The Wayfair Model (Part 1 of a 2-part series on 'Who is gonna be the Wayfair of SE Asia')

Part 1: The Wayfair model (this article)

Part 2: Looks at the players in SE Asia that are trying to follow in Wayfair's path and own the furniture space (coming soon)

First an intro to my story

In mid-2021 I got a call from a headhunter in Russia who later became a friend.

And he says to me "Ken... I've got this player who wants to be the Wayfair of Russia".

Which made me smile a bit as I'd worked there back in 2017-18 when i went back to the US to deal with a medical issue. And had also lived in Russia for many years. So it felt kind of like two different worlds were trying to connect.

The company as it turned out was called Hoff, a leading offline furniture retailer in Russia. And while I wasn't keen on moving back to Russia, I was interested to meet the owners who were pretty well known entrepreneur/investors in Russia. And if they wanted to pay me to do some fun advisory stuff.. hell, who was I to complain.

And so for the next couple weeks I had a number of conversations with them and found myself talking a lot about how Wayfair does business... both the things that I thought worked well and not so well.

Who is Wayfair?

Founded in 2002 in Boston by Niraj Shah and Steve Conine, two grads of my alma mater Cornell University. Steve actually graduated in 1995 so we didn't cross paths... as I began my freshman year a few months after he'd finished that year.

Wayfair is head-to-head with Amazon in leading the furniture eCommerce space in the US.

In 2021 they'd generated $15.3 bn of net revenue. And had employed 16k+ people.

They offer a pretty massive assortment (for furniture) of 22m products across five retail brands: Wayfair.com, AllModern, Birch Lane, Joss & Main, and Perigold.

They are at a ~$5bn market cap now, but were as high as $35bn back in April 2021. And have taken a hammering the past year or so.

Wayfair is a retail and not marketplace business model

This is something that is often misunderstood by outsiders as they mistakenly think Wayfair is a marketplace. But fact of the matter is that that everything is sold by Wayfair and purchased from a supplier (often after already selling it). Making it what I call a 'managed retail' business model because it has elements of both a marketplace & retail model.

Suppliers in fact determine their 'wholesale price' and then Wayfair runs a pricing algorithm on top of it to determine the consumer price. Margin is one component but many other factors come into play and a large team is constantly improving this in-house built pricing algorithm.

This has the advantage that Wayfair, via pricing, has much more control over its revenue and profitability than a pure marketplace. A well built pricing algorithm, in theory, could pretty much hit your quarterly revenue target to the dollar.

It does, however, come with some disadvantages... for example it is harder to motivate a supplier to lower their wholesale price because it may or may not have any impact on the consumer price (and thus sales). ie. you do not get clean marketplace dynamics.

Wayfair is mainly a dropship model

I've heard there are something like 22,000+ suppliers dropshipping on Wayfair now (when i was there it was closer to 8,000). Many of them are consolidated around the two main furniture import entry ports in the US... North Carolina and Los Angeles.

By dropshipping I mean that the inventory is sitting in the warehouse of the supplier and when an order comes in, the supplier picks/packs/ships it direct to the customer. Either with its own 3pl or one organized by Wayfair.

And since storing furniture is bulky and expensive.. the 'FBA model' fulfillment doesn't work so well. Wayfair does in fact have its own version of FBA that they called "Castlegate" but I believe back when i was there it was doing <2% of sales. And I doubt if it has progressed much since.

This was in part because most of this furniture supplier base was selling also on Amazon and other online & offline channels (ie. the majority of furniture sales in the US still happens via a brick & mortar store).

So they didn't want to have, for example, a couch sitting in a Wayfair warehouse for months racking up fees, when it could be selling somewhere else.

Wayfair is very good at bulky logistics

Having physically visited one of their warehouses in New Jersey and one of their delivery hubs near Boston I have a pretty good idea of how Wayfair operates. And as an ops guy I found it interesting.

As it had worked on principles that were quite contrarian to the way Lazada and Alibaba had worked, and to which I was familiar with already.

The customer basically places and order which either gets dropshipped from the supplier's warehouse or comes from a Castlegate fulfillment center. And the goods will generally aggregate (from multiple sources sometimes) at a delivery hub. Each hub generally covered a delivery radius of a few hours drive.

Once the goods had all arrived at the hub, the customer would be called and asked to provide a delivery date & time. And it generally had to be within a week of arrival of the goods into the hub.

Now in the Lazada world in SE Asia that would have been a major no-go as it would have created a massive bottleneck in the delivery system. Given that you generally wanted goods to arrive into a delivery hub and then be delivered to the customer within 24 hrs.

But in the Wayfair world I would say it worked well and it was a key CX (customer experience) advantage at the time vs Amazon... who worked more like Lazada, ie. the customer could not dictate an exact date and time of delivery in the same way.

Wayfair white labels most of what it sells

In furniture there aren't a lot of big brand names as the industry is quite fragmented. And so Wayfair white labels many, if not most of the smaller & mid-sized suppliers they work with.

This video talks a bit about how this white labelling program works. Revenue-wise i'd estimate about half of Wayfair sales is through private label.

Part of why Wayfair did this was their 'dirty little secret'... which is that the vast majority of Wayfair suppliers and products can also be found on Amazon.

As in my rough estimate would be that the overlap is like 95%+. And oftentimes, at least at that time, you could often find the product being more competitively priced on Amazon.

Which of course was not something Wayfair wanted customers knowing. So it went through extensive efforts to mask the original supplier brand & content with its own.

Who are Wayfair's suppliers?

The traditional supplier base was in the US and at the time there were about 8,000 of them in 2017. Pretty much the entire base of furniture suppliers in America as they generally had no reason not to sell on Wayfair given that their own D2C effort (if they had one) probably sucked.

They typically had a relatively simple business of purchasing from factories in places like China & Vietnam, slapping their brand on it, importing to their US warehouse, and then selling to Wayfair and other channels.

Not many of them were adding much value to the products. Meaning that they were generally not designing anything new and rather just tweaking things that were already available. And making a tidy profit on it.

Which of course was a recipe for getting competition from their supply base. The Chinese, who were flooding onto Amazon (often using FBA) back in 2017-18, were very eager to jump onboard.

I remember walking around High Point fair (the largest home furnishings trade show in the world) back in 2017 and seeing Chinese suppliers trying to snap off photos of stuff, but getting kicked out everywhere. The way they were being shoo'd out of showrooms felt kind of like when I was in grade school watching the naughty kids walk on the grumpy neighbor's lawn... lol.

Wayfair is good at engaging & inspiring the customer online

By this I mean that they were not a simple search-find-buy, SEO-based platform like Amazon was at the time. They wanted to differentiate by inspiring their customers with beautiful simulated rooms that could be shopped (like this example below).

And so they went deep on things like content & 3D modeling to be able to create these rooms on the fly.

Wayfair was also good at account management

The other thing that Wayfair was quite good at was account management. Meaning that they hired armies of account managers that would manage all of these suppliers pretty tightly.

I joined a number of these meetings and calls and generally the job of an account manager was to:

• Get more assortment (ie. ensure the supplier was giving Wayfair everything they had, in particular the strong selling sku's)
• Get the supplier to price better (including participate in upcoming campaigns)
• Get the supplier to use services like Castlegate, etc.
• Wayfair would also try to provide value add services like consulting on how to better package and send bulky items so that damage rates would go down

Now for a little bit of what I considered Wayfair to be weak at back in 2017-18

There were three main 'opportunity areas' that I raised to Niraj Shah (the founder/CEO) back in a 1-on-1 that we had back in late 2017 (note that it was normal for Niraj to do 1-on-1's with all new directors).

I'd been working in the company a couple of months and still kind of comparing to the experience i'd had at Lazada just previously. And since he asked me what my impressions were and wanted me to be honest... I'd highlighted these 3 'opportunities' below:

1. The rise of Chinese suppliers
2. Missing out on the omni-channel opportunity
3. A monolithic tech stack

Niraj was pretty intrigued or rather perhaps also thought i was a pretty strange dude to highlight weaknesses in a company i'd just started working for

(or probably a mix of both hahaha)

And so a week after the first one, he asked me to do another 1-on-1 to explain and discuss in more detail. I'll explain a bit more about what I mean for each of the 3 items below.

1) The rise of Chinese suppliers

I was of the view that turning a blind eye to Chinese suppliers when they were joining Amazon in droves was a bad move. And note that this was at a time when the company mantra was... "we protect our American supplier base and will help them do logistics better".

And Wayfair (ie. Niraj) was essentially shunning working direct with Chinese suppliers/factories at the time.

But fact of the matter is that these small American suppliers were adding very little value in a lot of cases and getting a lot of margin for it.

I found it interesting however that started around 2020... Wayfair in fact began wooing these Chinese and other int'l suppliers (as seen in this video above which is quite clearly targeting the Chinese seller).

So was i right? yeahhh i think i was.

2) Missing out on the omni-channel opportunity

In 2017 I was coming off the back of numerous visits to Hangzhou, China and learning about China e-commerce from Alibaba's acquisition of Lazada.

One element in particular had really engaged me... which was called "New Retail" at the time and Alibaba had invested $billions into it. Basically buying up traditional offline retailers to be able to offer a hybrid omnichannel experience.

It was particularly blasting off in "touch & feel" categories like furniture and fashion. Where Alibaba was really breaking new ground in 2017 with an offline furniture retail concept called 'Home Times' (article).

Now my slant on this was a bit different... I was of the view that offline furniture retailers in America were dying off. It was just getting too difficult to compete against Wayfair and Amazon.

There were too many things you needed to get right as a local offline furniture retailer... find the right suppliers, select what to purchase correctly, manage your inventory & working capital, manage your retail store(s) well, etc.

So my point was... rather than put the gravestone on these offline retailers... partner with them! And allow them to focus only on being a retail storefront (ie. showroom).

In my view Wayfair could essentially select suppliers, select what to show in the showrooms, swap things in and out, remove all the inventory risk, manage deliveries & returns, etc. The business of mom & pop furniture retailers would have simplified to being good showrooms.

A competency that was far easier to master and could still contribute significantly to Wayfair for having a lower CAC (than online acquisition) and better LTV (via better customer experience).

And in my view it would have put a much deeper moat between Wayfair and Amazon.

But Niraj was a bit skeptical... in particular as they'd closed their only offline retail store (from an acquisition) a year or so before.

Now recently I noticed that Wayfair has begun re-investing in creating their own retail storefronts (like this newly opened 'AllModern' store above), which I generally view as being a good thing.

But do I think they could scale this a ton faster and more efficiently by partnering with the 27,000+ offline furniture retailers that still exist in America? Yeah I do.

Was I right? Still to be seen.. but i feel like I get some points for the fact that Niraj has decided to get back into offline retail. Something he was very skeptical of in 2017.

3) A monolithic tech stack

Now this was perhaps the most blaring one for me... When I joined Wayfair in 2017 and realized how large the tech team i was just in shock. I was in a group called "OPI", which was the operations-related tech folks, and it was like 70+ product managers deep at the time.

I believe it even hit 100 at one point the following year. And that is just the PM's... there were probably about 3 engineers for every PM (ie. 300+ engineers).

And this was only on the operations side. There was still a completely separate tech org managing the website and consumer-facing apps that was probably almost as large.

The way I looked at it... I had essentially managed the same exact 'operations' scope at Lazada for about 3 years (2015-17) and never had more than about 10 PM's for it. And Lazada had more complexity.

If we compared complexity at the time it would have looked something like this:

• # of SKU's: Lazada already had far more
• # of suppliers/sellers: Lazada had far more
• Business model: Lazada was retail & marketplace whereas Wayfair was only retail
• Dropship pickup: Lazada picked up from far more sellers & suppliers than Wayfair
• Warehouses: about the same number
• # of delivery hubs and in-house drivers: Lazada had more
• Crossborder: Lazada was far more advanced

In short.. in my view Lazada was managing a shitload more complexity with a tech team that was about 15% the size of Wayfair's.

And it took forever to get anything out at Wayfair. Because one tech team needed to go and investigate with other team(s) to understand what the logic and interdependencies were.

I'd estimate if you built a feature in Lazada (which I wouldn't define as being super fast or anything)...

it generally took about 3x longer and 3x more resources to build the same feature in Wayfair in 2017-18.

Why? Because the monolithic stack that was highly complex, had poor foundational logic in some areas, and was generally poorly documented.

So even though Wayfair was paying top dollar for a lot of its engineering talent and going head-to-head against guys like Google...a lot of it was being wasted due to this poor foundation.

Now when I was talking to a tech friend at Wayfair a year or so ago.. I found out that they'd in fact pretty much changed the entire tech leadership team of Wayfair and were now finally tackling this monolithic mess.

Was I right? Yeahh I consider myself right on this one. Though I doubt many people at Wayfair who had worked at other faster tech co's would have argued this point back then.

So in essence the three "opportunities" I highlighted to Niraj in our duet of 1-1's in 2017... he has changed his stance on and begun to address.

But regardless... at the end of the day Niraj is still probably worth like a BILLION dollars and I am not.... so yeahhh he still wins.. hahahaha

Coming up in my next article in this 2-part series.... How all of this relates to SEA and the race to become the 'Wayfair of SEA'