Propelling Wayfair to $16B exit

TLDR;

The people who’ll change your life.

Propelling Wayfair to $16B exit.

LBAB Community: People that will change your life

Writing today’s edition on a rainy day in NYC, nursing a mild post-wedding hangover, and staring at the roof of the Barclays center (my desk view).

Last night was at my sister’s best friend’s wedding.

I’ve been thinking a lot about spending time with the people who will change my life.

There are so few people—friends, family, biz partners—who have an outsized impact on your life, and it’s rare that you actually spend the majority of your time with them.

They’ll come in and out of your life at different times and you may need something different from them as you go, but especially in biz, it feels like you always have to seize those opportunities immediately.

We’re working on a lot behind the scenes here. I’m sure you’ve noticed changes between the events, research and other topics that have filled this slot the past couple of weeks.

There’s going to be some big upgrades we’re making to LBAB in the new year, and I can’t wait to share them all with you.

The one common thread behind them? They were inspired by people who I believe are going to change my life.

I’d encourage everyone to spend 30 mins this week talking to someone they believe is going to change their life. You never know. You might be going to their wedding one day.

Enough philosophizing. Let’s get into how we’re going to change Wayfair stockholders' lives.

Let’s Examine This Biz

Wayfair is on a razor’s edge.

They’re losing $1.1B/yr with $2B in Current Liabilities and $1.93B in Current Assets.

I’d be pissed if I were a Wayfair stockholder right now.

• They’re trading at $71.15/share

• With a $8.25B market cap,

• -53% since Sep ‘18.

This company has come crashing down after its COVID boom (peaking at $343/share), and it needs to find itself. Again.

3P sellers on Amazon have cloned Wayfair’s playbook. The barbarians are at the gate. Wayfair hasn’t made major missteps, but they need to figure out why shoppers should continue buying from them in today’s market.

I’m back at a true PE fund, and we’re going to take down an $8B acquisition in the pursuit of a $16B outcome.

Let’s 2x our money.

TLDR Analysis:

Wayfair is hemorrhaging money.

Sales are shrinking, costs are rising, and investors in the public market have 0 patience for it. The stock has paid the price. They’ve been downgraded from a Tech Company to a Retailer.

That’s how a company doing $12B in Topline is only valued at $8B (a 0.66x multiple). That’s worse than the US being demoted from AAA credit rating to AA.

Let’s be honest. They deserve it:

• Customers -7% YoY

• Topline -11% while Marketing is +7%

• Largest YoY increases were in SG&A (+30%)

• Earnings down -895%!

When you match those numbers with their cash position, it sounds like an all too familiar story.

(Hint: It rhymes with Shmankrupcy.)

The company is in dire straits.

It’s time for the LBAB team to step in and take this from 8B → 16B biz.

Let’s Fix This Biz

Here are the 3 moves I’d make to get Wayfair out of the Retail category and back to a Tech marketplace—and make profits along the way.

1) Move Products and Price Points upmarket

Wayfair made a name for themselves as the cheap online furniture company. Basically, digital Ikea with 3 guys from Boston.

They found a great arbitrage:

• Making low-cost furniture in China

• Shipping to a warehouse in the states

• Dropshipping products to customers

Sound familiar?

That’s because over the past 20 years, Amazon 3P sellers stole the playbook. But those sellers don’t need to pay for tech, the fulfillment center investments, or headcount.

So, if the competition is beating us at our own game, how do we win?

Wayfair needs to start listing better quality items at higher price points.

Easiest thing to say. Hardest to do.

They have to give up being the most affordable online furniture retailer and go conquer new ground. Preferably, an established biz model where they can undercut a more expensive option and repeat the playbook that worked well for them in the past.

This will require serious customer and strategic research, but it’s not really an innovative approach. Improve Topline Rev and Gross Margin dollars to plunger this biz out of the unprofitability toilet bowl.

Takeaway: Play higher value games you know you can win.

2) Make Wayfair Pros the star of the show.

Wayfair has a Pros section of their site where you can hire the Wayfair team to help you design your property. Think Hotels, Offices, Property Management Groups.

This is brilliant, but they’re leaving millions on the table.

First, open up a services marketplace connecting customers with interior designers, architects etc. Give customers a unique, high-value experience to come shop on Wayfair vs. Amazon or any of the other low-cost providers.

Amazon won’t do this, and Amazon sellers can’t afford to execute it at Wayfair’s scale.

Then have professional consultants creating unique merchandising experiences onsite but offload marketing expenses to them.

The beauty of a multi-sided marketplace is that you help the service providers get initial leads, but they eventually do the Marketing (and customer support) for you.

Give Marketing and Promotional opportunities to top performers.

• Featured Collections on the Home page

• Seasonal rotations

• Blog/Newsletter features

Outsource Merchandising and Content Creation to someone who is already successfully doing it. By encouraging them to promote their own services on-site:

• AOVs go up → service providers are selling complete sets

• Happier Customers → better support from trusted partners at lower costs to the biz.

• Outsource Merchandising costs to providers.

This isn’t simple, and there are a lot of moving pieces.

Some might say it’ll compete with the existing Pros program. Which might be true. But true Ent clients always want fewer vendors and bundled pricing and will go with Wayfair most of the time anyway.

Opening this up to consumers will dwarf whatever cannibalization happens.

Takeaway: Feature your top influencers as partners. Build your brand through building theirs.

3) Unleash ads on their properties

Wayfair already has an ads platform, but it isn’t a big enough priority. They don’t report Rev on it. Looking through their site, there aren’t many ads displayed to customers, which makes sense. When your price point is bargain basement low. Pricing is your Marketing budget.

If I were a seller on Wayfair, I’d be asking them how I can afford to run ads when my margin is <~20% . That’s why Moves #1 and #2 are crucial.

If price points moved up, their sellers could reinvest the additional Gross Margin in ads. And, if you add service providers, they have significantly higher margins to invest in advertising.

Amazon has already validated this model with $38B in Ad sales in ‘22. Now, Wayfair needs to steal a page out of their playbook.

Takeaway: The Ads flywheel is a powerful accelerant.

Final Thought

Wayfair doesn’t get enough credit for how important it is to the eCom/DTC community. The path they built in 2002 was truly innovative and laid the groundwork for our current bizs.

But like all companies that grow too big, they lost touch with the market. I don’t mean to beat up on the CEO, but when I see BS, I gotta call it out. This is the CEO’s direct quote from their 2022 earnings:

1. Customers aren’t responding well to changes. 7% fewer are buying YoY and Int’l sales are down 29% YoY.

2. Not really a lean, focused team. $/Employee is $917k. Comps are 2-3x. They did a 10% RIF in Jan ‘23, but with SG&A +30% YoY, they probably need to lay off another 10-20%.

3. I have no idea how this became standard practice, but putting “Adjusted” in front of a word has somehow made lying/fraud legal. Just state the bleeping bleeping earnings.

4. Equity based comp was $513m (+49% YoY). These grifters lined their pockets with half a billion in extra pay while losing $1.3B.

Talking about commitment to EBITDA profitability.

🧠 The Takeaways

If you're not one step ahead, you're dead.

1. If someone’s undercutting you: Move your product + Increase prices + find someone else to undercut.

2. Build your brand by building your influencers. They don’t have to be celebrities.

3. At scale, the game is all about monetizing eyeballs.