Wayfair’s Burgeoning Home Goods Ecosystem

21. August 2018.








Wayfair has always been a big idea, according to its founders, Steven Conine and Niraj Shah, but it hasn’t always been a big company. In fact, in its founding days back in 2002, Wayfair fit comfortably in the spare bedroom of Conine’s Boston-area home.

Humble beginnings, to be sure — but humble beginnings that its technologist founders were set to overcome from day one.

“We knew we wanted to build a nationally-known mass retailer,” Shah told The Boston Globe, noting that over the next ten years, Wayfair grew from a bootstrapped spare-bedroom operation to a business boasting up to a half a billion in annual sales.

And that growth has carried on since then.

As of today, Wayfair brings in $6.6 billion in annual revenue, has a stock market valuation of $10 billion and an employee headcount that is expected to surpass 10,000 by the end of 2018. About 2,000 of those workers were added in the last year alone — and Wayfair isn’t done expanding just yet. As of now, the firm is looking to branch out from its Copley Place headquarters in downtown Boston and into a neighboring building that reportedly has enough space to accommodate it.

At first, Wayfair seemed like an odd fit for a digital business — something its founders were told often in the early days. Unlike clothes, food and books, furniture was not considered an ideal good for digital distribution — it’s large, heavy and expensive to ship. It’s also expensive to buy, and as a major purchase that one tends to have to live with for a while, it is also historically the type of good a consumer wants to have hands-on experience with before deciding to make it a permanent feature of their household.

Layered on top of that, Wayfair is, and was, unusual among the entrants in the digital furnishings vertical, in that it claimed absolutely no pedigree in design. Both of its founders are technologists and self-described “data geeks.” Though Shah does consider himself a bit of a design buff, according to The Globe. Wayfair’s value proposition wasn’t built around designer curated offerings to consumers. It was built on data.

Driven By Data

Wayfair, until very recently, hasn’t focused on hiring people from the design and furnishings world. Most of Wayfair’s recruiting, according to reports, come from the ranks of MBAs and PhD candidates in data science — it’s a firm by and for “data geeks” who are working with some slightly unusual set of data about how many sectional sofas and matching curtain sets consumers are purchasing, as well as where they are purchasing them and in what volume.

On the backend, that data is mostly for the construction of Wayfair’s complex logistics network that allows it to offer delivery that is fast, often free, and that always comes with an option of additional white glove services that will see the item not only delivered, but set up appropriately for the buyer.

“For us, it’s a primary focus,” Niraj Shah said in an interview. “With logistics, fast delivery, accurate dates, high quality and minimizing damage, we’re taking care of the customer, and that’s something we continue to do better and better as the years go by.”

On the front end, it meant feeding their proprietary learning algorithms over a decade and a half’s worth of purchasing data, such that they’ve gotten very good at predicting customers’ intentions from their browsing habits.

Steven Conine uses the example of the consumer shopping for an expensive leather sectional — depending on what else they were looking at, Wayfair’s algorithm might determine they are contemplating a larger renovation project. That affects what the customer sees while they browse — and becomes valuable data for Wayfair, which can now flag this potentially valuable customer and target them with a higher volume of more specific ads.

“When you walk around the halls of Wayfair, to me it feels like you’re walking around the halls of McKinsey or Boston Consulting — the aptitude of the people around you is at that level,” said Neeraj Agrawal, a college friend of Shah and Conine, whose firm Battery Ventures invested $40 million in Wayfair in 2011. “They hired almost nobody from the furniture world; they look for raw aptitude. It always goes back to: ‘What is the data telling us?’”

And, judging by Wayfair’s actions over the last 18-24 months, it seems pretty clear that what the data is telling them is that it’s time to think about how to turn their popular online furniture store into a profitable home furnishings ecosystem.

Doubling Down On Tech

Two years ago, when conversations about the uses for augmented and virtual reality technology were mostly limited to the gaming industry, Wayfair was among the first out of the gate to apply the technology to retail. Because for Wayfair, AR offered a solution to one of its longest running business problems — getting people comfortable enough to purchase furniture online sight unseen — by making it easy for customers to literally visualize the object in their home.

That roll-out was extremely limited in its first iteration, but Wayfair has been consistently leveling up the function for the last few years such that these days, it is relative easy for any user of the app to upload a photo of a room in their house such that they can see how a particular object will fit into the space.

When Facebook launched 3D images, Wayfair was first on the bandwagon — quick to jump on, sharing a 3D image of a virtual living room it had created to show off its AR/VR tech.

As part of that AR/VR upgrade, Wayfair has also enhanced its visual search capacities such that a customer can upload photos of any piece of furniture they fancy in real life and the site or app will pull up similarly designed items for the customer to consider.

And if none of that is enough to help the customer feel comfortable enough to buy online — if they still need that hands-on experience?

Well, Wayfair looks like it is expanding to offer that as well.

Wayfair Wades Into The Real World

While Wayfair has, for years, been adamant that it had no intention of selling from physical stores, it seems its resolve has crumbled somewhat on that point. The chain has announced its intention to open its first store later this fall.

The news did not come as a shock — one, because opening a physical store has become the move that most large eTailers eventually make, and two, because Niraj Shah publicly hinted last year that for the first time that Wayfair might consider a physical store, even if its primary purpose was to drive people to the online channel.

Wayfair will reportedly be testing the waters in a Cincinnati suburb, and as of now, its stated purpose is to sell off excess inventory, including returns. The store will be 20,000 square feet and will be piggybacked onto a new distribution center Wayfair is opening.

Most analysts believe that Wayfair’s move into physical retail — limited though it is right now — is a concession to customer acquisition costs and the fact that it is, in fact, cheaper to get a customer to walk into a store and make a purchase than it is to get them to log in via web or mobile and complete the same buy. There is something to be said for being there.

How there Wayfair wants to be, however, remains an open question, as its website is still touting the no-store strategy.

“Wayfair does not have any physical stores. … No more searching ‘Wayfair store near me’ or planning an all-day family trip to a furniture store to shop,” is all text that still appears on the site.

How long it will remain? Depends on how well that first shop in Cincinnati does.

But whether or not the stores concept takes off, Wayfair is clearly looking to develop a more personal relationship with its customers.

And to do it, is has even finally found a use for designers in the business model.

Interior Design Extension

Wayfair recently announced the launch of Wayfair Design Services — a two-tiered service for consumers who don’t just want to buy furniture, but would actually like some advice on what to buy from an expert.

The service comes in two forms. Lite is for the design-savvy customer who wants a little bit of help editing and polishing their desired look. That costs $79. The Classic package is for the more needful customer and includes phone contact with the designer, a custom floor plan and 2-D room design rendering.

To use the service, customers complete style surveys that come with preferences and goals — and then chose favorite looks and designers to be the starting point. The customer and the designer then collaborate on the concept, design and shopping list — via phone or Wayfair’s newly-launched messaging platform. And, of course, all the goods are easy to then add to a shopping cart, click and purchase.

“With Design Services, Wayfair is helping to connect the dots for customers who are designing an entirely new space or simply redecorating,” Wayfair Head of Design Services Blair Kenary said in a statement. “This new service takes the guesswork out of shopping for the home by allowing anyone to work with a talented professional, at a price they can afford, to make their personal design vision a reality.”

The Complex Future

Wayfair, going forward, has two main issues as it tries to build its ecosystem. The first is competition, of which there is suddenly a lot when it comes to moving digital furnishings. And much of what Wayfair offers can be found elsewhere. Amazon has massively bulked up its home furnishings offerings — and is expected to continue to do so. The online giant more than tripled its furniture sales to $4 billion between 2015 to 2017, according to One Click Retail.

“Amazon Home has flown under the radar, but you can tell that they’re starting to put a lot more energy into the space,” said Meaghan Werle, an analyst with Kantar Retail.

Home Depot launched a similar designer partnership program with online decorator start-up Laurel Wolf — and has also intensified its push in home furnishings and online delivery in the last year — and those investments are ongoing. Houzz, Overstock and Target.com have all incorporated AR VR into their digital home furnishing sales operations.

What Wayfair has on all of these firms, of course, is a complete ecosystem package that none of them has quite put together. One could try shopping at all of those other retailers, but Wayfair’s ecosystem play is taking all of the diffuse functions offered across home furnishings players in aggregate and putting it all under one roof. So far that is working — it is far and away the leader in the segment.

But its second problem attracts more attention — it is not, nor has it ever been, profitable. In fact, the more it sells, the more money it seems to lose.

Earlier this month Wayfair reported that second quarter direct retail net revenue rose 48.8 percent year over year to $1.6 billion — the largest year-over-year direct retail dollar growth in the company’s history. It also reported that active customers in that business rose 34 percent to 12.8 million, as of June 30.

But net loss in the quarter was $100.7 million, and adjusted earnings were negative $34.8 million, or negative 2.1 percent of total net revenue.

Wayfair has responded that its lack of profitability is a function of its focus on growth — a refrain familiar to anyone who remembers the early days of Amazon’s ascension from online bookshop to the web’s largest ecosystem. But Amazon has its cloud services business and third party marketplace, both of which have been its major profit drivers in recent years.

Wayfair has neither of those things, which makes its path to profitability more of an open question.

But one worth watching for the answer to — because Wayfair as a simple eCommerce business may not have a lot of profitability potential natively. But the Wayfair home furnishing ecosystem properly constituted and sufficiently service-rich and perhaps omnichannel?

That might actually make some money.

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