Supply Chain Matters continues to highlight select 2019 financial performance data that, in certain cases, points to challenged online business models in terms of operating profitability.

Following on our recent blog commentary related to Walmart’s online financial performance and eroding profitability, we turn our attention to

The online retailer describes itself as a technology company applied to online retailing, with a goal of providing: “Everything home, all in one place.”  Online buying and merchandise returns

Readers may be familiar with Wayfair’s business model that couples significant amounts of merchandise listings with an aggressive marketing spend. Anyone who has surfed the retailer’s online listings of merchandise items is often overwhelmed by the huge variety of merchandise in various categories, often with confusing or inconsistent product descriptions or specifications.

Most items are setup for direct shipping from suppliers, many of which are located across many low-cost manufacturing regions of Asia and other regions. Since its inception in 2002, the online retailer has struggled to produce consistent operating profitability.

Founded in 2002 and formerly known as CSN Stores, this retailer previously operated as 200 plus different web sites, each offering a single product category, with a predominate drop-ship customer fulfillment model. While each was growing fast, the company was missing cross-selling opportunities and supply consolidation opportunities, and thus made the decision to consolidate under the singular Wayfair brand.

At one point, the retailer’s active SKU’s grew from upwards of 2000 to 40,000, shipped directly at targeted service levels. Service levels moved from 1-8 weeks under drop ship, to 1-2-day delivery for high volume items. As is the tendency for these types of products, many long-tail demand patterns existed, as was cyclical forms of demand related to seasonal products. That magnified the challenge for managing long-tail demand patterns for individual products.

After incurring a 2019 annual operating loss of $985 million, including a $330 million loss in the all-important final holiday quarter, the online furniture and home improvement retailer is now taking a hard look at its operating model, including making some painful decisions.

After multi-year increases in hiring, the retailer has now had to shed upwards of 550 jobs, mostly in its company headquarters.  The notions of free shipping are fast fleeting to minimum buy thresholds. In its most recent quarter, while revenues increased 26 percent, operating expenses increased 44 percent, hence building an unsustainable operating model.

According to reporting from The Wall Street Journal, Wayfair plowed $311 million into advertising in Q4, amounting to about $28 per order, and barely broke even in the all-important holiday quarter. Factor in the higher cost of logistics and transportation that is often associated with furniture and home goods, and the notions of an unsustainable business model become ever more obvious. The Journal further observes that investors are increasingly growing weary of unprofitable companies since the unraveling of office-rental services provider WeWork.

Wayfair’s stock has reportedly lost more than half of its stock value over the past twelve months.

For its part, Wayfair’s management team assures investors that the focus for 2020 will be on profitability. As the WSJ points out, traditional furniture and home goods retailer Pier 1 Imports has recently filed for bankruptcy protection. Walmart shed most of the corporate staff ay Hayneedle, the online furniture retailer acquired in 2016, in order to boost profitability.

We would not be all that surprised if Wayfair has to make other tough decisions in the coming months.


Reader Takeaways

Under the notions of Supply Chains Do Matter, providing an alternative selling model for furniture and home goods comes with the reality of high logistics and transportation costs. Add to that a very wide selection of available online SKU’s, and the business model becomes ever more complex in terms of built-in costs, not to mention a very high dependence on advertising spend to sustain sales momentum.

While some equity analysts insist that seizing and maintaining market share remains the end-goal, the realities of efficiently managing a complex and extended supply network model are likely at-odds with profitability targets. From our lens, the online merchandizing model will have to be streamlined for both online market dominance and profitability.

Once again, there is another online retail business case that reinforces the need for controlling or reducing online customer fulfillment costs.

The notions of an online business model that fosters aggressive spending to gain online market share are no longer being tolerated in today’s investment climate. Only the likes of Amazon, who can rely on other cash generating businesses to bankroll online growth, are tolerable to investors.


Bob Ferrari

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