Wayfair plays long game as online furniture war with Amazon looms

Here's a look at a few Wayfair initiatives that are designed to help the online furniture retailer gain share, acquire customers and help it leverage new technology.

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Online furniture retailer Wayfair has its share of worries. Sure, furniture purchases are moving online, but the company will battle Amazon for wallet share. And the company's third quarter featured a larger-than-expected loss.

But there are more than a few nuances to ponder. Wayfair, like its rival Amazon, is playing the long game and seems to be willing to disappoint Wall Street to be better positioned in the years to come. In other words, Wayfair may be well suited to compete with Amazon because it's strategy is to be customer first and engender loyalty via service, online experiences and behind-the-scenes logistics. The battle between Amazon and Wayfair starts in the home and moves to the office.

Indeed, Wayfair's third quarter drove shares sharply lower on Thursday. The company reported a third quarter net loss of $151.7 million, on revenue of $1.7 billion, up 43.3 percent from a year ago. The non-GAAP loss was $1.28 a share compared to Wall Street estimates of $1.09 a share. On the bright side, Wayfair ended the quarter with 13.9 million active customers, up 35 percent from a year ago.

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Niraj Shah, CEO of Wayfair, acknowledged that the company missed its EBITDA targets in the quarter, but saw investment opportunities it couldn't resist. "By putting those dollars to work in a rigorous and high conviction way, we are taking steps today that will drive growth and profitability for many years ahead," he said.

Among the key points from Wayfair's third quarter earnings conference call:

Big technology bets for the future. Wayfair co-founder Steven Conine outlined the company's investment in visualization technologies such as augmented reality, virtual reality and mixed reality. The company didn't detail returns on these investments, but Conine said forward technology bets will "keep us at the forefront of e-commerce for the home in the years to come."

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Conine outlined the company's partnership with Magic Leap as well as mixed reality and spatial computing overall. Wayfair bets that Magic Leap One can enhance shopping

He said:

Spatial computing platforms utilize user space to show them information instead of a 2D screen, such as an iPhone or a computer screen. We believe this could have a huge impact on how people shop through the home online.

It's worth noting that Amazon is also using AR and many of its AWS services to enable shopping for the home. Wayfair isn't going easy though. Conine said Wayfair has more than 2,100 engineers and data scientists working on the shopping experience.

How Wayfair used big data and omnichannel retail to transform shopping | Amazon brings augmented reality feature AR View to Amazon app

Conine added:

With early stage technologies, the source of future returns is often very unclear. We have seen, for example, that our early investments in augmented reality has yielded substantial benefit to our wider business by enabling us to develop a catalog of 3D product images to use across our business. Today, oversight merchandising teams increasingly create rich lifestyle images digitally for use throughout our site where as the need to never assemble the stocks to be shop in a further studio. Without our initial investment in augmented reality, we would not have developed this capability.

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Wayfair bases its ad spending on customer acquisition and a one-year payback period. From there, customers often repeat and drive lifetime value. Wayfair aims to be opportunistic with its ad spend.

One reason Wayfair missed its EBITDA targets was that it saw good deals on advertising and potential to add customers. CFO Michael Fleisher explained:

As we talked about in the beginning or last quarter's call, we did expect to show some ad spend leverage. But as we went through the quarter, we continued to see great opportunities within our paybacks as everyone I think is aware, we look for a 1 year -- on average, a 1 year payback on new customer acquisitions on ad spend. And we've said time and time again, if in the middle of quarter, we see those opportunities and the team is finding that, we're going to go lean in and take advantage of it. And we're always going to do it from the perspective of what's the right long-term returns of the business as opposed of sort of trying to make a particular number even if it's something that we guided.

Here's a look at Wayfair's high level marketing spend approach and some numbers to ponder.

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International expansion. Shah noted that the company's international expansion was necessary, but German is running elevated losses. "Germany is currently running at elevated losses as we are in an inflection point in the development of our business there. In Germany, we've built dedicated teams with category managers," said Shah.

Wayfair is also building out logistics in Canada, which can leverage U.S. infrastructure, and in Europe. "We're continuing to invest heavily in our teams in Europe, with over 1,400 people based there present and Berlin where over half of our European headcount is located, we're continuing to great people across our teams, with functions including marketing, engineering and operations," said Shah.

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