Women have a drive for style and uniqueness, expressed in clothing, jewelry and home goods. (Men, not so much.) How do you build a $1,000,000,000 business around this concept?
The answer is by operating the category leader in internet home goods sales, says Wayfair CEO Naraj Shah, speaking to the ACG-Boston Breakfast Meeting this morning.
Targeting the women of middle market households with incomes of $60,000 to $250,000 per year, and driving flow to its website by aggressive television advertising, Wayfair has an annual order run rate of $1,000,000,000. Shah expects online orders for home goods to grow to 22% of all sales by 2019.
Why do people shop on line? You can do it any time, delivery is automatic and you have a broader selection. If you are interested in wide selections of styles, shopping on the internet is much more convenient than going to dozens of stores. Wayfair offers over 7,000,000 items for the home market; examples: 8,000 table lamps, 4,000 bar stools.
Having so many different items reflects the diversity of the home goods market. Take for example a comparison of the United States sales of paper goods such as towels, and of lighting. Each is a $7,000,000,000 annual market. Paper has about 50 SKUs. Lighting has about 500,000 SKUs. Only on-line marketing can capture this product diversity.
To which factors does Shah attribute the growth of his company? First, he picked a very large market so he could continue to compound growth. Second, he took no outside capital until he had $500,000,000 of sales, allowing him to focus on customer needs rather than on financial targets driven by investor requirements. Third, he focused first on efficacy of his technology so as to make the online shopping experience simple (“we are a technology company that happens to focus on home goods”).
Certain elements of the business are intuitively evident: Wayfair does not carry much inventory, using a network of vender fulfillment companies covering 12,000 brands. One thing that seems counter-intuitive but relates to customer satisfaction: Wayfair takes charge of the entire delivery process, picking up the product, consolidating it and shipping to the customer themselves from various warehouse locations.
Is there room for growth? Not only is the market large, but also as of now only about 1% of visitors to the website actually place an order. Even a modest increase in the sales rate could drive great expansion.
Finally, what about the high end of the market place? Wayfair at present has not significantly addressed this market. But looking at the demographics, the middle market alone is certainly big enough to accommodate growth in the current business model for a long time.