Wayfair Inc at Canaccord Genuity eCommerce Sustainable Advantage Forum - Fireside Chat Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : So to start off, I had fun recently listening to How I Built This podcast, the original episode you did a few years ago, and then the more recent one about the impact of COVID. And I have to say, it was very interesting to revisit the very beginning of the company. And I mean you've come a long way. So as we get started, I would love it if you could share with us your high-level thoughts on how the company evolved over the past few years, especially over the past year. And what are some of the strategic priorities for the management team these days? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO Thanks, Maria. Well, I think just to give some context over the last few years, if you go back, as you mentioned, the company started in 2002, but I think a lot of our current history starts when we launched the Wayfair brand in 2011 and then we transitioned the sites for a couple of years. But really, we started building Wayfair as a brand in 2013. I think a number of folks may remember that we went public in 2014. And so what's interesting is over those 7 years from 2014 until now, we've gone from the one -- little over $1 billion in direct retail sales in 2014 to 7 years later in 2020, we did over $14 billion. And along the way, quite a lot changed. We started building our logistics network in 2015. We started really expanding aggressively into Europe in 2015. And what we've done over time is really built the infrastructure to be the leader in home that we are today and everything from what we have for technology capabilities to logistics capabilities, et cetera. So COVID, this last 1 year has been a real test of those capabilities we built, where volumes spiked. We -- there's all types of complexities and logistics around both delivery, but also the international supply chain and ocean freight. And we've been able to show that a lot of the capabilities we built REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2021 / 6:15PM, W.N - Wayfair Inc at Canaccord Genuity eCommerce Sustainable Advantage Forum - Fireside Chat have, in fact, given us the advantage we said it would in terms of being able to keep reliability high, being able to get capacity when it's scarce, being able to bring that selection of goods to customers to bear even when there's a lot of competition for a relatively limited amount of inventory. So where we sit today, we're particularly -- well, we're excited that COVID looks like it's almost done, but we're also particularly excited about how the company is going to be able to keep compounding for the years to come.

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Got it. So -- and now as the vaccine rollout accelerates and sort of the economy reopens, consumers are likely to spend more discretionary spending

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Great. I wanted to ask about brand building and marketing in general. So sort of the way I think about Wayfair's marketing evolution is sort of in 3 phases. The first phase was when you had to launch number of websites, and you largely focused on SEO for customer acquisition. Phase #2 for you was when you started sort of focusing on a fewer number of websites, but your marketing spend was still largely targeting sort of direct customer acquisition. And Phase #3 was kind of started a few years ago, was sort of -- has been focused on brand building. And I believe you found sort of customer engagement and loyalty for those channels to be much, much stronger. So with that as a backdrop, can you just maybe talk to us about how you think about Wayfair, the Wayfair brand today? What are some of the metrics you look at to understand the strength of your brand? And more broadly, how are you thinking about investments sort of to continue to build it? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO Yes, sure. So the marketing spend we have, certainly, brand building is one aspect of it. But the majority of our marketing spend is really about getting new customers. And the way to think about it is, we'll spend up to a year's worth of contribution margin to get a new customer. But what happens is, after they first get engaged with us and they really see what the experience is like, from a repeat standpoint, we don't really need to spend very much to get in front of them. And the reason is, they have a strong point of view once they've gone through that full experience and what they think of Wayfair. And if they're quite happy, they're very inclined to come back. And what we find is that they're signing up for our e-mail list. They're downloading our app. They sign up for app notifications. So we have many ways to communicate with them which -- where we have a direct relationship, so we don't need to pay for advertising. And so while there is some overall halo we get from our paid advertising, the truth is that direct customer relationship is what drives our business. And the reason we've grown at the rates we've grown is that our repeat business grows at a much faster rate than new, and so we're getting a lot of new customers every year. But what happens is that once they have the experience, they then decide if they want to come back, and we're finding that they do. And so our business now is up to 72% repeat orders. And that's while, as I mentioned, we're only getting $500 per customer per year, which keeps inching up. And so there's so much runway to go when you think about the $500 million relative to the few thousand dollars. And you're right, we -- on one hand, we have 31 million active customers, but on the other hand, we only have 31 million active customers, and so there's a lot more to get. And so as we look to the future, marketing is a key part of the mix in terms of being sort of ever-present and acquiring new customers. But it becomes a smaller piece of the mix as we keep rolling through time, as our brand is better understood and ubiquitous. And as customers, we have more and more active customers who every year, the customers who come back are spending more that year than they did the year before. And that's been the trend that keeps compounding.

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : That makes sense. I want to switch our conversation here to talk about fulfillment and logistics. And you touched on that in the beginning of our discussion. So that's one of the key differentiating points for Wayfair, and that was the decision that you made several years ago to invest in fulfillment and logistics. So CastleGate and WDN. So that came at the expense of profits for several years. But now you really started to see that leverage, which creates sort of -- as demand accelerated. So today, your fulfillment network is viewed as your probably the strongest competitive advantage. Can you maybe spend a few minutes talking more broadly about your strategic approach to building your fulfillment network? And what was it that sort of made you recognize that it would become so important for the company's operations? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO Sure. So in the goods that we handle, if you look across home goods in general, they're generally large and bulky. They're low dollar value per cubic foot. And the way that manifests itself is, of every revenue dollar, $0.20 is basically spent on some form of logistics. And the other is the initial transportation, whether it's the ocean freight and the drayage, whether it's the over-the-land transportation, whether it's the final mile or the warehousing. And as much as $0.20 of every dollar spent on that, the reality is if you look at our suppliers, by and large, they're small and medium-sized businesses. So their ability to optimize the logistics is quite limited given the breadth and scale that they have. And so what we found is that there's quite a good opportunity for us to build out a logistics infrastructure to enable our suppliers to use it, thereby offering a higher quality of service at a more competitive cost and enabling the customer to get incredibly fast delivery. Because by worrying about the whole chain, we don't worry about taking goods and putting them in the cheapest place to get to in the United States, which would be in Southern California when 70% of the population is on the Eastern Coast of the United States, for example. We worry about putting goods right near where the population centers are. The net cost savings of that final mile savings more than makes up for the cost earlier. So your net cost goes down. You get to next-day delivery. It's quite an exciting sort of thing. Ocean freight is the same thing. I mean, today, there's headlines about how the Suez Canal has a ship that's effectively blocking it due to some mishaps a few days ago. That's just the latest in what's happened over the last year on ocean freight, just creating a tremendous amount of REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2021 / 6:15PM, W.N - Wayfair Inc at Canaccord Genuity eCommerce Sustainable Advantage Forum - Fireside Chat congestion. We, with the scale of the forwarding business we've built starting 3 years ago, have been able to provide our suppliers with access to containers and transit during a period of time where there's been tremendous congestion. And last year, we moved 46,000 TEUs. This year, we'll move significantly more than that. And this is with the top-tier carriers, with Maersk and Hapag-Lloyd and others. And this is something that we're in a position to do that our suppliers aren't. So we view logistics as a key thing that you need to do in order to win with the customer. And what we found is the way we can do it with our suppliers is by us building the infrastructure and then partnering with them, letting them use it and purchase the appropriate services from us, that's enabling all those benefits to flow to the customer.

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Great. That's very helpful. I wanted to ask about sort of the home category more broadly. So there is a perception among some investors, and I actually think you brought it up in the beginning of our discussion as well, that sort of in the home category, once people furnish their homes, they don't need to buy anything else for a number of years. Your level of repeat purchases, which is over 70%, suggests otherwise. So maybe can you share your thoughts on how you view sort of discontinuity of your customer relationships? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2021 / 6:15PM, W.N - Wayfair Inc at Canaccord Genuity eCommerce Sustainable Advantage Forum - Fireside Chat Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO Sure. So I think if you think about what ends up happening is the reality is customers don't furnish their whole home at once. And in fact, the only place that's really ever done is at the super high-end of the market. And so what customers do is they tend to move with the things they have, they'll add some pieces over time. And then if you think about the categories you describe this as being in, I think that comment is also rooted when people think about furniture. But the reality is, furniture is just one piece of our TAM. And so sure, furniture, but let's just start with the backyard as a space. Well, you have furniture, but then you'd have -- you have your patio umbrella. You have grills. You have planters. You may have a hot tub or gazebo. You may have a shed. You may have a hammock. By the time you're done listing out all the things you could have in your backyard, they're quite numerous. Now if you go to the front of your house, you have a door mat, you have a mailbox. And again, you can go down through a long list. You have a bird feeder. Now when you look in your garage, you might have garage storage. There's other items that we'll sell there. Now you go into the house. Well, there's furniture, there's large appliances and there's lighting and plumbing and tile when you do a renovation. And then there's all the decorative categories. And you go into the kitchen, there's the small electrics. There's the plates, there's the knives. And so what happens is you're actually in market for something in home at every point in time. And so if you look at that, the customer in theory could buy from us constantly. Now we don't have 100% share of wallet for our customers, so they're not. But if you look at the $500, that $500 is coming from 2 purchases per year on average from our active customers. But one of the statistics we just put in our investor presentation is, we mentioned that last year, the same year where we had 31 million active customers, we mentioned that we had 4 billion visits to our site or our apps. And obviously, we have some visits from people who don't buy from us, but we have pretty good conversion rates. So if you do some basic math, you'll find out all of a sudden, the average person is visiting our site many dozen times a year. You say, "Well, why would they visit your site many dozen times a year and only buy twice?" Well, the truth is there's only 2 categories that customers are very, very passionate about broadly in physical goods, and I'm not talking about automobiles. Meaning they're not as passionate about grocery or consumables. But when you get to fashion and home, they're actually quite interested in trends and what's out there, where things are headed and ideas and inspiration and aesthetics. And so all of a sudden, you'll actually -- if you think about it, you'll realize, well, there's magazines devoted to fashion, there's magazines devoted to home. And so a lot of what we're doing with customers is basically providing them with content, letting them explore and get ideas, and that manifests in them purchasing from us more and more over time. And that's kind of the journey of what we've been on. And I think it's why home is different. So once you realize the breadth of home, the $840 billion is not any one category. It's 1,500 different classes of goods. And then when you realize how consumers engage with the category of home, you start realizing how loyal and sticky the customers are and why it becomes so obvious that we're just -- that repeat flywheel is still in its early days.

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Got it. That's very helpful. I wanted to ask you about the competitive landscape. And sort of how do you view the competitive landscape within the home category more broadly? And what do you think the unique advantages that Wayfair enjoys as a pure-play e-commerce platform for the home category versus others that perhaps sort of have a multi-category approaches? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO Yes. I mentioned a few minutes ago how home and fashion are really bespoke, and they really -- if you're buying AA batteries or nails or a power saw or paper towels or dish soap, they're kind of all the same. It's a commodity. You know what you want. There's a few brands that compete with each other. You basically type in what you want, you get it. Or you type in the category and you get the 4 different brands and you pick the one you want. Maybe it's a 42-inch TV, you don't just pick it by brand. Maybe you read the reviews of the Samsung one versus the Sony one, and you pick which ones is a little better for you at the price point you want. But it's all commodities, and that's what most e-commerce platforms are focused on. To really focus on fashion or to focus on home requires a bespoke approach. And those two, fashion and home, are quite different from each other. So they share attributes, meaning aesthetic matters. People want to find the right, unique item. They don't want the same item as anyone else. But then when you get deeper, how logistics works, how merchandising works, what content and education customers need, those are entirely different. And so we're very focused on home because it's a huge market with a real need for these differentiated points in order to really provide the customer with the best experience. Who do we compete with? We compete with basically those folks who focus on commodities. And so as a result, it's very hard for them to really be the logical place a customer would want to go, which is why we're successful in taking share so well. And we then take the gains we're getting and we invest back into making the experience more bespoke, and that just creates a compounding cycle. And the reality is we're now at a size where we gain so much benefit that the amount that we can invest before -- we're not maxing out our investment by some arbitrary number. We're maxing it out by, like, there's only so much you can actually do at any given point in time, like you can lower your headcount so fast productively, you can only spend so much in advertising productively. And so we use those constraints and what's left is the profit, and I think we've been demonstrating that the profit potential of the business is tremendous because we're actually hitting profit levels that are close to the old long-term model while we're still aggressively investing a tremendous amount. And that's basically, I think, we recently updated this guidance for folks to basically show them that the profit potential is actually dramatically higher than we'd previously explained. And so I think folks are starting to see that the model works, and we're at a scale where there's significant benefits accruing to us. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2021 / 6:15PM, W.N - Wayfair Inc at Canaccord Genuity eCommerce Sustainable Advantage Forum - Fireside Chat

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Got it. That makes sense. Switching our conversations here to international markets. If we look at your footprint outside of the U.S., so you've got Canada, the U.K., Germany. You recently talked about the U.K. and Germany generating over $1 billion in combined revenue. Can you maybe talk about how those markets are scaling? And what are sort of -- how do you view the profitability curve there? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO Yes. So the 3 international markets we're in today, Canada, Germany and the U.K., are all growing very nicely. We have a household brand in Canada. We have one in the U.K. And I'd say in Germany, we're about 2 years into what is a 4-year cycle to building one, and it's tracking quite nicely up that curve. So we're really happy with the performance we're having in all 3. I think one thing to understand is what we've done in Europe is we haven't focused on building a business in the U.K. and a business in Germany. We actually invested ahead of the curve into a network for Europe, meaning that we -- there's 30 different countries we source from where we have a transportation network pulling out of those countries, delivering today only to customers in the U.K. and Germany. But by having this network of suppliers that are all across the various countries, the transportation network that connects it all, we're basically in a position, and we have category teams based out of our headquarters there in Berlin, that we have an Italian category team, Spanish category team, they cover the suppliers in those countries. They're all native speakers of the language, et cetera. We're in a very good position to actually keep expanding. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2021 / 6:15PM, W.N - Wayfair Inc at Canaccord Genuity eCommerce Sustainable Advantage Forum - Fireside Chat And so I think the way to think about it is the international P&L, which doesn't show the profitability that the U.S. has, it will as it gets more scale. So there's nothing that's different about that. It's just an earlier point in time, and we're not going to forego some expansion opportunities we have to grow that business in a way that just focuses on near-term profits versus much larger long-term profits. But we're pretty excited about how far it's come because that business, which was only $50 million in 2015 in Europe is now, as you mentioned, well over $1 billion, and it's growing at a very fast rate because, again, $1 billion is not very large relative to the TAM. So it's going to be able to keep doing that for a while.

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Got it. That makes sense. I want to ask you about sort of your data that you accumulated on your platform. And sort of you have granular -- you have access to granular consumer to -- data to granular consumer behavior. You see what they're looking for. You see what they're actually buying, you see what they buy together, et cetera. So can you maybe talk about this data asset, how it helps your business? And how are you sort of planning on leveraging it going forward? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO I mean, it's a huge advantage we have because if you think about the experience in our categories, part of the wonder is, well, having a huge selection means we have the perfect item for every customer. Well, if we can figure out how to help each customer find the perfect items for them, that's pretty compelling. So everything from what e-mails do we send a customer to how do we treat different customers differently in terms of their interest in content versus products to how do we know what the right selection is for a person, how do we know what categories they might be interested in. There's a whole series of things we can do from a customer lens. Then similarly, we can take a lot of the data we have, and we can share it back with our suppliers, help our suppliers understand what's happening on the platform, what are the types of products that are in demand, where are there gaps in their catalog that they may want to fill that are gaps where they could create a big business for themselves by providing that item on our platform, how do we help them know what the exact sweet spots are on price. Maybe their pricing is something a little too high, but there's a lot more volume if they move the price down a little bit. So we're trying to take all the data and use it 2 different ways: help our suppliers take care of our customers, help our customers have an incredibly good experience. And that creates a very nice reinforcing cycle. We then, of course, also use the data internally, how do we make everything we're running more efficient and better. So we're highly quantitative. We have over 3,000 people who are building technology or who are data scientists. These are data scientists, software engineers, product managers, analytics folks. And what they're doing is they're just improving this kind of technology that we use to do everything we do in ways that our competitors can't. Part of it is building the technology. Part of it is what fuels the technology is the data underneath. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2021 / 6:15PM, W.N - Wayfair Inc at Canaccord Genuity eCommerce Sustainable Advantage Forum - Fireside Chat

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Got it. Another question we have here is how has Wayfair -- how has Wayfair's customer LTV to CAC ratio trended over time? And how should we think about a natural ceiling for the LTV to CAC ratio? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO Yes. So it -- the short answer is it keeps getting better. And the reason it keeps getting better is, I've mentioned, we'll spend up to the 1-year contribution margin to get a new customer. And so you say, well, the breakeven point, the 1 year in has stayed the same. But if you look at our investor presentation, there's a slide in it, which shows the cohort curves, and what you notice is the cohort curves keep getting higher and they actually rise over time. So what that actually means is that all the -- if the breakeven is at the same point, but the area under the curve is increasing over time, that means your IRR or whatever you want to think about your return, it's actually increasing. And then from an LTV standpoint, you have to pick what time horizon you want, but you have some of these curves that we show you in that presentation that go out 5 years, and you can see that they keep rising. So you have to decide what lifetime value you want to use, but no matter what time frame you use, basically, you see the returns keep increasing. And we think there's a long way to go to your question about where we think the ceiling is because, as I mentioned, we're only getting about $500 per customer per year. And so you can take a position and say, "Well, you're never going to get the full few thousand dollars." And that could be very well accurate. I certainly believe that that's accurate. But we get far more than $500. And so you realize, just moving that number a little bit cause a tremendous amount of profit in the model because all of your other costs have been -- all the contribution margin effectively drops to profit. Well, the truth is we think it can rise dramatically from $500 over time.

Question: Maria Ripps - Canaccord Genuity Corp., Research Division - Analyst : Got it. Well, that's been awesome, and it's been incredibly insightful discussion. And before we let you go, I'd like to ask you one question that we're asking all our participants today. And that is, what is one prediction about the e-commerce space that you think might surprise people over the next 2 or 3 years? Niraj S. Shah - Wayfair Inc. - Co-Founder, Co-Chairman, President & CEO I don't know if the exact time frame is right, whether it's 2 or 3 years, it might be a little longer than that. But I have -- my belief of how the phone, the smartphones people have and the cameras and the device, the hardware that's in them is going to make it such that I think augmented reality is going to become a very basic part of the purchase process, almost an intuitive part in a way that my children, so my wife and I, we have 2 teenagers. And they -- when we make sometimes references to when we were young, they can't even fathom how that would work that way or how that was possible. There's an element where I think augmented reality will become a very intrinsic part of purchasing, particularly in the home category where just -- it will just become such that you can imagine that you didn't carry a phone with you. It would be that type of thing.