Online furniture and accessories retailer Wayfair (NYSE:W) has built a business worth $13 billion in annual sales by prioritizing market share capture. While this approach has paid off for shareholders in 2020, as shares have quadrupled during the COVID-19 pandemic, the strategy isn’t risk-free. In a conversation with fellow Motley Fool contributor Brian Feroldi, Asit Sharma walks through the opportunities and shortcomings of Wayfair’s hypergrowth bent.
A full transcript follows the video.
Brian Feroldi: They rebranded themselves as Wayfair in 2011. Six hundred million dollars in revenue. IPO in 2014. They’ve acquired a logistics network, expanded internationally, built out their existing products, and last year, $9 billion in net revenue. And a pretty good growth rate, too.
Asit Sharma: Hey, Brian, if I can jump in with a comment here, just to say, this idea that they have of investing in a hypergrowth that you don’t like, and I’m not a huge fan of either, but I understand it, has a lot to do with this logistics network. So they’re building these big distribution centers all over the U.S. and in Europe. And they also have what they call a middle-mile-delivery network, which is basically trucks from distribution, and they’re getting into last-mile delivery services too. So that’s taking the furniture that you buy online from Wayfair and getting it right to your door. It’s an expensive business. They’re building a lot of infrastructure. The big why — why do they want to do this? — is because a certain company called Amazon.com also is in the furniture business, and they want to make sure they insulate themselves from competitive threats from Amazon and some others.
Feroldi: I understand their strategy there. And thank you for pointing that out. But there are things I like about this business, definitely. Huge TAM — $600 billion is what they believe their TAM is, total addressable market, in the U.S. and Europe. Again, last year, $9 billion. So if that’s true, there is about a 1.5% penetration rate. They have a hugely fragmented market with 12,000 suppliers. So that’s a lot of people that are on their platform. They’re increasing engagement from repeat customers. I am a Wayfair customer. We’ve purchased numerous things off their network, and they are balancing a return to profitability. Balancing it; it’s a balancing act. And their co-founders are the largest shareholders.
Boy, do I like both of those things. And they are focused on long-term growth, so their core business is selling furniture, which is a category that they have really come to dominate even more so than Amazon. They’ve had a really good long-term growth trajectory. They have some mega-tailwinds at their back. They believe that they’re taking market share. Asit, have you ever bought anything off Wayfair?
Sharma: I haven’t, but if you can pause right here on this graph. So this is a graph they’ve been showing on their financials for a few quarters — we can maybe get back there — and you can see, going from left to right, the online category is growing much faster than the physical store category in terms of furniture. And what they’re showing here, as your eye moves from the left to the right, of those dollars that are shifting to online purchases, they’re saying that they’ve got about two-fifths of that $5 billion in growth of that category, so about 38%.
And so, if you’re a Wayfair bull, this is what you like to see.