Please ensure Javascript is enabled for purposes of website accessibility

How Long Will This Moat Last for Wayfair?

By Motley Fool Staff – Aug 11, 2018 at 2:49PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A look at the major investments that are powering this company’s disruptive business model.

The Industry Focus: Consumer Goods team is turning its attention to e-commerce furnishings specialist Wayfair (W -1.68%), which has booked nearly $6 billion of revenue over the last 12 months.

In this segment, they tackle one of the advantages that has helped Wayfair resist bigger competitors like Amazon (for the time being): its logistics and delivery capabilities.

A full transcript follows the video.

10 stocks we like better than Wayfair
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Wayfair wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

This video was recorded on Aug. 7, 2018.

Vincent Shen: Let's move on into some of the strengths that help them stand out. Everything we've described, you could say Amazon could replicate a lot of that. They're known for pretty good customer service, they have a massive product selection. Something that's a struggle here is the logistics and delivery. Wayfair has invested a lot into that. Can you speak to how the company is creating these competitive strengths through CastleGate and its Wayfair delivery network?

Asit Sharma: One of the problems that we mentioned before, big-ticket items are big. If you want to compete in this business, you essentially have to build warehouses to inventory your products. This company has several thousand suppliers. They range in size from very big concerns to very craft-oriented, small outfits. It speaks to this very large selection that Wayfair offers.

CastleGate is the company's proprietary warehouse system. They call this a forward position supplier inventory complex. That allows the company to deliver smaller parcels in one to two days, larger parcels in about a week plus. The company says that suppliers supply approximately 65% of their inbound volume into their delivery. This speaks more to the fact that the point-to-point delivery is extremely expensive. Wayfair has about four warehouses open in the United States, one in Canada, one in the U.K., and one in Germany. In building up this warehouse capability, that of course decreases some of the company's costs, in addition to serving the customer.

It also has a distribution network that's slightly larger. They call this the Wayfair delivery network. About 9% of the company's large parcel orders flowed through this delivery network in June. So, why is this important? Amazon is famous for utilizing third parties for distribution while it builds up its own capacity. Wayfair is following the same model.

The problem, from a shipping perspective, with large parcels is, you can't fit them on a truckload shipment. The cheapest form of shipping is truckload. If you have 160 widgets that are all the same, you can fit them onto one truck. This is how the logistics industry operates. If you have odd items, items of varying sizes, that will always go to a less-than-truckload shipment, which is more expensive, it's harder to route less than truckload shipment to the various endpoints. So, by creating this distribution network of its own, Wayfair is able to more economically handle what's called the LTL market, which gets the products to that last mile.

As I mentioned before, the last mile is something totally different in and of itself. By the way, Wayfair has invested resources there as well to make sure that when the product comes off the truck, it has its own people taking that off. Not just some third parties, which is going to... and you know, everyone is probably remembering seeing this thing at least once in your life, taking a package, hold the back of the truck and sort of dropping it to the part on to the curve. Part of the investment is making sure that it gets to the front door in a manner which cinches that great customer service from the investment in employees who receive the call questions which have been mentioned to being unpacked.

John Mackey, CEO of Whole Foods Market, an AMZN subsidiary, is a member of The Motley Fool's board of directors. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN and Wayfair. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.