Wayfair is following Amazon’s plan to dominate e-commerce

Believe it or not, there is actually a retail market Amazon.com (NASDAQ: AMZN) may not be adequately equipped to handle: household items.

This gap provided the company with enormous growth opportunities Wayfair (NYSE:W)one of the largest online sellers of furniture and decorations.

Over the last 15 years, Wayfair has grown from nothing to a $5.1 billion business – an impressive feat considering Amazon was rapidly growing and gobbling up brick-and-mortar retailers over the same period. Apparently, Wayfair found a niche it could exploit, selling home goods online, that Amazon couldn’t touch.

Ironically, the reason for Wayfair’s success can be traced to the strikingly similar management approach used by its founders and Amazon founder and CEO Jeff Bezos.

IMAGE SOURCE: GETTY IMAGES.

Big vision, humble beginnings

The similarity between Wayfair and Amazon is that the founders of both companies had no retail experience before starting their businesses. This may seem like a disadvantage, but in retrospect it was very beneficial because it gave both entrepreneurs a fresh perspective on how to run retail.

Most of Amazon’s early employees were software engineers. Wayfair was formed from a similar mold. Founders Niraj Shah (who is CEO and co-chairman) and Steve Conine (co-chairman) studied engineering at Cornell and worked in technology consulting before founding Wayfair. Similarly, Bezos worked in finance in New York before founding Amazon.

Both companies started doing something very simple, which later turned into rapid development. Amazon started doing the unthinkable in the 1990s – selling books online. Wayfair started out selling stereo stands and racks. Humble beginnings provided both companies with enormous market opportunities.

W data by YCharts

Shah and Conine’s engineering and technology background has been ingrained in Wayfair’s business as the company relies on data to manage inventory, supply chain logistics, as well as advertising. Management believes this gives them a competitive advantage and credits their data-centric approach for the company’s exceptional growth in recent years.

Focused on the long term

While Wall Street focuses on quarterly results, Wayfair’s co-founders own a combined 84% of the company, allowing them to ignore short-term noise and focus on making decisions that maximize the company’s business value over the long term. deadline. Similarly, Bezos is Amazon’s largest shareholder, owning about 16% of the stock.

Like Bezos, Wayfair’s founders are willing to report a loss in their bottom line in order to make significant investments in expanding their assortments and building the infrastructure necessary to satisfy customers for fast delivery. Back in 2012, Wayfair wasn’t reporting profits, but that doesn’t mean the company’s expenses are out of control.

In its early years, Wayfair grew out of cash flow. And a year before the company went public, in 2013, the balance sheet showed zero debt and $115 million in cash and short-term investments, reflecting a company that was growing within its means without taking on large amounts of debt to finance growth.

Wayfair took on some debt last year, which totaled $337 million at the end of the first quarter, but it also has about $582 million left in cash and investments to more than make up for it.

Large addressable market

Selling household items means Wayfair has a much more limited ceiling compared to Amazon, which sells everything under the sun. However, the home goods market still provides Wayfair with a huge market in which to expand.

Wayfair estimates its total addressable market worldwide to be around $600 billion, which is quite a huge amount compared to Wayfair’s trailing 12-month revenue of $5.1 billion. Online sales account for only 12% of the U.S. home goods market, but as with other retail markets, more and more spending on home goods is moving online, and Wayfair is monetizing it handsomely.

Total revenue has increased 10-fold since 2011. Active customers are also growing rapidly, from 2.4 million in 2014 to almost 12 million in 2018. 65% of Wayfair’s orders come from repeat customers, which continues to grow and is an important indicator that the company definitely offers a level of selection and service at a price point that can’t be beat… even by Amazon.

Amounts in millions. Data source: Wayfair.

Build and the profits will come

Wayfair spends a lot of money on its delivery network and advertising, which is a large part of the reason it doesn’t currently report profits. Executives are following the same playbook as Amazon, gradually building shipping facilities across the U.S. and around the world to beat the competition.

So far, the management strategy is clearly working. The company’s results for the first quarter of 2018 showed impressive growth dynamics, with revenues increasing by 47% year-on-year.

Management doesn’t seem to be investing much in its infrastructure create growth, but instead catch up to growing demand. And that’s a great sign for investors.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has no position in any of the companies mentioned. The Motley Fool owns and recommends shares of Amazon and Wayfair. The Motley Fool has a disclosure policy.