It’s beginning to look like all those brands that raised millions from venture capitalists because, well, stores are dumb (my shorthand version of Sand Hill Road’s investment thesis) might have gotten it wrong. It turns out that, in most cases, it is super expensive to build a brand of any size online and—I hope you are sitting down—some consumers actually like shopping in brick-and-mortar locations. It also turns out that, in certain categories, product returns can obliterate any hopes of turning a decent profit.
So it should come as no surprise that Wayfair, the rapidly growing (and cash-hemorrhaging) home furnishings e-commerce company, just announced plans to open its first «full-service» physical store this fall in the Natick Mall just outside Boston. Wayfair joins a long and growing list of so-called «disruptive» direct-to-consumer brands that are now opening hundreds of physical outlets. Not only has just about every once online-only brand taken the plunge into the offline world, quite a few (e.g. Warby Parker, Bonobos, Peloton) are reportedly generating the bulk of their incremental growth from their physical stores.
After experimenting with pop-up stores and opening an outlet store earlier this year, Wayfair’s foray into a «real» store will be modest. At a mere 3,700 square feet the new service and design oriented showroom will scarcely rival Nebraska Furniture Mart stores or directly challenge New England’s market share leader Jordan’s Furniture—both of which are owned by Warren Buffet’s Berkshire Hathaway. Yet, like many other direct-to-consumer brands that are now opening stores, Wayfair likely hopes to appeal to the part of the market that still likes to touch and feel products or work directly with an actual human being, while testing their way into what will likely be a greatly expanded physical presence very soon.
Regular readers may recall that I have real questions about the viability of Wayfair’s business model. Even their CEO seems a bit skittish. Regardless, the company has done an amazing job activating explosive revenue growth and building out excellent digital capabilities. Unfortunately they have not come remotely close to figuring out how to make money—and they don’t seem to be on a glide path to do that any time soon.
It remains to be seen whether a meaningful physical store presence will help address some of the headwinds to Wayfair’s profit model over time. Clearly, in the big picture, the modest investment associated with their first full-service store will not make much of a dent in the company’s balance sheet. More importantly, even with a more robust store expansion plan, underlying issues of low gross margins and a complicated and expensive supply chain will not be fundamentally changed by brick & mortar alone.
The fact is, like so many other previously online-only D2C brands (including Amazon) Wayfair must have a physical store strategy if they hope to sustain their hyper-growth and have a real shot at meaningfully lowering customer acquisition costs and reducing return rates over the long-term. Given that so many «pure-play» brands came to this realization several years ago I’m only left to wonder what took Wayfair so long.
Nevertheless, while physical stores can almost certainly become material contributors to Wayfair’s revenue growth down the road—and therefore can be seen as a necessary part of any long-term strategy—whether they are sufficient to make Wayfair a viable brand is unlikely. Until Wayfair can demonstrate improved product margins, lower supply chain costs and much better marginal customer economics, I remain highly dubious.
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