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Here's Why Wayfair's New Outlet Store Is Important

By Rich Duprey – Aug 16, 2018 at 8:25AM

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It suggests there may be a worrisome problem with its business, but also an opportunity to exploit.

Wayfair (W -2.70%) is opening its first brick-and-mortar store, which could be the first crack in what so far has been an online-only home goods juggernaut.

Although Wayfair continues to post impressive gains in customers, sales, and repeat business, the new store may be a sign of an underlying problem. The location will be dedicated to selling merchandise returns, perhaps indicating a complication from the try-it-at-home business model that comes from solely selling goods online.

Two men delivering furniture

High return rates may mean that Wayfair needs to deploy an omnichannel approach. Image source: Getty Images.

The start of omnichannel retailing?

Industry site Furniture Today was the first to confirm that Wayfair will open a 20,000-square-foot outlet store in Kentucky to sell merchandise returns and closeouts that are in good condition. Because Wayfair has been so adamant over the years that an online-only model was superior and that it did not need a physical presence, the opening of an actual store may mean the retailer is dealing with a higher-than-usual influx of returns.

A recent Forbes article indicated that Wayfair's returns are "excessive even by online standards." While online retailers are growing much faster than their physical counterparts, and digital sales by brick-and-mortar retailers are the fastest-growing parts of their businesses, items purchased online are far more likely to be returned than those bought in a store.

In fact, almost one-third of online purchases result in returns, compared to just 9% for physical-store sales. The expense of handling these returns can range from 20% to 65% of an e-commerce site's cost of goods sold.

If Wayfair's returns are "excessive" compared to industry norms, that could be extremely problematic, particularly because the retailer offers free shipping for most orders over $49. Although Wayfair doesn't typically pay for the cost of return shipments, it will do so for wedding registry items (though it gives a store credit rather than a refund).

Most still want to touch their purchase first

Wayfair has long touted its online-only credentials. Its website still says it doesn't have any physical locations, reveling in the notion that customers don't have to search for a "store near me" or plan an all-day outing to shop for furniture. Or, as it likes to say, "You'll be happy to know that Wayfair is located everywhere thanks to our online store!"

Certainly, the opening of a single returned-merchandise outlet doesn't mean Wayfair is about to abandon its distinctive online presence, although CEO Niraj Shah said last year that Wayfair might open a few stores. But furniture might not be the best business for exploring the online-only model, regardless of Wayfair's relative success to date.

First, Wayfair still needs to prove it can operate its business profitably. It is marginally profitable (at best) in the U.S., and loses money internationally.

Second, there's no real moat to its business. reportedly achieved $4 billion in furniture sales last year, up 51% from 2016, which suggests it could catch and then surpass Wayfair in a year or so.

Third, although digital furniture sales are expected to rise 19% this year to over $90 billion, most consumers still prefer to buy furniture in a store. eMarketer points to a recent study by CivicScience, a consumer research platform, which found that 14% of consumers who have not bought furniture online might be interested in doing so (on top of the 18% who want to do it again), while the vast majority (60%) have no interest in doing so even once. 

The key takeaway

This suggests an upper limit to Wayfair's growth potential -- unless, perhaps, it actually does begin to open more brick-and-mortar stores. While that would increase costs relative to Wayfair's current asset-light business model, it would lower its apparently large expenses from returns and expand its addressable market.

In short, an outlet store could mean Wayfair is having problems that haven't been fully disclosed to investors yet. But it also represents a potential opportunity for Wayfair, should the company decide to pursue it.

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

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