Wayfair: Are Customers Really Ready to Buy Furniture Online?
Wayfair is leading and promising e-commerce player in the home goods market. It is providing a unique online shopping experience while managing an asset light inventory. Is there anything we should be worried about?
You just moved to your HBS apartment and you need to get furniture. You are thinking about a trip to Ikea, but you need to get a car, make sure you have a day off, and find a friend to help you carry and assemble the things you got. Or – will you just buy your furniture online?
Wayfair is an online retailer for home goods. It sells everything from furniture, lighting and storage solutions to pet beds and seasonal decor. The company started in 2002, and grew as a collection of more than 250 standalone sites. In 2011, the founders decided to move all those sites to one destination and named it Wayfair. In a world of fast paced digital transformation, Wayfair is definitely a winner. As of Q3’16, it experienced a 53% YoY growth in direct retail and its brand awareness is increasing as the company invest more and more in marketing.
Wayfair’s mission is “to transform the way people shop for their home”, and with more than 7 million active customers, its seems like they are on the right direction.
Creating value with a unique shopping experience
Wayfair is creating a unique experience to its customers in several different ways:
First, as it logo state “a zillion things” – Wayfair offers a huge variety of home products – currently more than 7,000,000 by partnering with over 7,000 suppliers. This variety is unique especially as considering competitors like Crate & Barrel, or Bed, Bath & Beyond who has much more limited options. Second, the website provides with images of furnished rooms, ideas and tips around design and look and allows customers to create their own idea boards – saving products they like, organizing the boards and sharing them with other people. Finally, Wayfair is creating an easy and convenient shopping experience by shipping the products to the customers home, without needing to get to a physical store, saving time and money. In case customers experience any issues with their order, the company provides a great customer service and does its best to solve the issue quickly and efficiently.
Capturing value as the middle man
Wayfair manages an inventory light model as most of the inventory is being held by suppliers. The website is used as a platform to order the products, but once a customer placed an order, the relevant supplier is notified and ship the product to the customer, while a Wayfair last mile agent hands the product to the customer. Wayfair gets a commission from of every sale and therefore can capture value while limiting the risk on the company. In order to improve the customer’s experience, the company is now shifting towards a CastleGate – a system in which Wayfair will hold inventory of mainly small items in its distribution centers, allowing better control and speed for some of its most popular items, while still keeping the large expensive inventory items at the supplier’s sites.
So why are we still a bit worried?
Wayfair believes that by creating inspiring images, and providing detailed shots of the product it can get more customers to buy their furniture online. Today, while the online penetration of electronics is 54% and of apparel is 15%, online home goods are only 7% – a huge potential for growth. However, while the e-commerce space is developing, it is not clear yet whether customers will be willing to give up on the option to see and feel their furniture before they buy them. In comparison to other products like apparel and electronics, the shipping costs of home goods are high, therefore increasing the costs of returns and refunds. In addition, even after several years of operations, Wayfair is not profitable yet. Although it is known that the economies of scale are critical in the online retail business, there is still a question of the sustainability around the company’s business model. It will be interesting to continue and follow the company in the future and see if it continues to win the e-commerce home goods market.
Student comments on Wayfair: Are Customers Really Ready to Buy Furniture Online?
Interesting post, thanks. Two questions for you: if we assume e-commerce can take share in the furniture market, is there a risk that a higher returns percentage keeps Wayfair from ever being sufficiently profitable? It seems like since the furniture isn’t seen in person, higher returns would be a risk and I’m not sure how profitable this industry is from a baseline perspective, and how much it could be offset by savings from lack of brick and mortar footprint?
Also, is there a risk that some of Wayfair’s larger suppliers attempt to build up brand recognition on their own and go direct to customers, cutting Wayfair out? I have no idea how concentrated any suppliers are, and potentially this would be more of a risk in a B2B setting, but never-the-less it seems like Wayfair might be in a difficult position down the road.
Great post! Given the big-ticket purchase nature of the items on Wayfair and the many competitors in the space (while the likes of Walmart.com and Amazon may not have the breadth and quality of furniture offerings, they may already have the online brand loyalty of many customers; taking a risk on a new website for a large purchase is a big mental impediment), it feels like Wayfair is going to have to be at the absolute forefront of the online shopping experience to maintain its competitiveness. Investments in best-of-class digital customer service and AR/VR offerings will be crucial; I wonder if you think Wayfair is well-positioned and has the managerial commitment to do all this. It also feels like the online shopping experience is going to converge for most goods, particularly for less brand-specific goods (high-end fashion brands and electronics may be the least prone to this trend), so I wonder if Wayfair’s focus on home goods is ultimately sustainable.
Really interesting! This made me think about luxury fashion e-commerce. It’s very likely that many people thought at first that no one would spend thousand of dollars on a high value item before seeing, feeling, and trying it on. Net-a-porter is a great example, to help shoppers make a decision products are perfectly photographer (several photos to show all the details), they provide detailed descriptions of the fabric, fit, and exact measurements for every single item in every single size. Like other fashion wesbites they style outfits, and they couple that with a highly flexible return policy. They even sell fine jewelry nowadays for tens of thousands of dollars. Wayfair seems to have most of this covered, more detailed photos though would probably improve the user experience and make purchasing decisions easier but I defintely see the value and convenience in being able to buy furntire at a one-stop shop online!
Thanks for your post! The hurdle of getting customers to purchase big ticket items online is a big one – I agree that Wayfair will need to stay at the forefront of innovation (they are investing in VR technology) and convenience (easy shipping/returns) to make this work.
I am curious about how their investments in people and marketing will pan out. They are hiring high numbers of smart people to fill their middle management and senior executive ranks, building out a hierarchy in what has been, to date, a relatively young and flat organization. Will this rapid growth enable them to grow their business faster, or will the company get bogged down in complications from growing too quickly? Second, part of the reason the company is not yet profitable is because of its huge investment in marketing. Using their impressive data collection, the company is investing in expensive marketing campaigns from online to television. I wonder if these campaigns are effective, or are these “traditional” (and sometimes hard to quantify) marketing channels simply a drain on resources?
Great post! I believe that Wayfair’s thesis that brands are not important in furniture and home decor have been proven and that customers instead value a broad selection of products. Wayfair is well positioned to capture a substantial portion of the value as more furniture and home decor purchases move online. The marketing investment is meant to build the Wayfair brands so it is the top of mind as people invest in their homes.
Additionally, Wayfair is doing really interesting research in the augmented reality and virtual reality space that could make it easier for customers to make these big-ticket purchases online. For example, imagine having the Wayfair app open, browsing to find a new dining room table, and being able to view the dining room table in your dining room using your phone’s camera and augmented reality. I also was able to test a virtual reality headset sponsored by Wayfair last year that allowed you to look and walk around a virtual room that was decorated with Wayfair products. It was amazing! These new technologies have great use cases in the furniture and home decor e-commerce space.
Loved your post!
I also have been thinking about the difficulty in shifting consumer behavior to purchase large items, like furniture, online. Obviously one of the biggest hurdles is the large associated return shipping cost and inconvenience if you are unhappy with a product, essentially making returns almost impossible. I think this is likely the biggest barrier and believe Wayfair somehow needs to make this seamless — free returns, pickup — in order to truly be successful and convert customers in this space. While I believe the augmented reality innovations will be helpful, I am not sure it will every truly mirror the ability to see the items in person pre-purchase. I wonder how Wayfair can instead use digital technology to give people the ability to change their mind post-purchase.
Thanks for the post, great!
I’m curious about WayFair’s profitability margins and how reliant they are on further decrease in logistics costs. Although the platform is technically scalable beyond US market, there is associated ramp up of shipping costs when delivering products to customers outside of US borders and I’m worried that with the further growth of e-commerce and emergence of local competitors, Wayfair wont be able to maintain its profitability without making changes to its business model. We saw a couple of other promising Home & Living vertical players going out of market, will this happen to Wayfair?
Recently, we spoke about VR and how this could help enhance customer shopping experience – I think this is one of the areas company could take the lead in to win competitive advantage over potential new entrants.