relatively small base), 6.7 million customers representing a 45 percent increase year-over-year, 800 new hires in the past three months and a prediction that it will take between a third and 40 percent of all the annual online growth in the home space. That alone is an astonishing number.

How Wayfair fares will be fascinating to watch. Will it get sucked up, like Jet and One Kings Lane, by a traditional retailer that has to buy its way into e-commerce? Will it keep building, eventually flipping the profitability switch like Amazon, and become a more financially conventional business? Or will it implode, as have many tech companies before it, when investor patience wears out and the consumer novelty wears off?

Because we live in an era of unpredictability and the dreaded disease known as disruption, it is virtually impossible to say what will happen. The company, on its site, says it is building the “ultimate home goods shopping experience.” Given what they’ve accomplished so far and given what those both inside and outside the company say is likely to come, about the only thing you can’t say at this point is, no way.

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