Wayfair's layoffs and reorganization cut losses, but full year revenue is still on the decline. Can the elusive Vaccine Economy operating model be found in 2024?

Stuart Lauchlan Profile picture for user slauchlan February 23, 2024
Summary:
Tiny revenue growth in Q4, but CEO Naraj Shah declares "a definitive step" on the journey back to profitability.

wayfair

As far back as 2021, as Vaccine Economy realities started to hit a retail sector that had seen an online explosion, diginomica asked whether digital pureplays could build a future operating model

A prime example of such a company was furniture retailer Wayfair which was a firm that ‘had a good war’ during the pandemic. As we noted back in April 2020 as its business boomed: 

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.

But now that the pressure is on to get people back into offices, one of the drivers for growth has, if not gone away entirely, at least diminished.  That’s taken its toll on Wayfair in recent quarters and re-ignited the question that CEO Niraj Shah himself had posed rhetorically

In the early days, people would debate whether home goods would be bought online. Then it became clear that home goods were being bought online, but the debate became, how big a piece of the market could move online?

He added: 

E-commerce is a very tough business and the reason why it's tough is that it's like an athletic competition that really rewards the fully well-balanced athlete versus someone who maybe has really strong arms or particularly strong legs. 

The company has taken some tough measures to get its balancing act right. The latest in a series of job cuts was announced last month with the planned elimination of 13% of the global workforce. This follows earlier rounds of lay-offs - 1,750 employees in January 2023 and 870 in August 2022. Meanwhile Shah has been urging staff who remain to be more frugal and more open to working longer hours. 

Progress? 

So, is it working? Is this corporate blood-letting achieving the balance needed to get the business model on track in a post-pandemic market? The firm just turned in its Q4 and full year numbers, which showed a tiny bit of progress for the former - revenue up 0.4% year-on-year - but for the latter, revenue was down 1.8% year-on-year.

On a more positive note, net loss for Q4 was $174 million and $738 million for the full year, both down on year ago losses of $351 million and $1.331 billion. Overall, according to Shah, it’s “one more definitive step on our profitability journey”. He argues that at the end of 2022, when problems began to kick in, the firm had committed to three core initiatives - nailing the basics, driving customer and supplier loyalty, and cost efficiency: 

Over the course of 2023, we systematically executed on all three fronts. Our efforts to nail the basics and drive customer and supplier loyalty led to a large improvement in our core recipe across availability, speed and price competitiveness.

The improvements across our offering were directly responsible for the step-up we saw in loyalty, which manifested in our robust share expansion over the last year and by the fourth quarter, a return to year-over-year growth in our active customer count.

That engagement was driven in part by our progress on the third initiative, a meaningful evolution in our cost structure with savings spanning labor, operations and every other line of our P&L, which allowed us to reinvest in our customer experience.

As for those rounds of headcount reductions, he explains there was a need to cut away at the fat: 

As we looked at the evolution and composition of our teams throughout 2023, it became increasingly clear to us that there was more that could be done to increase productivity. We realized that many of our teams were still over-indexed to middle and upper level managers in proportion to the more execution-focused team members that are the foundation of each group.

Late last year, we started an exercise involving a number of our senior leaders to look at each team across the organization and answer some simple questions. How would we maximize the efficiency of this team? How many people would be on it? What would the appropriate leveling look like? Could we actually prioritize all the activities the team does? And then we answered as if we were starting from a blank slate.

We took this work and use it in conjunction with the effort we started in the summer of 2022 to return to our lean and fit self by re-organizing around an ideal structure. While this is not the work anyone enjoys being lean as a key part of our culture, and partly why we think we've out executed others over the last 20 years. The key here is that we are comfortable being frugal around headcount.

Brexit Britain boom?

Breaking the latest revenue numbers down, US performance is better than non-US. For the full year, US revenue was up 0.2%, while international was down 13.3% year-on-year. But Shah points to what many may regard as a surprising sweet spot for Wayfair, that of the post-Brexit UK market, where he cites “a noteworthy inflection in share over the past year”, important given the addressable market there is estimated to be around $60 billion. 

Given the meldown that’s characterized the UK retail sector of late, that raises the question of what Wayfair appears to be doing right? Shah posits that the firm’s country-specific approach to customers is paying off: 

Our creative is specifically built to emphasize UK tone of voice, along with using UK homes in our television ads, which you can view on our UK specific social channels. Leveraging our strength in logistics and our six UK Wayfair delivery terminals, we bring our UK customers a best-in-class fulfillment experience, with services like scheduled delivery and white glove upgrades, while also opening up a wider selection from suppliers based in Continental Europe. We find that UK competitors frequently have much lower levels of selection, which makes our endless aisle even more compelling and positions Wayfair as an unparalleled option in the market.

My take

The UK sweet spot caught my eye, not only because of the retail apocalypse we've seen there, but because of my own UK-based problems that I experienced with Wayfair back in late 2021, which left me wary of dealing with the firm again. Others apparently are having a better time…

Away from that, is the organizational bloodletting over? Shah is cautious when he says: 

On the productivity, efficiency gains, head count side, I think the way to think about it is, we obviously did reduce head count over the last 18 months. But this last time, what we did is we did it with first and foremost in eye to what we thought a very efficient organizational model would be versus a cost savings target or something like that is the initial going-in goal.

And so we think we've set up what will be a very efficient organization. There is some head count we will add to that, but it's modest in the scheme of the head count we have and what it really does, it lets us really reformulate teams including a lot of the more junior members of those teams, which during the COVID period, we hadn't hired…But that's from like an incremental head count cost standpoint, that's not a big number.

And there’s more productivity gains to come, he argues, including a boost from an overhaul of the firm’s tech infrastructure: 

We've spent a lot of the last couple of years on a technology transformation and re-platforming our core technology stack. And as we're nearing the later stages of that, we get a lot of gains from when we build feature-function on the new technology. It's much faster to build and much more flexible. Those gains will come in the future, but we're nearing that point. 

But there’s a still a tougher macro-economic climate to contend with as well, he admits: 

I'd say the macro has gotten tougher, but I will also point out the macro, the depth of the macro drawdown now, is quite significant. So it's kind of like…demand bouncing along the bottom. And I'd say that's kind of like generally what we would think it roughly is. But you can't predict the macro.

And Wayfair does have new competitive threats emerging, such as Temu, Shein and TikTok Shop. Shah is dismissive of them: 

What I would say is what we've really seen is, where they compete is at the very low-end of the market, both low-end quality wise and ticket size. And so that's where their volume is, that's what they're known for…We have not seen them really be a competitor. Obviously, we focus on home. Many people have a home business, the question is what do they really sell in home? What are the sub-categories and what tranches of them do they really play in? That's where you start seeing the Venn Diagram overlaps end up not being necessarily very large in certain places, and they are much larger in other places. So we have not seen these folks to be competitors. 

One other development to keep an eye on in 2024 - Wayfair will no longer be online-only as it launches its first retail store in May in the Chicago area. The tentative trial or the first of many? Who knows? 

Overall, some limited progress perhaps, enough to convince investors that there are still signs of life. But Wayfair is a long way from being out of trouble yet. Definitely one to watch in 2024. 

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