Can brands furnish an online retail future in home decor? Wayfair and Williams Sonoma have their own designs for survival

Stuart Lauchlan Profile picture for user slauchlan November 22, 2022 Audio mode
Summary:
Online home furnishing retail boomed during the lockdown days of the COVID crisis, but has since run into trouble. Can the likes of Wayfair and Williams Sonoma avoid following the demise of Made.com?

ruins
In need of some improvement...

Earlier this month online furniture retailer Made.com, once a darling of the retail sector, collapsed into administration, with Next grabbing its brand, domain names and intellectual property for £3.4 million. How far the firm had fallen can be seen in the fact that it’s only a few years since it floated on the London Stock Exchange for £775 million.

Founded by Brent Hoberman, co-founder of Lastminute.com, and Chinese entrepreneur Ning Li, Made.com had enjoyed a good pandemic as people trapped in their homes embarked on upgrades to their living and working environments. The DIY and home improvement sector saw a massive boom in business during the height of the COVID crisis; so too did the furnishing game.

But as lockdowns lifted and the cost-of-living crisis kicked in, disposable income on a new sofa or a bespoke desk started to become tighter. Zelf Hussain, partner at administrator PWC summed up the situation thus:

A combination of factors, including significant decline in consumer spending from cost of living pressures, rising import costs and continuing supply chain pressures, has meant the business could no longer continue.

The firm was certainly hit by rising inflation and an unfriendly macro-economic environment overall, but also perhaps by its just in time production model which ran headlong into the global supply chain crisis. It may have had specific corporate reasons for its troubles as well, but it’s also possible to argue that it’s symbolic of the pressures facing the online furniture business.

The way back?

Look no further than Wayfair, which recently celebrated its 20th anniversary, but is now embarked on a big push to try to stabilize and turn around what once looked to be a thriving concern. Co-founder and CEO Niraj Shah argues that since its beginnings, the firm has had a vision of creating a premier online shopping destination for the home:

We've got big and bold every step along the way, and for nearly a decade, we were able to self-fund our growth as we reinvested operating profits back into the business…In the decade since 2011, we've grown the business by nearly twentyfold and made meaningful investments in building out our catalog, customer file, geographic presence, logistics platform and more. With the size and scale we've achieved, we are now in a position where we can operate the business for both profitability and growth and are well on our way to returning to a state of self-funding once more.

But there’s a but and that’s the harsh reality that the prevailing consumer climate has become less than friendly in a relatively short space of time. Shah explains:

Inflation persists quite broadly and with spending pressure across the spectrum of discretionary goods, we continue to see shoppers being very discerning about where their next dollars are going. For much of the summer months, that discretionary spend shifted from goods to services, with pressure felt across a wide array of retail sectors, including ours. While interest in the broad home category remains, we are seeing shoppers being more deliberate with their spending patterns as they seek out great value and wait for promotions.

He adds that he’s confident Wayfair can find its way through this:

I think what we're seeing in customer behavior is that customers are responding well and as we would have expected to what we're doing in relation to the macro-environment. So if we look at the macro-environment and we see customer sentiment low, we see excess goods, we know the playbook for that…we know how to run that playbook.

Some things haven’t change, he argues:

Our competitors are the same set of competitors. There's a long tail of competitors. So we have a few sort of large competitors, and then a long tail of folks in the category. I do think when we talk about the macro-tailwinds though, I do think there are some things that through the cycle of COVID kind of hurt us. I try to talk about the big three sometimes, but they're basically product availability got pretty bad for a period of time. The speed positioning, the forward position of goods got quite bad. And then retail got quite bad. The combination of how inflation was passed through and the lack of forward positioning, if you think about that, that kind of erodes an offer.

Well, where are we now? We're now reasonably far into a cycle, which is reversing those things. We've gotten all-time highs on speed, and that's continuing to climb at a fast rate. Availability has recovered quite nicely, and that actually has still nice headroom ahead of it, that we have very good insight into, and retail prices have been falling quite nicely…So there's sort of these things that are playing out quite well. We feel very good about our position, both as a home retailer and the bespoke things we're doing, and then specifically on these core elements of the offer and particularly where we are relative to where we were a year ago due to the kind of these external forces that were far out of our control.

Keep calm and carry on, appears to the underlying message:

I think that this environment is going to be here for a little while. It's not something that's going to go away. The amount of excess inventory is going to also take a little bit of time to work through. So, you can think about this environment lasting, I would probably say, a small number of quarters. But it's not weeks or shorter months…Over our 20-year history, we've seen several economic cycles. One thing that [co-founder] Steve [Conine] and I have learned is that moments like this present an opportunity to set ourselves up for continued success as a category leader. One irony is that this is when we're at our best. We built this business with no outside capital and [against] very well-funded competitors. We know how to win by being both lean and focused.

Consumer shift

But the competitive landscape is become more difficult, insists Laura Alber, CEO at Williams Sonoma, and demands more focus on differentiation of offering:

The macro-environment or the competitive environment has always been promotional. When you really go back and you think about it, even before all these new start-ups came about, there was Macy's always in the home business, and a lot of other big players, and then Amazon came along and Wayfair. They’ve always been after price first. What we do versus them is very different. We’re designing our own goods and we've been doing it for a lot of years. So, we tend to be first with new trends and able to bring out finishes that others can't replicate. Even when they try to copy us, they can't replicate. When you actually go and look at the difference between our furniture or even our tabletop or any of the categories versus theirs, you're going to see a big difference in quality and the resulting price. Even with their markdowns, our value is better.

But that’s a high-minded view that isn’t immune to commercial reality. Alber admits:

There's always a few exceptions. There's always a few opening price points that I wish were sharper. Those are the opening price points of the place that I want to get back to, be more competitive as we were pre-pandemic. Those are the areas where I think everybody got a little too high. But in total, I really don't think it's a competitive pricing issue, because it's hard to match our goods against anyone else's goods.

Now, in terms of inventory in the channel, Bed Bath & Beyond has a ton of inventory that they're pressing, and going to continue to press, deep markdowns. Again, different products, but will that hurt everybody on the fringes? That one might be the biggest factor going. But the Wayfair and the Amazon, those guys are the biggest out there, it's a very different business. So you might buy one thing from them for your garage or something, but you're not going to furnish your living room, your full bedroom from some of those brands. Our customer won’t anyways, because what they're looking for is a much higher quality level and design sensibility, and they want someone to help them put it together.

But those customers are in a different state of mind, something that can’t be ignored. Alber admits consumers are nervous, but insists people still love their homes and want to improve them:

The sentiment is still,  'I want a nicer home, I want a second home, I want a bigger home'. Now they're not going to buy one, because nobody wants to buy right now. That doesn't mean that you don't still love your home, you don't want to still spend money on it. A lot of those renovation projects are still lagging from the pandemic when you couldn't even get a refrigerator, right? You still can't get a refrigerator. And so, you're not done with your kitchen, so you're not finishing your kitchen yet.

So, it's interesting that those projects are still lagging. In my opinion, there should be still a big upside as they finish those projects and then they go to spruce up the furnishings. Because if you spend a lot of money on your new bathrooms and your new kitchen, which are usually where people go first, generally speaking you buy furniture next. So, it should be a very positive thing for us.

What I think is happening right now is more fear than reality, and we'll see what happens and which way that goes. But as I said earlier, our customers are still in really good economic shape. I think they're taking a small pause for a minute as everyone's been talking about.

So again, the conclusion is, keep calm and carry on:

We just have to make sure that we're not distracted by a short-term blip and that we are all focused on what we've built here and continuing to feed it, which means innovation - innovation in product and service - and continuing to press forward when everyone else is doing duck and cover. It's exciting, even though it's a different hand than we expected to be dealt right now. It's an exciting time to really think about it offensively. What's the company that we want to look like and, again, make improvements to. If this is a recession, what are we going to look like on the other side of it? I think when you saw us come out of '08, we were stronger and we're much stronger coming out of the pandemic. Whatever this is going to be, I would say the same thing, we're going to be much stronger coming out of this, too.

My take

Having been stung a few times when buying furniture online, I’m not a huge fan of the sector. Clearly it was one that was always going to benefit from lockdown, but equally obviously it was a business model that was going to run into issues once people were able to get back into showrooms to touch and feel products. The ‘don’t panic’ mentality on show at both Wayfair and Williams Sonoma is commendable up to a certain point. After that point, there’s a need not to trip over the smouldering remains of Made.com. 

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