Wayfair’s earnings miss may portend trouble for fellow ‘disruptor’ brands – RetailWire – RetailWire

May 10, 2022

Through a special arrangement, presented here for discussion, is a summary of  Steve Dennis’ s recent Forbes article. Steve is President & Founder of SageBerry Consulting and a senior Forbes Contributor. He is the author of  Remarkable Retail: How to Win and Keep Customers in the Age of Disruption.

Last Thursday, shares of Wayfair lost 26 percent of their value and are now off about 75 percent from their high last year. Warby Parker, Allbirds, TheRealReal and many other online shopping darlings have likewise taken massive hits to their valuations as investors are waking up to the challenges of building sustainable digital-first companies.

While these brands are to be commended for their innovative business designs, they’ve also become quite adept at lighting fire to large piles of cash. It turns out that many of their market share gains are likely coming from both unsustainable pricing models and over-investment in marketing.

For Wayfair in particular, they seem highly dependent on leveraging their massive infrastructure investment, needing to improve gross margins and dialing back substantially on ineffective marketing. But raising pricing and pulling back on ad spend in the face of weakening consumer demand seems like a recipe for deleveraging their fixed costs.

Wayfair is opening its first physical stores this year under two distinct banners — AllModern and Joss & Main — after marking its fourth consecutive quarter of declining active customer count. Niraj Shah, CEO, told analysts, “This is the next stage of Wayfair’s omnichannel journey.”

Many digitally native vertical brands are hoping that opening physical stores will get them on the glide path to profitability. Yet Warby Parker, the one disruptor brand that actually has dozens of relatively mature brick and mortar locations, is still far from breaking even.

It’s one thing to say that “rent is the new CAC” (customer acquisition cost), talk about the halo-effect of stores and how brick and mortar expands the total addressable market. It’s another to actually open, scale and profitably operate a successful fleet of stores beyond a handful in largely no-brainer locations. This story is far from over.

Inflation and supply chain woes may explain part of these brands’ profit shortfalls and a couple of rough quarters. Particularly, as we transition to a largely post-COVID world, this is not automatically cause for panic.

But as we are now two decades past the first dot.com bubble bursting, there are plenty of lessons we should have learned.

DISCUSSION QUESTIONS: In what ways are Wayfair’s problems similar to and different than other digitally native vertical brands? What lessons from the first dot.com bubble may be relatable to the current crop of digital natives?

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“Wayfair has long been betting on future scale to explain away consistent losses, which were the rule not the exception for their earnings calls until the pandemic blip.”

“Apart from a brief spell during the exceptional period of the pandemic, Wayfair has never been profitable. It has lost billons over the past 10 years.”

“The challenge now is to develop and execute an appropriate business model going forward.”

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