Wayfair Is Going Strong in Home Furnishings Online, But Don’t Count Amazon Out
Wayfair, the e-commerce home furnishings company, just released its financials for 1H2017. For the six months ending June 30, Wayfair revenues reached $2.1 billion, up 36% from $1.5 billion in the same period last year. Its number of active customers grew impressively as well, from 6.7 million in 1H2016 to 9.5 million this year. And while Wayfair did better than analysts expected, it still reported a loss of $95.4 million.
Along with its financials, Wayfair also released a presentation outlining their marketing plans which details its advantages in the home marketplace. If you want to go beyond the numbers, this is the place to look.
Impressed by its plan, editor-in-chief of RetailWire, George Anderson wrote a story, “Is Wayfair Amazon-Proof?” In it he suggested that Wayfair is well positioned to fight back against the relentless assault by Amazon into the home decorating space.
But I can give you one reason, or more precisely 80 million reasons, why Amazon shouldn’t be counted out: It’s Prime customers. With more than 8 times the number of customers digitally and financially bound to Amazon and with data recording each customers’ purchases across its wide range of offerings, Amazon is in the catbird’s seat to swoop in and eat Wayfair’s lunch if and when it chooses.
Here is where Wayfair is particularly vulnerable:
Wayfair hasn’t broken the code to selling furniture online
While Wayfair would like us to believe that it is in the e-commerce furniture business, and brags about the backend logistics that make delivery of large furniture items for free a key competitive advantage, its average order size is around $250. That doesn’t go very far when buying furniture.
Wayfair is primarily in the decorative home furnishings business, rather than furniture. There is no question that e-commerce penetration in the total home furnishings market is small, only 9% of the total $269 billion market. It can only grow, but there are many other variables in making a furniture purchase than just color and style, unlike decorative home accents.
People want to touch, feel, see and sit in furniture before they buy it. Assessing a piece of furniture’s size and scale is a challenge for most customers when shopping off of a sales floor, let alone from a screen.
The success some companies have had selling mattresses online isn’t comparable, since mattresses come in standard sizes. And part of the success of selling bedding online may well be a push back against how uninspiring shopping for a mattress is in a store, unlike furniture shopping in retail which is more fun and engaging for the customer.
Amazon has it all over Wayfair in customer demographics
When it comes to home purchases, two demographic factors are key: age and income. Home furnishing spending reaches its peak between ages 35-64 years which also corresponds to when people are at their highest income levels.
Right now Wayfair is banking on the millennials aged 24-34 years by attracting them early and building loyalty as they mature.
But where the real money is to be made in home furnishings is among the affluent consumers, with household incomes about $100k and over. These top quintile consumers spend twice as much as the average American household in the category and 75% more than those one quintile lower, with HHI from about $60k-$100k. Wayfair reports its typical consumer is in this later segment, median HHI $82k.
While Amazon doesn’t report the specific demographics of its Prime customers, I only assume that Amazon is way ahead in the affluent segment, since each pays $99 annually for the privilege of belonging.
Amazon knows when its Prime customers move
Another key variable tied to when home furnishings purchases occur is when people pack up and move. Moving stimulates a whole host of home-related purchases, decorative as well as functional.
To keep those Prime deliveries coming, customers have to notify Amazon of their change in residence. With that kind of big data, Amazon can anticipate their customers’ next need and push out offers targeted to those needs. Wayfair simply hasn’t the depth or reach into their customers’ life stages to match that of Amazon.
Wayfair’s mass-market positioning is no advantage in home
One of the key advantages that Wayfair touts is its mass-market positioning. It brags that it isn’t tied to the ebb and flow of the housing market, because it focuses on customers buying individual items “to freshen up their home,” said Wayfair CEO Nirah Shah on CNBC, rather than in the high-end furnishings market where customers are decorating their whole home.
If we’ve learned nothing else from the recent recession, it is that the mass market in any category is the last place a company wants to be. Yes, Wayfair has some brands that skew toward a higher demographic – Joss & Main, All Modern, Dwell Studio, and Birch Lane – but its core is the middle-income consumers, the most vulnerable when it comes to discretionary purchases like home furnishings.
How can Wayfair keep from getting “Amazoned”?
To propel its growth, Wayfair has had to adopt mass-marketing advertising tactics – television. It claims to have reached 81% aided brand awareness thanks to it. In order to avoid being “Amazoned,” it is going to have to make the quantum leap from e-commerce into the real brick-and-mortar world of retail like so many digitally-native brands are starting to do.
Whether Wayfair adopts a showroom-focused approach, like Blue Nile where the showroom acts as guide shop for customers to make their jewelry selections in person but to order online, or a more traditional retail strategy, like Warby-Parker, that will be determined. But a chain of Wayfair stores has got to be in its future.
Of course, it’s in Amazon’s plans as well. Now that it owns Whole Foods, I can see a “Whole Home” spin off coming from Amazon too. Then things will get really interesting.