Wayfair’s earnings miss may portend trouble for fellow ‘disruptor’ brands

Discussion
Wayfair celebrates its biggest sales event of the year - Photo: Wayfair
May 10, 2022

Through a special arrangement, presented here for discussion, is a summary of  Steve Dennis’ s recent Forbes article. Steve is President & Founder of SageBerry Consulting and a senior Forbes Contributor. He is the author of  Remarkable Retail: How to Win and Keep Customers in the Age of Disruption.

Last Thursday, shares of Wayfair lost 26 percent of their value and are now off about 75 percent from their high last year. Warby Parker, Allbirds, TheRealReal and many other online shopping darlings have likewise taken massive hits to their valuations as investors are waking up to the challenges of building sustainable digital-first companies.

While these brands are to be commended for their innovative business designs, they’ve also become quite adept at lighting fire to large piles of cash. It turns out that many of their market share gains are likely coming from both unsustainable pricing models and over-investment in marketing.

For Wayfair in particular, they seem highly dependent on leveraging their massive infrastructure investment, needing to improve gross margins and dialing back substantially on ineffective marketing. But raising pricing and pulling back on ad spend in the face of weakening consumer demand seems like a recipe for deleveraging their fixed costs.

Wayfair is opening its first physical stores this year under two distinct banners — AllModern and Joss & Main — after marking its fourth consecutive quarter of declining active customer count. Niraj Shah, CEO, told analysts, “This is the next stage of Wayfair’s omnichannel journey.”

Many digitally native vertical brands are hoping that opening physical stores will get them on the glide path to profitability. Yet Warby Parker, the one disruptor brand that actually has dozens of relatively mature brick and mortar locations, is still far from breaking even.

It’s one thing to say that “rent is the new CAC” (customer acquisition cost), talk about the halo-effect of stores and how brick and mortar expands the total addressable market. It’s another to actually open, scale and profitably operate a successful fleet of stores beyond a handful in largely no-brainer locations. This story is far from over.

Inflation and supply chain woes may explain part of these brands’ profit shortfalls and a couple of rough quarters. Particularly, as we transition to a largely post-COVID world, this is not automatically cause for panic.

But as we are now two decades past the first dot.com bubble bursting, there are plenty of lessons we should have learned.

DISCUSSION QUESTIONS: In what ways are Wayfair’s problems similar to and different than other digitally native vertical brands? What lessons from the first dot.com bubble may be relatable to the current crop of digital natives?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Wayfair has long been betting on future scale to explain away consistent losses, which were the rule not the exception for their earnings calls until the pandemic blip."
"Apart from a brief spell during the exceptional period of the pandemic, Wayfair has never been profitable. It has lost billons over the past 10 years."
"The challenge now is to develop and execute an appropriate business model going forward."

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12 Comments on "Wayfair’s earnings miss may portend trouble for fellow ‘disruptor’ brands"


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Mark Ryski
BrainTrust

Given their large bulky furniture product, Wayfair has especially difficult challenges related to delivery and product returns. It’s true, the digital brands have been disruptive and creative, but they have also failed to be profitable. Generally, without profit there is no sustainable future and that’s what many of these brands are experiencing. And while the move to open a few token physical stores may placate Wall Streeters, this will hardly move the needle for most – Warby Parker is an excellent example.

Neil Saunders
BrainTrust

Apart from a brief spell during the exceptional period of the pandemic, Wayfair has never been profitable. It has lost billons over the past 10 years. With online shopping going into reverse and consumers being more cautious about spending, it is very difficult to see a positive trajectory for the company. Of course, much of the same logic applies to other brands whose stars rose dramatically due to (temporary) pandemic related trends. We’re now in a period that I call the great unraveling as many things reset after two years of disruption. As the tide ebbs, bad business models will become increasingly exposed.

Michael La Kier
BrainTrust

Wayfair has a history of blowing through cash and not caring about customer acquisition costs and lifetime value. This was exposed way back in 2017/2018 when two Ivy League professors estimated that Wayfair was spending about $69 to acquire new customers, but only earning $59 back from the customer over the long haul. Losing money every time they acquire a new digital customer was not a smart solution then and it is not now. If brands are not smart about their customer acquisition costs and customer lifetime value they are doomed to fail, digital or not.

Brian Delp
BrainTrust
4 months 21 days ago

Wayfair has long been betting on future scale to explain away consistent losses, which were the rule not the exception for their earnings calls until the pandemic blip. Although their problems are not unique as all e-commerce is feeling the pendulum swing back to stores, their business strategy was fairly unique to them and the gamble doesn’t seem to be paying off.

Jeff Sward
BrainTrust

Alan Greenspan nailed it when he coined the phrase “irrational exuberance.” It’s contagious. From exuberant founding CEOs to exuberant financial analysts to exuberant investors. Throw in a large dose of wishful thinking. These businesses might make for some frothy trading in the early days, but not many are turning out to be solid long term investments. It would be great to see the original pitch deck from some of these businesses, especially more recent cases that would have had the opportunity to learn from earlier launches. Time frame to break even? What confluence of internal and external events was it going to take to vault into profitability? I’ll venture that there is no glide path to profitability. It’s a tortuous climb up a sheer cliff.

Mohamed Amer, PhD
BrainTrust

Some lessons to consider: There must be a credible path to profitability. All models, disruptive or otherwise, are still prone to the ups and downs of the business cycle. It’s difficult to pivot and manage your business model from digitally native to a hybrid/physical without incurring higher levels of investing. Inflection points are either imposed by the market or proactively created by a CEO and board with courageous foresight; the latter is a rare animal in business.

Gene Detroyer
BrainTrust

Opening brick-and-mortar stores for a digitally successful brand is very different than a brick-and-mortar brand opening an online channel.

The online business is quite straightforward compared to brick-and-mortar. So now they want to open stores? So they deal with real estate. Oh, and they need inventory in every store — an entirely new calculus. Gee, how much labor do we need to operate a store? And let’s not forget that this country is over-stored.

Gary Sankary
BrainTrust

Digitally native retailers are not immune to expanding faster than their business would support. Venture capital is not a substitute for revenue and I believe that’s where many of these companies get into trouble. The need to build their business with sustainable results. Chasing future profits is not sustainable as many of these companies are being forced to learn.

Peter Fader
Guest

As one of the “Ivy League professors” mentioned in Michael La Kier’s comment (thanks!), I’m glad to say more. Specifically, it’s important to note that these digitally native vertical brands are quite different when it comes to the unit economics of their customers. Wayfair is, indeed, a pretty dire scenario, but others such as Warby Parker, have reasonably healthy CLV numbers. See this article for instance, for an analysis based on their pre-IPO S-1 filing. Others (that we’ve analyzed privately) are even stronger.

So let’s not write off this entire business model just because of one highly visible example. And let’s not write off Wayfair just yet either — there’s sill time for them to wake up and smell the CLV…

Roland Gossage
BrainTrust
4 months 21 days ago

While Wayfair does have significant challenges (many of which are affecting both conventional and “disruptor” brands alike), intelligently targeting complementary products to the large purchases made during the height of COVID-19 will allow them to capitalize on the investment in acquiring these customers. Personalization and adjusting the product mix is a solid way to edge those clients towards being profitable. I also believe there are internal cost savings in their business model to get them the rest of the way there.

Richard J. George, Ph.D.
BrainTrust

It appears the wave that has driven Wayfair’s sales, not accompanying profits, has peaked. The challenge now is to develop and execute an appropriate business model going forward. While adding “bricks and mortar” may be a potential next step, it does little to address the supply side issues that have negatively affected profitability. Whether the future is virtual, physical or both, the consumer offering needs to be profitable.

Anil Patel
BrainTrust

The problem I could see is with the product line, which is way more substantial with Wayfair as compared to the other digitally native vertical brands (DNVB). Wayfair’s products are quite bulky, which makes the logistics complicated, and in case of product returns the problem gets even worse. While for the fellow brands the situation is not that tricky, as they have smaller and easy-to-handle products and had successfully set up stores post-pandemic.

Talking about learnings from the first dot.com bubble, if we look at the example of Pets.com, it offered low-margin products to consumers and bore the high shipping costs by offering free shipping. It became one of the many reasons for their failure. Even today, a lot of digitally native brands forget the simple math and spend dollars on customer acquisition or offer free deliveries that impact their profit margins negatively. I think one of the most important lessons that DNVBs can learn from history is not to repeat the same mistakes.

wpDiscuz
Braintrust
"Wayfair has long been betting on future scale to explain away consistent losses, which were the rule not the exception for their earnings calls until the pandemic blip."
"Apart from a brief spell during the exceptional period of the pandemic, Wayfair has never been profitable. It has lost billons over the past 10 years."
"The challenge now is to develop and execute an appropriate business model going forward."

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