Wayfair Inc. (W) Earnings Call Transcript & Summary

Great. Good morning, everyone. My name is Jonathan Matuszewski. I cover the broader home industry at Jefferies. Very pleased to be hosting this fireside chat with Wayfair. As many of you know, Wayfair is the leading online destination for all things home, with 33 million active customers in their ecosystem. And from the company today, we have CEO, Co-Founder and Co-Chairman, Niraj Shah; and Co-Founder and Co-Chairman, Steve Conine. So welcome, Niraj and Steve.

Thank you, Jonathan. Great to be here.

Thank you.

And so I think the format of this chat will be some prepared questions, and then we'll leave it up to management for any concluding remarks. But Niraj, I want to kick it off with just a high-level question. At the onset of the pandemic, obviously, Wayfair was a popular choice for home furniture and outdoor furniture. Obviously, you saw more broad-based trends thereafter. You were able to add $5 billion in sales last year, a pretty remarkable feat. So I guess my questions are, how do you think about consumer propensity to spend on the category as we have this reopening going on? And then how do you envision what the consumer will be spending on, on your platform within home that they didn't spend on last year?

Yes. So the way we look at it, so a few thoughts about home. So one is, it's a pretty vast category. So the TAM we're going after between Europe and North America is about $840 billion, about 50-50. So inside it, there's just hundreds of kind of what you think of the subcategories, whether it's sheds or gazebos or garage storage or mailbox or doormat or rug or bed or kitchen pots and pans or what have you. And so what happens is, there's a never-ending list of projects or items you want for your home and you sort of go from one to the next. And you don't particularly buy that same one again that often, but there's always something you're in market for. And other than the very beginning of the pandemic, the first 2 to 4 weeks, other than that, we've not seen a concentration of demand in any particular category. So at the very beginning, there was a little bit of concentration, but then very quickly have broadened out. And frankly, the more time people spend in their homes, the more they create a list of what they want to do next and what they'd like to do to improve it. And what we're seeing is that home has become more important to customers. And even as they are excited to be out and about and travel, the reality is, I think they've spent enough time in their homes, so sort of it's grown in importance to them. And frankly, they have a bunch of money to spend. You look at American Savings account that's gone from $800 billion or so pre-pandemic to over $3 trillion. And so they have the money. And to be blunt, we have very little share. Last year with $14 billion in revenue, we had less than 2% share of the category. And so what's happening is more and more is moving online. And when it moves online, it doesn't stay with the same retailers who've had it before. It tends to change hands. And this is why we grow so fast is that we're effectively a major place where share moves as it moves online.

That makes a lot of sense. Yes, big category. Obviously, a lot of money in consumers' pockets and home remains paramount here. Steve, I wanted to ask you a question here. Obviously, technology is a differentiator for Wayfair, obviously, part of the competitive moat. You do see other retailers stepping up their investments in terms of whether it's augmented and virtual reality. So maybe just share kind of what thought -- what inning Wayfair is in there? And how important is that technology for driving higher e-commerce penetration over time?

Yes. Sure. Thanks, Jonathan. So I would just sort of preface it with -- certainly, our broad goal over time is to make online the preferable channel for shopping for the home. If you look at the category today, still the vast majority is sold at bricks and mortar. And I think we, over the years, have researched and pushed on and invested in tools and experiences that really continue to chip away at how do you make shopping online the preferred channel for home. And so AR and VR is certainly a space that we've been playing with for quite a while now. And we do believe, over time, it has -- it can have a meaningful impact in terms of making it easier to shop for your home from your home. So you can, obviously, visualize products in your space, if you're in your space. I think in terms of where we are, we're early innings in that. And so our experience, our sort of use of the technology today, frankly, a lot of it turns back into 2D imagery. And so we produce a tremendous amount of 2D imagery. We know consumers use that. It significantly impacts their propensity to purchase online, their comfort with what they're getting and how it's going to look. And we do a tremendous amount of 3D rendering to create imagery. We're also -- I would say we've tried to be a real influencer in the 3D ecosystem. So we're part of the 3D commerce group, which is trying to sort of set the standards by which models and modeling and 3D content in retail is evolved, right, so -- to make it so that as you see device, see imagery and you want to pull it down to the 3D models, you want to make sure that it works across all platforms, it works across all tools. And so we've tried to be a real influencer in that space. And then we've also tried to be a real influencer on our supply side, where a lot of our suppliers are interested in the technology, but we can play a real role in helping them accelerate their use and their understanding of kind of what's appropriate to invest in today versus what might be in the future. I honestly think we're like in inning 1 in this. I don't know that the core tools consumers have to use AR and VR and digest the content are really like -- they haven't really crossed the chasm yet, in my opinion. But I think that that's -- it's always tough to know exactly when that will happen, but we're firm believers that's going to happen, and so we're positioning ourselves to really take advantage of it as it does.

Yes. That's helpful. And just a follow-up question there. I mean, obviously, kind of you guys are investing in technology for a better online experience. You've experimented a little bit with brick-and-mortar pilots from time to time. And you guys are kind of thinking about the next concept. And do you -- how do you see kind of technology, whether it's AR or VR kind of playing a role in the future store concept, whatever that looks like?

Yes. And to your point, I think there is sort of an unread field of opportunity out there for us in bricks and mortar at some point, if you can figure it out, and running the experiments now to figure out what the opportunities are, are certainly something that we're doing. I think in technology, for sure, I mean, I think if you -- I don't know, I think some people probably visited the one store we had open. We had a design bar which was a concept we pushed or we experimented with where customers would come in and we would help them design their space. And so the idea of like, well, if we can get a photo of your space ahead of time or -- ideally, I mean, at some point in the future, I think every home in the U.S. will have a 3D model associated with it. And so you can come in and say, "Hey, look, I live in 123 Main Street. And yes, you have permission to pull in my model." Well, for sure, then we can have a design services team in our store who can give you a very personalized experience and actually help you visualize products in your space, get really help guarantee that it will fit. It will flow well, it's the look and style you want. And so those are experiences and experiments we're running in -- at this stage, kind of in the evolution of us going after that opportunity. And again, I think it's early -- very early innings in that. But for sure, those will become tools I think consumers will expect with greater -- with an in-person experience as well as self-service.

Yes. That's really exciting. And then so let's move on to international. Niraj, it feels like this part of the story is really kind of coming together. You have brand awareness in the United Kingdom, I think, in the mid-70s. Obviously, U.S. suppliers using Wayfair to expand abroad, higher utilization of CastleGate internationally. So I guess my question is, how do you think about international progress from here? And how do you solve for when to go after the next step in the playbook? And I imagine that's going to be going beyond the 2 countries you deliver to in Europe.

Yes. That's a great question. I think that -- let me start with one thing which I think is important to understand is that we've taken a very methodical approach to Europe from day 1 around what our long-term aspirations were, even though obviously focusing is a key part of winning. And what I mean by that is there's a few key decisions we took in the very beginning. So even though the U.K. was the first market we focused on, we decided to headquarter the business in Berlin. Even though we're focused on the U.K. market, we basically said, hey, we want to have a pan-European supplier network. So today, even though we only deliver in the U.K. and Germany, we have suppliers in 30 different countries and would supply the goods. And in order to make that work, we invested into 2 key things. One is we have a European transportation network that basically is doing consolidation and moving goods between those different countries. And so while we only deliver in the U.K. and Germany today, we actually have already invested in and built the transportation capacity to do more. And then the other thing we did is we built native country category management teams headquartered in Berlin, but there's a team of Spanish nationals that cover our Spanish suppliers, or a team of Italian nationals that cover our Italian suppliers, same for Poland, et cetera. And so what we've done is we've effectively built the infrastructure that basically allows us to expand over time. And so for example, in the U.K., once the U.K. was off to the races and doing well. And so we kind of started -- we made a big focus on the U.K. in 2014. We said in 2015 to start the brand marketing. Two years in, 2017, we felt like it was going quite well. We could see it in the metrics. We then started building the team to focus on Germany. Then in Germany, by 2019, we felt like we were in a good place to start the brand marketing. So that's when we started it. We're now 2 years in, and we're seeing it going well. So everything is done in a very methodical sort of order of operations. And that's been a key piece to how we win because trying to do too many things in parallel doesn't work. And so doing it in an organized way is the key to success. And then frankly, even though it felt quite expensive when you go back a couple of years ago in Europe when we built that infrastructure, the truth is, that's the investment that then allows us to do more things very economically. And so that's why we'd taken that approach.

That's helpful. Yes. So it seems like a lot of the groundwork is laid for future expansion. And then also kind of B2B is an exciting opportunity for you guys ahead. The last update you shared, it was $1.5 billion in terms of overall sales, larger than I had anticipated. So where do you guys see this business long term? And is there any reason why that kind of sub-1% penetration in Europe today won't follow the same path of North America being over 10%? Is there any kind of structural differences or anything like that?

Yes. That's a great question. Actually, that's a great example to my earlier point. So the B2B business is about $100 billion of TAM in North America and about $100 billion in Europe, very similar, very analogous kind of big open opportunity, super fragmented. The customers are not served very well. The -- all the benefits of our platform work very well for the verticals we go after. So it is the same opportunity. Similar to North America, the way it started is, we noticed that we were having business -- customers on the site, then we incubated by having kind of a small team of business account managers then focus on that set of customers and take care of them. And that effectively we saw that really drove the repeat economics by having just an account manager. Then over time, we built the technology to basically support the verticals to have different navigation, support the additional selection. We have different service offerings and others like if you're in the office vertical, one of the things we'll offer is space planning services. We'll help you lay out your new office and design the space layout. Obviously, that leads to you buying a lot of goods from us, right? So that's, of course, why you provide that service or consolidated delivery for designers. Well, in Europe, what we've already done is that same first piece. So we've now, for a couple of years, had a small team of business account managers working with customers there, and we're seeing the same metrics. And so -- and then as you can imagine, software you build is directly transferable because we have one platform that we use globally. And so we're effectively doing the same methodical thing. And so I wouldn't think of the B2B business as something that we haven't yet done in Europe. Just think of it from a time index standpoint is evolving the same way. And we're just at a natural point where now that business account manager team is big enough, you now say, okay, well, let's add some of the additional kind of operations, how we manage what we already do in North America. That will grow the business quite quickly. We know, same order of operations.

Right. And you mentioned office. I mean obviously, you work with interior designers and hospitality clients and things -- I see the content you have in the education field. So where -- how should we think about where you are kind of most penetrated, least penetrated today?

Yes. So I mean I mentioned the TAM in North America is $100 billion. And you mentioned we're at $1.5 billion we announced just recently, which is, to your point, it's about 10% of the Wayfair business in North America, but it's only less than 2% of the TAM. So you can tell how early we are and how vast the opportunity is, is when you start saying, well, who is the leader in the segments of the TAM. You're like -- you can't even think of who they are. It's just super fragmented there. It's not like we're trying to unseat a big behemoth winner. It's just that these segments have never been taken care of particularly well. So I would encourage you to think is just we're early everywhere. If you said, well, which vertical is the most advanced? I would say the designer vertical, but that's simply because we started there first. And so the -- kind of we have these 7 focused verticals and they're kind of progressing, and it's actually quite a big opportunity. And so having that dedicated team on it, which we have is exciting. But that's when we talk about, if you look at the corporate head count, corporate staff of about 7,000 people, rough numbers in the company. And we've tried to make the point a few times that the P&L you see today is despite literally thousands of people working on the experience for the future and people have this kind of business, well, what are the -- let's make it up, say there's 2,000 people or 2,500 people working. What are they doing, right? That's a common question we get. Well, one example is, a lot of the experience on the B2B side, if you log in as a designer, you log in as a contractor, that vertical experience has really come a long way between the different tools we give you, between the navigation you have, the additional selection that's available to you, these additional services. So that's a great example where we bolstered that team over time, and that's allowed us to make the vertical experience stronger and stronger, which then lets us take share and a customer ends up being very pleasantly surprised by what we offer. And of course, they start coming back more and more often as that happens, et cetera.

Yes. That color is helpful. And in terms of people, you also have kind of people building this Perigold business. That's a really unique opportunity. Obviously, kind of access to this high-end product isn't available everywhere and kind of the digital capabilities that these manufacturers are limited. So obviously, we've seen over the years press releases about adding more and more designer brands. So what else do you need to do to take more share of higher income consumers? What are kind of the things on your list to kind of really grow share there?

Yes. So stage 1, which would be the same thing that we needed to do when we entered the U.K., it's the same thing we needed to do when we launched Perigold is, you need to really build the catalog. So you have to get the suppliers on board, you need to get the items built out. You need to have the catalog. Because if you don't have a catalog, you effectively don't have an offering for customers. And obviously, you need other things like the transportation, delivery infrastructure and the service infrastructure. But we, of course, have those things already. But the catalog for Perigold, of course, we wouldn't have had, right? Because we were mass, we didn't do luxury. So you can think of kind of the phase that sort of the last 3 years was about was, hey, how do we onboard these kind of few hundred key suppliers that you find in the design centers? How do we get the catalogs loaded? How do we get them working with us? How do we help them learn about how e-commerce works? And so we've done a lot of that. And so today, the offering you find on Perigold is dramatically advanced relative to what it would have been even 1 year ago or 2 years ago. And we're now in a phase where you then focus on bringing the offering to life. And that's a bunch of things you would do on merchandising, that's a bunch of things you would do on the site experience. And so you're at a period of time where now you've built a nice-sized business but very small relative to potential. And you're saying -- you're seeing customers come in and really enjoy. And so you're basically saying, let's keep bringing more and more -- let's market it to get more and more customers and let's keep elevating the experience. And that's the phase we're in now. And there's just a tremendous runway because we think luxury in North America is probably around about $60 billion or $70 billion of that $420 billion TAM. As you would imagine, Perigold is quite small today relative to -- tiny relative to potential. And there -- again, there really are not a lot of direct competitors, so it's quite a big opportunity.

And also opportunity on the margin side, right? A little bit higher margin than your mass business?

Yes. So typically, what you find is inside mass, even from opening price point to better, to best, margin goes up and then it goes up as you go to specialty and then it goes up as you go to luxury. So that's just -- that's fairly common in most industries, but absolutely also the case here. And we kind of get that double benefit because it's not just the margin of the items higher. Part of the reason the margin's higher is, as you can imagine, delivering a sofa that costs $5,000 doesn't really cost dramatically different amount than the sofa that cost $500. And so if you start thinking about the way shipping efficiencies play into it, that even though you might do a couple of more things on the shipping side, the truth is the cost doesn't change in the way that the percentage changes.

Right, right. And then so this past year, a lot of people focused on the top line trends and kind of end consumer demand. I want to spend a second on your supplier base, right? Because I think this is interesting. You provided a lot of visibility when there was uncertainty. You partnered closely with them. I think you helped accelerate payments when some of them were experiencing cash crunches. So could you give us some anecdotal examples maybe of how are the suppliers paying you back in terms of you helping them out in a crunch? And do you ascribe to this thesis that COVID-19 has permanently changed how vendors are going to allocate going forward?

Well, what I would say is -- and this is not COVID-19 specific. This has been happening over the 18 years we've been in business. It's just that suppliers increasingly see e-commerce as part of their future and COVID certainly heightened that, for sure. The second thing though is, we take a much more collaborative approach to how we work with our suppliers than most retailers take. And that collaborative approach really helps significantly because what happens is that collaborative approach allows suppliers to learn what they can get better at. It encourages them to ask questions on things they don't understand, which you can then help answer. And we can do that. We'll also making clear, the truth is we're a platform and they're competing against their peer suppliers. But our goal is to help give them good guidance. Then it's up to them on what they choose to do with it. And that -- what that has done over time is they found that we can be a reliable partner who basically they can build their e-commerce future. They can build their business around. A lot of the other platforms out there, like when COVID hit, a bunch of competitive platforms deprioritized these categories, for example. Well, that -- if you're a supplier only in this category and you had reliance to it, that would be a really painful thing, right? Or what happens when certain other platforms is like things are optimized for other categories. So what you're trying to do in this category gets suboptimized and there's kind of no way around that. So what we've been able to do is we've been able to get suppliers increasingly focused on Wayfair being their anchor of how they think about their e-commerce future and increasingly doing things that help the Wayfair customer, whether that be with doing more items that are not available on other platforms, whether that be about integrating the supply chain so that basically we're offering incredibly fast delivery to customers and taking costs out in the process, whether that be held or embracing what we're doing around merchandising and with the 3D models and rendering the imagery, which then heightens the merchandising experience. And we're seeing suppliers just increasingly leaning in. And I think maybe where COVID did help is that COVID sort of -- it sort of heightened what was an obvious conclusion in my mind even before, but just that e-commerce was going to be a really meaningful piece of the future. I would say whoever was either neutral to skeptical on that has ended up deciding that, that's clearly true. Like there's no debate about that topic anymore. And people want to -- how do I then advantage my business, if I take that as a given that e-commerce is critical.

Right. And you have all these services that you kind of continue to offer your suppliers. We get a lot of questions about the advertising services, media services business from investors. So my question here is, is there a major unlock that needs to occur to really scale that business? And you talk a lot about kind of adding functionality to make it more self-served. So is it going to be all of a sudden kind of a switch turns on? Or is it just more of a slow and steady ramp as kind of suppliers get comfortable with it, as suppliers kind of spread the word to their colleagues in the industry? And what is it about this self-serve functionality that is helpful?

Yes. What I would say on the advertising side, I think it's -- I don't know if slow and steady is the right word, but it is more like it just plays out over time, for sure. And what it is that like some of the advancements we're making in how some of the reporting works. Well, that's key for certain suppliers to scale their spend or certain functionality, whether it be around the keyword bidding or other things that we've recently launched or new things that we're working on matter for certain suppliers. Or we've been introducing new types of ad units, and that helps for some. And so -- and then there's just generally like some suppliers are very quick to adopt new tools and other suppliers wait and watch for a while. And certain suppliers say, well, that's just not a priority, and they get around to it later. So there's a little bit of like combination of all those things are what lead to that kind of sustained growth over time. But it ends up being significant because it's not like you're adding new suppliers who are then leading in while certain depart sort of like as they become a user of the product, they find that there's a bunch of use cases where, of course, it makes perfect sense for them and they get a great return. So it's kind of like you get this cumulative build.

And I remember, I think, a while ago, maybe when you started this presumably as a pilot, you wanted to kind of maybe just test it with some key suppliers, right, and kind of test and learn. Just give us an update in terms of the availability, is the sponsored SKU advertising kind of open to all suppliers or...

Yes. It's open to all suppliers. The extra net we have called Partner Home, which is where they have all the different tools they use to operate their business on our platform. it's available in there with all the functionality equally to all the different suppliers. So typically, when we're going to introduce something new, we'll have a short period where we do some beta testing with a small number of suppliers. It's more about just making sure it's working well for them before we launch it broadly rather than only giving a small number of suppliers an advantage. So those periods are usually pretty short, but we just want to make sure things are working really well before we launch it and then that's how you avoid problems, of course.

Yes. That makes a lot of sense. And we'll switch over to some cost items here on advertising expense. Maybe just comment on the path forward towards that 6% to 8% goal. Is that past contingent upon repeat continuing to grow as a percentage of the mix? Maybe just kind of talk about your expectations there? And then also just in that same vein, how do you think about advertising spend as some of your mass competitors that are maybe kind of competing for more eyeballs going online? And how does that affect kind of digital advertising spend?

Yes. So one thing I would just highlight, we're obviously a substantial advertiser already. And so when you think about -- like Ad Age does a list of the top 100 advertisers in the U.S. every year. And in the 2019 list, which I think might have been the last one to come out, we were something like 50th on the list. And if you just looked at what our spend was last year, I think we would have moved up to like 35th or so on the list just with what we spent in 2020. So part of the way you get -- the advertising gets more efficient over time is a combination of things. One is repeat. When someone's second purchase is -- you spend far less than you spent on the first purchase, third purchase, fourth purchase, it keeps going down. So you keep getting more and more efficient. And the reason for that is the advertising plays less of a role. The customer becomes loyal to you, they've downloaded your app, they're getting your emails, they're getting push notifications. You're corresponding with them for free, and you're actually, frankly, able to make more and more targeted great communications. And then if you send them a catalog, 100-page catalog, there -- it only costs you $1. So if they're spending $500 a year, you turn that into a percentage. It's like you're not spending a very high percentage to be very active with them. And so that's one way it goes down. The second way it goes down, frankly, as I mentioned, I think we'd be around about 35th on the list last year. I mean, at some point, you say, well, why are you marching up the list? Isn't everyone else marching up? Well, at some point, there's a diminishing return for everybody because you just become ubiquitous. And I think, #1 and #2 were at like $6 billion of spend each. I think it was Amazon and Comcast, and I think Xfinity. And so you're like, well, I see them advertising literally everywhere. And so it's like, well, that would be also why they're not necessarily spending more because like you won't be everywhere twice, or it's a point, how much do you really want to advertise. So the combo of those 2 things really give you a lot of leverage.

Yes. That makes sense. And Steve, a follow-up question for you on this topic. I mean, obviously, you guys have mentioned in the past that the ad tech team has done a good job in terms of taking advantage of shifts in the ad market. Obviously, kind of we're in one of those dynamics now with some of the Internet privacy law changes. So maybe just talk about kind of, without revealing your secret sauce, how the ad tech team is responding to some of these changes and kind of exploiting kind of Wayfair's first-party relationship with customers and things like that.

Yes, sure. Yes, this is obviously an area that we have a team working very closely on. I would say just first and foremost, I mean, we obviously make sure that we remain compliant in following the rules and just doing the right thing for our customers. I think our -- as you alluded to, our success is, in a large part, having a brand and having a deep relationship with our customers really, I think, sets us apart from some of the dynamics a lot of our smaller competitors face. And I think the other thing we've always seen in advertising is that when we are small, it's hard to advertise the generic big terms and get those in front of customers. We, obviously, have the breadth and scale and depth to go way broad in our advertising and still have very good conversion yield because we generally are going to have what people want when they come into our properties as opposed to narrow operators who have a very difficult time advertising when things get more generic or when they can't target quite as tightly. We really think that -- so the latest impact from the privacy changes. So far, they're very manageable. And the fact that we do have this trusted brand, we've been investing in it for years, I think it really positions us well vis-a-vis the rest of the advertising landscape. And so as the market shifts, I mean, it's a very dynamic ad market as it has been since we've started this business. We really have a team that works on how do we keep pushing at the forefront of that and how do we run the right experiments, so that we're seeing what's happening now before it really maybe takes effect, so we can then navigate much more intelligently. As you know, different platforms kind of changed the way that they're allowing you to target or they're allowing you to access deeper analytics about your advertising too.

Yes. No, that color is helpful. Well, it looks like we're at the half hour mark. So I think we'll call it time. Niraj and Steve, thank you guys so much for your perspectives this morning. Really appreciate it and look forward to the rest of the conference.

Great. Thank you.

Thank you, Jonathan.

Thanks, everyone.

Thank you.