COVID-19 lock-down boosts sales for billionaire Niraj Shah’s Wayfair
Since March, locked inside by the COVID-19 pandemic, Americans look around their homes and decide they need a new chair or an outdoor table. In May, $38 billion of furniture was sold in the U.S., up 90% from the previous month, according to the U.S. Department of Commerce.
The rise in furniture, as well as other retail sales, at a time when there is limited or no access to physical stores, is fueled by booming online demand. While overall retail sales in the U.S. will likely drop by 10% in 2020, online retail sales is expected to rise by 18%, according to E-marketer. Similar rapid growth in online retail sales is evident in India, China, and other countries.
COVID-19 boost online sales
Companies benefitting from the recent sharp rise in online sales in America include giants Amazon and Walmart as well as Boston based Wayfair. An e-commerce platform, Wayfair.com enables over 12,000 suppliers to sell 18 million products, including chairs, tables, sofas as well as dishes, coffee mugs and other home furnishings and housewares. The site offers products in a wide range of styles and curates the offerings into ninety brands. Its prices and service are competitive to that of Amazon and Walmart.
In 2019, Wayfair’s stock price fell by 50% due to fears about rising online competition and the company’s continuing losses. Now, benefiting from the lock-down, Wall Street analysts estimate that Wayfair’s net-revenues will rise by 36% to $12 billion this year. Over the past three months, from its low of March 19, Wayfair’s stock price has jumped nearly 1,000% to $210. As a result, Niraj Shah, the chief executive and co-founder, (in photo,) is worth an estimated $3 billion. He owns 15% of the shares, including half of the voting stock of the company.
From 250 e-commerce sites to one online platform
In 2002, Wayfair launched a single website selling stereo racks and stands. Working out of a spare bedroom in co-founder Steve Conine’s home, the business was an outcome of their extensive analyses of Internet search patterns and results.
The business grew to more than 250 standalone sites selling goods from bar-stools to birdhouses. In 2011, Shah and Conine combined all the e-commerce sites into one platform selling home goods and named it Wayfair. The next year, sales exceeded $600 million. The company went public in 2014 at a price of $29 per share. In 2015, it launched its own logistics and warehouse network to enable quicker shipping, control costs and improve customer service.
Starting a business as Cornell students
Shah and Conine met as high school students during a summer program at Cornell University. They became friends while studying engineering at Cornell and living in the same freshmen dorm on campus. During their final semester, Shah and Conine wrote a business plan for a class on entrepreneurship, which led to their first company. They went on to co-found and build several technology businesses.
In 2001, Shah and Conine co-founded Simplify Mobile, an enterprise software company. Earlier, Shah was chief executive of Spinners Incorporated, an IT consulting company he also co-founded with Conine. Shah served in various roles at iXL Enterprises, Inc., including as Chief Operating Officer. In 2001, he was an Entrepreneur in Residence at Greylock Partners, a venture capital firm.
Focus on rapid revenue growth
In 2019, Wayfair’s net revenues were $9.1 billion and it had a net loss of $10.68 per share. Analysts anticipate the company will lose about $7 per share this year. At the end of March, the company had accumulated losses totaling about $2.4 billion. Yet the stock market is valuing Wayfair at about $20 billion.
In the post-COVID-19 business landscape, investors are ignoring the losses suffered by Wayfair for three reasons. First, investors support Shah and Conine’s strategy of pursuing rapid revenue growth today and later, after building a big market share, shifting focus to profitability. This strategy was successful for Amazon.
The total annual sales of home goods in the U.S. is estimated to be nearly $300 billion. Wayfair has also expanded into Canada, the U.K. and Germany, where the markets total an additional $150 billion. The company plans to expand into selling apparel and consumer electronics, which are also huge markets. Wayfair’s estimated net revenues this year will be up nearly six-fold from $2.3 billion in 2015.
Young, digital savvy consumers
Second, only about 14% of home goods are purchased online today. So, Wayfair has the potential to entice more buyers away from physical retail competitors. Wayfair estimates that online sales of home goods will reach $160 billion by 2029.
Third, Wayfair has over 21 million customers who made an average purchase of $450 on its site in the past 12 months. Most of them are recurring buyers. The company seeks to sell to 69 million U.S. households with annual incomes between $50,000 and $250,000. The focus is on women, especially those between the ages of 20 to 37, many of whom buy goods online through mobile and desktop devices. As they age, start families and move into new homes, they will purchase more home goods, says Wayfair.
Using 3D and algorithms to boost sales
Wayfair’s business is powered by technology and data analysis, with a staff of 1,900 engineers and data experts among its 16,000 employees. In 2019, the company spent over $400 million to enhance its technology, algorithms, logistics and service capabilities.
The company uses 3D technology so customers, for instance, can visualize what a sofa, of different sizes, shapes and colors, may look like in their living room. Wayfair also spends on advertising, about $1.1 billion in 2019, to push sales of goods sold on its platforms.
Wayfair’s large base of buyers, and its technology and advertising, attract sellers to use its platform. This is especially the case for small and medium companies who do not own recognized brands and lack the funds to set up their own online business.
Competition from Amazon and Walmart
Investors assume Wayfair will see good revenue growth from both a bigger market share and rising online sales of home goods and other products. As revenues grow, Shah and Conine expect Wayfair’s advertising and operating costs to decline, as a percentage of revenues, thereby generating good profit margins.
While investors are bullish on Wayfair, it faces intense competition, especially from Amazon, market value $1.3 trillion, and Walmart, $335 billion. The two giants offer a wide range of products online, including their own as well as from third party sellers, competitive prices and perhaps most importantly, unlike Wayfair, the ability to return items bought online to physical stores, as in the case of Amazon to Whole Foods and other outlets. Amazon and Walmart are constantly improving their product offerings and pricing as well as spending far more on technology and service than Wayfair.
Typically, sellers seek all avenues to sell their products, provided the sales are profitable. Amazon reportedly charges vendors on its site fees ranging from 6% to 25%, on average 13%. Wayfair may be charging slightly lower fees to attract sellers to its platform.
Sellers likely use Wayfair to also reduce their dependency on Amazon and Walmart, in order to protect their brands, pricing and profits. For this same reason though, sellers will want to avoid tying exclusively into Wayfair’s platform, distribution and logistics systems. For instance, Libbey Glassware is one of Wayfair’s popular items, while Libbey itself sells directly on Amazon.
Wayfair, like Amazon and Walmart, aggressively pushes sales of its own brands, from glasses to tables to mattresses, since they are more profitable and gives them control over the products. The quality of house brands is often as good or better than that of reputed brands and the prices can be cheaper by 30% or more.
Rescued by the lock-down?
Wayfair also faces competition from Shopify, the Ottawa, Canada based online platform and logistics company, with a market value of $106 billion. It provides online sales, billing, logistics and distribution capabilities to over 10 million vendors, from small shoe stores to large brands like Lindt chocolates and Heinz ketchup.. Several of Wayfair’s sellers also use Shopify.
Since March, with customers locked indoors due to the pandemic, the competitive landscape favors Wayfair. “Many physical retail stores closed temporarily, leading customers to move increasingly toward shopping online,” creating a unique opportunity for the company, Shah told investors in May, during the first quarter 2020 earnings conference call. Will the boost in demand enable Shah and Conine to grow and control enough market share to compete successfully with Amazon and Shopify, after the COVID-19 threat recedes? Perhaps, with effective vaccines and treatments, we may have an answer in about a year.
