As 'normalization' kicks in and shoppers head back to the store, can online pureplays like Wayfair furnish a Vaccine Economy future?

Profile picture for user slauchlan By Stuart Lauchlan August 23, 2021 Audio mode
Summary:
Wayfair has 'had a good war' during the COVID crisis, but as consumers drift back to the stores, what lies ahead for an online-only business model that was already eyed skeptically pre-pandemic?

desk
(Wayfair.com)

A question we’ve asked on multiple occasions is what the role of the store will be in the Vaccine Economy's omni-channel retail mix. From what we’ve seen from the likes of Target, Walmart and Macy’s, there does seem to be a pent-up consumer desire to get back into the aisles.

That being the case, here’s another question - what happens to online pureplays that have thrived during the pandemic and don’t have the store half of the omni-equation to fall back on? For some companies, this isn’t an issue - Amazon’s unlikely to suffer any time soon, although even there retail's 'Great Satan' is now looking at building out a real estate footprint.

But there are others where at first sight there might be a question mark or two hanging over them, justified or otherwise. As diginomica noted back in April last year, one of the surprise ‘winners’ during the COVID crisis was online-only furniture retailer Wayfair:

What’s the reason for the upturn? Look no further the working from home and the sudden demand for those who haven’t previously had need of a decent home office environment to kit themselves out with one.

In January this year, Wayfair founder and CEO Niraj Shah made no secret of the fact that there was still skepticism about whether buying furniture online was a sustainable business model. That’s not gone away as the Vaccine Economy has begun to take shape, with Shah telling analysts earlier this month:

Many of you have had questions as to whether Wayfair can be sustainably profitable as the pandemic recedes…Vaccination rates picked up, the economy more fully reopened, and consumer behavior understandably adjusted.

That’s reflected in a 10% drop in year-on-year revenue, although Shah was quick to point out that over a two year period growth was running north of 28%. That led him to declare:

Despite any short-term noise, the underlying structural elements for continued long-term category demand and share transfer to e-commerce remain in place. Consumer balance sheets are strong, and interest in the home is not going away post-pandemic even if there is some shorter-term normalization.

There's a long runway ahead for online share of the home category to grow, he insists:

While there may be some short-term rebalancing towards brick-and-mortar over the next couple of quarters, we're convinced the structural trends towards e-commerce will hold and potentially accelerate. History tells us that e-commerce gains tend to speed up when categories crossed the 20% threshold and the pandemic helped bring us to this point. Wayfair is furthering that e-commerce shift and our own wallet share capture by building out an unparalleled offering in more than 1,000 classes of home across four key verticals, furniture and decor, housewares, Home Improvement and professional.

Wayfair has a loyal customer base, he added, with healthy repeat order rates that outpace new orders:

We're focused on driving repeat orders in a few ways by converting new customers into repeating customers, through building frequency with our shoppers, and by re-engaging past customers who may have left…75% of our orders were repeat orders, so the business is really driven by people we already know. If you look at the active customer count with 31 million people...and if you just look even five quarters ago, we only had 21 million, so it's grown 10 million active customers in just the five quarters.

New directions

 

That said, there’s activity towards new revenue streams with a big B2B  push, Wayfair Professional, being led by General Manager Margaret Lawrence, who pitches this opportunity here thus:

Wayfair Professional first evolved as many business customers initially came to the Wayfair platform through our consumer-facing site. We recognized that these customers were very different in nature, and that there was an opportunity to build a customized experience for them. We started the early work in 2015 and officially launched the Wayfair Professional brand in the US in 2017. Since then, we've grown meaningfully with the number of active customers growing at a more than 30% CAGR. In addition to our vast B2C catalog, the number of commercial grade products on site has grown by approximately 25 times from when we started and nearly all inquiries are now handled by dedicated B2B service reps.

Next stop is Europe, she said:

There, we have already informally achieved some nice early scale by serving professional customers through the B2C platform, much like our initial trajectory in the US. We enjoy strong and strategic customer relationships with businesses of all sizes, from sole proprietorships to Fortune 100 companies, of which 84 are active customers today. More importantly, there's an enormous future opportunity here with the total addressable B2B market approaching $200 billion across North America and Europe, of which we estimate less than 15% is spent online.

It’s a different sort of target customer in the B2B space, Lawrence said:

Professional customers as a whole have a very different profile than our B2C shoppers. For instance, the average professional shopper visits more frequently, buys more often, and spends more each time they purchase than our B2C customers each year. Over the last 12 months, 80% of Wayfair Professional orders were placed by business customers who have already placed four or more lifetime orders. We have designed a unique funnel for our B2B shoppers that showcases the best ways that Wayfair can help them. It begins with customer acquisition, where we operate with the same data driven payback minded marketing philosophy as the rest of the business, while optimizing for B2B reach through some unique business oriented channels.

We're also tuned in to recognize when businesses come onto the platform through the B2C experience, at which point we adjust our marketing strategy to move them into the Wayfair Professional ecosystem and enrolment process, verification and a gated site allow us to show additional assortment exclusive to businesses, and provide the opportunity for our suppliers to lean in with sharper business pricing.

And there’s also a need to approach B2B customer service differently, she added:

In the traditional offline universe, customers may have to work with a dozen or more different providers to complete a single project. We focus on demonstrating how they can use our tools and services to complete their entire job through Wayfair Professional. We have many self-service options that are custom built for various use cases, with tools such as quote creation and management, project organization, buy it again for easy repeat purchases, and bulk cart edit functionality to manage larger baskets.

For professional shoppers looking for a higher touch level of support there are more than 500 business account managers to help to educate customers about Wayfair services and proactively reach out to intercept emerging needs as we help them complete their orders and projects. Our team has a wide array of capabilities including design services, custom sourcing, coordination of support for multi-faceted orders, and consolidated delivery, all of which we offer as additional options to create a seamless shopping journey for our B2B customers.

Again the pandemic has acted as a stimulus for the B2B business:

During the pandemic, Wayfair Professional seized the opportunity for differentiation versus the competition and accelerated our forward momentum. There were moments of uncertainty and some natural volatility along the way. But we leaned into these as a chance to more closely partner with our customers at a vulnerable time. We expect that these will translate into tighter relationships and higher customer lifetime values well beyond the pandemic.

Lawrence cited the example of a logistics company that needed to up three new office locations quickly.

We leveraged the full range of our commercial office capabilities, including space planning, design, custom sourcing and custom logistics. We were able to complete the project within their existing budget and on an ambitious eight week timeline, thanks to our strong supplier relationships and top tier fulfillment expertise. Our ability to execute quickly was a huge win for the customer, especially given the complexities introduced by the pandemic, and has since led to several more projects, we've worked on together.

There will be more of this to come in the Vaccine Economy, she predicted:

Now that macro conditions are normalizing across the US, many of our business customers are in the midst of a meaningful refresh cycle. Hotels, restaurants and schools are all reopening and adapting to new norms while contractors and interior designers are busier than ever.

All of which leave Shah confident in the future: 

We believe we're leaving the pandemic period with an even stronger repeat customer base than when we entered it...As we go through this normalization period, we're very mindful of balancing the needs of our customers and our suppliers and believe the Wayfair platform is advantaged in doing so.

My take

Is Shah’s confidence in his online-only model justified now that the “normalization” period has clearly begun? Inevitably only time will tell and it will be interesting to see how other home decor firms perform in the coming months. Will the allure of the IKEA meatballs prove enticing enough to get people back in store? Quite possible - as noted above, there’s a lot of pent-up demand and a weekend trip to IKEA is as much a symbol of a return to normality for many as going to the pub or the theater might be for others.  Williams and Sonoma is due to report its numbers this week which might provide another indicator for the direction of travel here. I wish Wayfair well - it's achieved a lot to date. One to keep an eye one over the next 18 months.