Which is better Etsy or Wayfair
Is Wayfair really the breakthrough in the online furniture trade and a role model for Home24?
While Home24 has to hope that the existing investors believe in the business model and the market again, Wayfair in Boston is doing very well. Wayfair is something like the global home & living superstar in e-commerce and is therefore particularly suitable for checkout area analysis. Three years ago there was a short comparison with Home24. For me personally, Wayfair is also exciting because they originally started with the previously very popular multi-platform model (one backend, many frontends) before they decided on the single platform strategy. In our netimpact time for almost six years, the topic of multiplatforms was still very topical, which, for example, led to the establishment of vStores. So far in this series I have bonobos (too big too quickly), ULTA (prime example of stationary digitization), Zappos (on the drip from Amazon), Farfetch (the next Fab.com), Stitchfix (I'm a fan!), The hat Group (old business model, but very successful), Tencent (what exactly is Tencent doing?), Etsy / DaWanda (home-made problems) and Wish - “like Christmas, only without a wish”. The material for the analyzes is provided by eTribes - the leading digital consultancy in Germany. Many of you already know eTribes from the many Knut Digital studies.
What exactly does Wayfair do?
For a change, let's start with a quote from the "About Us" page:
Wayfair offers you everything about your home. With our diverse range of products and many years of experience, we make it as easy as possible for you to design your home according to your own ideas. Wayfair was founded in 2002 by Steve Conine and Niraj Shah. The two college friends first founded an online shop for shelves, which after many changes eventually became Wayfair - one of the most successful online shops for furniture in the USA.
From this romantic founding story, a large company has emerged with headquarters in Boston, eight million products, 10,000 suppliers (vertically integrated), 10 million customers, 7,700 employees and a market capitalization of over four billion dollars. Translated into hard numbers, that means almost USD 5 billion in sales with a loss of USD 240 million in 2017.
We'll judge immediately whether that's good or bad. Before doing so, a quick look back at the Wayfair history will help, because 15 years ago they started the market with a completely different strategy.
- Founded in 2002 as a collection of small SEO shops (barstools.com, everymirror.com, etc)
- In 2006 the $ 100 million turnover was exceeded for the first time
- Wayfair launched the UK business in 2008, followed by Germany in 2009
- In 2011 Wayfair decided to bundle more than 200 (SEO) shops on one platform, Wayfair.com was created and raised its first round of financing of $ 165 million
- A small financing round of $ 36 million follows in 2012
- In 2014, $ 150 million Series B were added, followed by the IPO in October of the same year
- 2016: Wayfair is profitable for the first time in the USA. The shop is named Online Retailer of the Year and is an example of usability and emotional and appealing product presentation.
- 2017: Sales are growing steadily and cracking $ 4 billion, but costs are also growing, especially for international business.
How does the business model work?
Wayfair is a classic online pure player in the furniture sector, with the special feature that the goods are sent directly to the customer by dropshipping from the manufacturer or wholesaler. The online retailer is working hard on the further development of its own brands, how large their share of sales is is not communicated. Wayfair also earns money with its Media Solutions from the sale of advertising space, but the revenue share seems to be extremely low. Annual report:
“Wayfair Media Solutions: A smaller portion of our net revenue is generated through third-party advertisers that pay for advertisements placed on our sites. Wayfair helps selected manufacturers, retailers and other advertisers market to our large consumer audience. "
The positioning is more like Amazon furniture retail with the online triad “best selection, best price, best availability”. With its 10 million products, the Wayfairs range is certainly many times larger than that of its competitors, with the exception of Amazon. If you compare a few categories, there seems to be little difference here:
- Beds: approx. 7,000 items at Wayfair, 10,000 at Amazon
- Chests of drawers: 6,800 at Wayfair, 8,000 at Amazon (the Amazon numbers should be treated with caution - a lot of duplicate items and non-chests of drawers are sure to end up in the search here)
The Economics unit is ok, even if not particularly impressive for a “furniture dealer”.
- In 2017 Wayfair had $ 408 in revenue per active customer
- 60% of orders from existing customers
- $ 66 customer acquisition cost
- $ 232 average cart
Due to the increasing losses in 2017, it makes sense again to take a closer look at the plans for the KPI improvements. How does Wayfair intend to make money in the future? The calculation is simple. The margins remain stable or do not develop into an advantage, so the costs have to go down, especially advertising and operations have to become more efficient and that happens in the platform economy through great growth. So far one cannot blame Wayfair. You are on the right track with this target KPI.
But how does Wayfair establish the growth potential? According to Wayfair, the online rate of furniture in the US is just 9%, from which Wayfair derives a lot of potential for natural market growth. In its annual report, Wayfair mentions the strengthening of its own brands, the growth of the customer base and various expansions as further growth drivers. Everything pretty standard so far.
Another driver of the business is technology and Wayfair speaks to me from my Spryker heart. They were and are able to develop solutions based on their technical skills that no other furniture dealer has on the market. This means that you pretty much map the Spryker pitch 1: 1 in your annual report.
We have custom-built our proprietary technology and operational platform to deliver the best experience for both our customers and suppliers. Our success has been built on a culture of data-driven decision-making, operational discipline and an unwavering focus on the customer. We employ over 1,000 engineers and data scientists and believe we are able to attract and retain some of the best technological minds. We believe that control of our technology systems and the ability to update them often is a competitive advantage.
- 3D initiatives: In the past year, Wayfair has made a push to have more of its 7 million products modeled in 3-D. So far the retailer has created 3-D images for more than 10,000 items. Once a product has a 3-D image, it can then be used in augmented and virtual reality platforms, such as those that allow a shopper to visualize what a sofa would look like in her living room. Subsequently, the retailer has deployed several AR and VR initiatives, such as IdeaSpace, which is a virtual reality app that consumers can use in Google’s Daydream VR headset to tour rooms decorated with Wayfair’s home furnishings.
- Home furnishings retailer Wayfair Inc. has launched a new site search tool that allows shoppers to search for products with a photo. Here’s how it works: Consumers tap the camera icon in the Wayfair search bar on its desktop or mobile site or in its app. From there a shopper can take a photo of the product she wants or upload one from her photo storage. Wayfair will then match the image with its 8 million products and surface the results. The feature aims to save shoppers time and help them find what they are looking for faster.
- Augmented Reality App with 40,000 Wayfair articles lets customers test the articles in their own living room
The financial figures confirm the view so far. The growth is booming, the US business is profitable.
- Direct Retail net revenue increased $ 1.4 billion to $ 4.6 billion, up 42.5% year over year
- Total net revenue increased $ 1.3 billion to $ 4.7 billion, up 39.7% year over year
- GAAP net loss was $ 244.6 million
- Adjusted EBITDA was $ (67.0) million or (1.4)% of total net revenue
The international business is not yet profitable (analogous to Amazon), but that does not prevent Wayfair from addressing markets such as Germany and UK directly. Wayfair's ambitions are very high and various suppliers are already working with Wayfair. German furniture retailers should probably no longer look so closely at IKEA when it comes to the topic online. Wayfair is currently looking for over 120 employees in Berlin alone.
But what does Wayfair do better than Amazon?
In the US market, the furniture category now comes down to the endgame Amazon vs. Wayfair, at least from today's perspective. To what extent new services such as Wish Home can shuffle the cards again is unclear. I still believe that customers are only concerned with the size of the offer, price and availability, but Wayfair sees it a little differently. You realize that the way you buy furniture is fundamentally different from other product ranges, but for my taste provides very little evidence for this thesis.
As is so often the case, comparing categories with Amazon is not easy. Depending on which analysis method is chosen, Amazon is already likely to generate USD 1-10 billion in sales per year with home and living products in the USA. Either way, they are in similar regions to Wayfair, which makes the Search vs. Browse thesis seem a bit shaky. Here, too, Amazon has a lead that should not be underestimated, as a clever analyst at Forbes has established.
But I can give you one reason, or more precisely 80 million reasons, why Amazon shouldn't be counted out: It's Prime customers. With more than 8 times the number of customers digitally and financially bound to Amazon and with data recording each customers ’purchases across its wide range of offerings, Amazon is in the catbird’s seat to swoop in and eat Wayfair’s lunch if and when it chooses. Amazon knows when its Prime customers move - Another key variable tied to when home furnishings purchases occur is when people pack up and move. Moving stimulates a whole host of home-related purchases, decorative as well as functional. To keep those Prime deliveries coming, customers have to notify Amazon of their change in residence. With that kind of big data, Amazon can anticipate their customers’ next need and push out offers targeted to those needs. Wayfair simply hasn’t the depth or reach into their customers’ life stages to match that of Amazon.
The argument cannot be dismissed out of hand, but the market is already very, very large with sales of $ 270 billion in the USA alone. Wayfair is likely to get a few billion more in the next few years.
Can you win in the furniture market with better logistics?
Wayfair has played an unusual, hybrid role here so far. On the one hand, as dropshippers, they are far away from inventory, on the other hand, they are expanding the logistics more and more in order to shorten delivery times significantly. Should Wayfair continue to invest in logistics here, it is probably only a matter of time before they also build up their own stocks in order to become even faster here. Another important reason for insourcing the logistics is that the goods are handled more than 5 times on the way via Fedex & Co, and large goods often arrive damaged. This should be counteracted by our own logistics and cooperation with certified logisticians.
Digitalcommerce360 writes about this:
Between the Castle Gate and Wayfair Delivery networks, transportation costs are lower and the damage rate per order has decreased, according to Wayfair. However, the cost of opening the facilities and ramping up their operations is eating into Wayfair’s gross margin, Shah said. Overall, orders from repeat shoppers reached 61% in Q2, which is a 55% year-over-year increase and the highest it has ever been, Wayfair reported.
The path is definitely exciting and it is also becoming clear in the US market that the existing logistics providers have to go a step further if they want to become more than just cheap aid providers in the future.
Mareike, my long-time colleague, secret force behind the e-commerce book and analyst on this post, says:
I rate Wayfair's chances as positive. Similar to Amazon, they have shown staying power (and with much later external financing) and have thus been able to build up online sales in the furniture sector, which is currently only available from Amazon itself. If Wayfair manages to continue to develop its acquisition costs sustainably and to strengthen its own brands, they have already won a lot. In the triad of success factors Choice, price and availability I see Wayfair very far ahead when it comes to selection & price: The selection is in fact even higher on Amazon, but Wayfair's navigation and search function are so much better that the “usable selection” is ultimately much larger here. The prices are often better at Wayfair than at Amazon. Availability will be the biggest challenge in my opinion. Without real goods control and ensuring availability, Wayfair is not ideally positioned as a dropshipper here. I find the hybrid approach of dropshipping plus in-house logistics very exciting, but I don't know of any example where it works well. In the long term, Amazon will do much better here.
For me, Wayfair is definitely one of the more exciting companies that we have looked at in this series of analyzes so far. The furniture market is huge and the customers are obviously quite impressed with the Wayfair offer if the cohort data are correct. Apart from Amazon, no competition has emerged so far and in the current financial market field, Wayfair can still stock up on cheap money for some time to grow online, while the stationary competitors use the cheap money to continue to build large furniture stores. The strategy doesn't seem to be really visionary to me yet and between the lines I read a considerable disagreement between the options verticalization (making furniture and logistics yourself) vs. asset light (little warehouse, little logistics, only customer loyalty ...). I'm curious how Wayfair will decide. Should they grow significantly more in the area of logistics, they will have to reduce their international, expensive ambitions a little and Amazon will certainly have a few more ideas here. With the current stock market price, however, I can well imagine that Amazon will simply take over the business.
The next candidate for checkout analysis is Alibaba. For this, too, the analysis material is used byeTribes provided - one of the leading digital consultancies in Germany. Many of you already know eTribes from the manyKnut Digital Studies. Further suggestions for new analysis goals and questions about Wayfair can be found inWhatsapp channel.
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Alexander Graf, * 1980, e-commerce entrepreneur & analyst, trained at the Otto Group, then founded over 10 companies, today Co-CEO of the leading commerce technology provider Spryker Systems. In June 2015 he did that E-commerce book published, which has led the e-commerce rankings since then. Further information here, or contact directly at: [email protected]
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