Wayfair and the Future of E-Retail: CEO Niraj Shah Talks Transition Strategy
When you’ve raised $200 million in venture funding, that qualifies you as the top VC-backed technology bet in Boston. When you’ve been profitable for the better part of a decade, and all the outside investment has come in the past year and a half, there’s probably a deeper story there. And when you say no one knows who you are yet…well, then you have really piqued my interest.
It wasn’t always this way. Until June of 2011, Wayfair hadn’t raised a penny of outside capital. The company was then known as CSN Stores—or not, as people hadn’t heard of that, either—but that didn’t matter because it ran a successful network of 200-some websites selling furniture, cookware, pet and baby products, and other home goods. Its revenues grew from $250 million in 2009 to $380 million in 2010, followed by $500 million-plus in 2011, and over $600 million last year.
Wayfair is one of the great bootstrapped business stories to come out of Boston. That it is a consumer-facing Internet company adds to its mystique in these parts. Now it is on the next stage of its journey. A big part of the reason the 10-year-old firm took outside money—an effort that is still unfolding—is that in the rebranding from CSN Stores to Wayfair, it began consolidating all those 200-odd individual sites under one massive e-commerce roof.
How many people know we have an “Amazon for the home” right here in the Back Bay? Where is the company—and e-retail more generally—headed, now that it has one brand name and a huge wad of cash behind it? When is it going public? And what are its challenges?
I recently sat down with Niraj Shah, Wayfair’s co-founder and CEO, to get some answers. Shah (pictured above) took me on a quick tour of the 26-story building in Christian Science Plaza where the majority of Wayfair’s 1,200 employees work, spread out among many floors (see building, left). Each floor and department had a slightly different feel, from engineering and design to marketing and sales, to customer support (in roughly increasing order of noise volume). The company’s space for its private-sale site, Joss & Main, had its own elegant décor, furnished with stuff from the site, of course.
But these days Wayfair has been more about unifying itself around one brand—and trying to get name recognition among consumers. As Shah puts it, “What happens when people do know who we are? All of a sudden you’re talking about a business that could easily be multibillion dollars in sales. The market’s very large. Once you build a brand around it that has recognition, it’s a huge amplifier.”
To that end, Wayfair is running TV ads, reaching out to the media, adding more compelling content (stories and photos) to its site, and forming partnerships with magazines like Coastal Living. But in the grand scheme, that’s relatively small stuff—tactics, if you will. I wanted to know the deeper strategy: where Shah sees Wayfair fitting into, and helping to drive, the future of e-commerce.
Shah was willing to go there. But it takes some background first. A lot has changed at the company over the past couple of years, and the transition from CSN Stores to Wayfair has not been all roses.
Biggest technology bet
First of all, why take that huge outside investment in 2011—$165 million from Battery Ventures, Great Hill Partners, HarbourVest Partners, and Spark Capital? (The company added $36 million more last month.)
“When you bring investors in, I think you need to believe that in a five-year time horizon, there’s going to be an opportunity for investors to get their money back out, hopefully having made a lot of money,” Shah says. “When Steve [Conine] and I started the company, we were very focused on building something of real scale, and we didn’t really have a time frame in mind. You can easily get into a bad situation in terms of interests not being aligned [with investors]. So we didn’t take money in early for that reason.”
CSN Stores did well enough in the early years to fund its own growth. “You don’t want to raise money if you don’t need it—you just take dilution, to what end?” he says. “Also it was unclear how an investor would be able to help us in the near term.”
But fast forward to early 2011, Shah says, and “within five years, we see this company having an opportunity for an investor to exit. We’re about to undertake launching a new brand. That could use some capital, and we also don’t know how rocky the transition will be.” (Make a mental note of that.) “We have all these sites with all this traffic, and when you close those sites and redirect them [to Wayfair.com], you know you’re going to create havoc on your traffic. You don’t know quite how much, and if you’re running it out of cash flow, you might have to be more conservative, move slower, make short-term decisions. Whereas if you have a stronger balance sheet, you can say, ‘We know what the long-term vision is.’”
In other words, it was time to take a risk and go really big. Wayfair’s VCs also brought a lot of knowledge about private sales, social media, global businesses, and taking companies public. It didn’t hurt to “offer some folks liquidity” within the company as well, Shah says.
At the time of the investment, Battery Ventures’ Neeraj Agrawal said he had his eye on the company from its beginning, and that its focus on customer experience got his attention. (Sounds a bit like Amazon.) Meanwhile, Alex Finkelstein from Spark Capital said he thought the firm was “unique in its ability to deliver this valuable customer experience across a wide selection of products.”
That’s not just VCs blowing smoke about their latest bet. In fact, their thoughts are echoed in the e-commerce and retail community. Mike Salguero, the CEO of CustomMade, says Wayfair’s Shah and his colleagues “have been quite helpful in the area of concierge or customer service for consumers.” He adds, “We have deep respect for the company that Niraj has built. Everyone we have met who has worked with Wayfair has been exceptional; they clearly spend a lot of time hiring right.”
OK, so let’s talk about that transition from 200-plus individual shopping sites to one site, Wayfair.com. Shah says his team broke up the old sites into five batches and staggered the redirects to spread out the impact. But there was no getting around the fact that search-engine algorithms are wary of traffic redirects, and they make you earn back your rank if you rebrand. (And on the paid search side, you have to pay more to advertise Wayfair.com than AllBarStools.com when someone searches for bar stools.)
“In the short term, everything’s going to get crushed. Our revenue is basically traffic times conversion rate times average ticket. If you take traffic and drop it a lot, in the near term, you’re not going to be able to make that back up,” Shah says. “So, having a strong balance sheet is a good idea because we’re not entirely sure what’s going to happen, and we’re pretty sure we know it’s bad. Rarely in business do you do bad things on purpose. But here, it’s sort of like you have to jump over this cliff to get to the other side. The only way to go there is through this valley.”
So how bad was it? The transition occurred from late 2011 through mid-2012, and the casual observer would hardly notice much of a revenue blip, although growth may have slowed. Shah says Wayfair.com saw between a 50 and 75 percent loss in traffic at the low points. “The transition was definitely painful,” he says.
But it’s over now. To me, this risky move makes Wayfair even more compelling. The company wasn’t satisfied with being the biggest network of home-goods shopping sites. It wants to be the one-stop shop for the home that everybody knows. And yes, it still has a lot of work to do on that front. “Our big goal right now is to grow the business and take care of our customers and build the brand,” Shah says.
As for Wayfair’s five-year exit horizon, Shah says the “most likely outcome is to take it public,” versus getting acquired. “We think public market investors are very excited about e-commerce,” he says. “Could we ever sell the business? Sure, but there’s a small list of buyers. I don’t know that you’d say, ‘We did all this work, we’ve got accelerating growth, we’ll go to the moon—we should sell it today.’ We’re not dying to get out of this business so we can go sit on a beach.”
Granted, that’s the kind of stuff CEOs tend to say right before they get bought by Amazon for a gazillion dollars. But if we take Shah at his word, Wayfair is preparing for an IPO, but it isn’t ready just yet. “Being private affords you some opportunities, and being public affords you some opportunities,” he says. “There’s a point where the benefit to the shareholders in the company crosses over. I think right now we’re still on the side where being private affords us more opportunities. We totally foresee that changing, which is why we talk about being publicly traded. It’s just, we don’t see that happening in the next 12 months.”
Amazon vs. Wayfair?
In the meantime, Shah has some time to ponder the future of e-commerce (at least when a reporter is bugging him about it). Will we be looking at 3-D retail sites and touch interfaces for Web shopping anytime soon? And where will social shopping and mass customization lead?
“People like to jump on some new trend and say it’ll be revolutionary, it’s e-commerce 2.0, 3.0, maybe we’re onto 4.0,” he says. “If you look at how e-commerce is really conducted, you’ll notice Amazon is really growing; eBay is back to really growing; all the brick and mortar retailers have growing e-commerce businesses. A certain amount of the retail experience out there, people want. They want access to product selection, they want things delivered quickly, they want it to be an easy experience, they want good service, they want a compelling price. I don’t think you can say, ‘Oh, well, that model is inherently flawed—here’s something that’s totally different and better.’ Some people say curation will replace e-commerce 1.0. I don’t think that’s true.” Instead, he says, “You’re taking a model that’s always existed, but making it better because of mobile, because of the Internet.”
In other words, he says, “E-commerce is perhaps changing slower than people think, but folks who are doing a great job of it are figuring out ways to just make life easier and easier for customers, and doing more and more for them.”
How so? “The companies in retail that have stood the test of time and become real big forces, typically they’ve built an amazing supply chain,” Shah says. He notes that Walmart beat out competitors by lowering its costs via an efficient supply chain. More recently, retailers like Zara, H&M, and Warby Parker have streamlined their design and delivery processes so as to bring customers the latest styles for lower prices.
Some examples from Wayfair’s supply chain: “We’ve focused on speed of delivery,” Shah says. “Historically, we shipped directly from the manufacturer to the end customer. We still do that the vast majority of the time, but we’ve taken a lot of days out by automating the order process and working with our manufacturer partners to figure out how our orders can get shipped very quickly. We’ve coupled that with something that’s relatively new in the last year and a half. We now have half a million square feet of warehouse space in Kentucky and Utah. It’s a slim piece of the product assortment—it’s the better sellers for very fast delivery, within two days to anywhere in the U.S.—for categories like TV stands and bar stools.”
When Shah talks about consolidating freight and changing packaging to reduce damage rates, the average techie’s eyes might glaze over. But that’s the point: “Those things which don’t sound as sexy are actually the hard things that are driving the big wins,” he says.
Other experts in e-commerce seem to agree with that. “Wayfair has cracked some really tough supply chain integration problems that are inherent with dealing with so many suppliers. That work alone is impressive,” says Jules Pieri, the CEO of Daily Grommet. And, intriguingly, she hints at a coming showdown in the field. “Amazon has two great weaknesses. First, it’s not a brand as much as a machine, and second, they are absolutely dreadful at merchandising. Wayfair is hitting them in these flanks with their deep investment in both.” (OK, we’ll have to keep a close eye on this.)
Just when I’m starting to think the future of e-retail is all in shipping and distribution—and Amazon vs. Everyone Else—Shah reminds me that advances in digital shopping interfaces and graphics could, eventually, lead to some dramatically new user experiences.
“One of the biggest complaints with online [shopping] is how do you get a real feel for it? There’s a bunch of technology being developed. You can take a picture of your room and drop furniture in it. Those technologies aren’t mainstream yet, but they’re far closer than they were a few years ago,” he says.
“There’ll be a point at which you would never buy an item for your house without basically holding up your iPad—it’s got a camera, you pick an item, you drop it in the room, do I like how this looks? I do, I’ll buy it,” he says. “At that point, shopping online could actually be better than shopping in a store. How is it going to look in my home? That’s the ultimate question you’re trying to answer. If you can actually see the bedroom set in your bedroom and decide, that’s pretty much your perfect experience.”