Online furniture-retailer Wayfair (W 4.86%) impressed investors with its fourth-quarter 2018 report on Feb. 22, not necessarily by the quality of its earnings, as losses widened, but by its emerging growth prospects. Let's review three comments made by management during Wayfair's earnings conference call that underscore the company's expansion opportunities and indicate for investors the regions in which the company is committing its capital for significant distribution infrastructure.
1) European growth runs through Germany
I was in Germany twice this quarter to meet with suppliers at major trade shows in the country, and I was struck by the enthusiasm and commitment we are generating with them. Some of those suppliers were with us in 2015 when we had approximately 60,000 products on our site to today when we have approximately 600,000 products on our site.
We are excited to be working with them to get to over 1 million products this year as we further accelerate the flywheel of our business there. -- Co-founder and Chairman Steve Conine
Wayfair has identified Germany as its most promising initial market in Europe. During the earnings call, co-founder Steve Conine listed two major reasons. First, management is tracking a trajectory of customer KPIs (key performance indicators) that mirror Wayfair's positive experience in its U.S. business. The second is the total addressable market (TAM) in Germany, which Wayfair estimates at $75 billion. Conine revealed to investors that this annual market opportunity is 50% larger than that of the United Kingdom and fully three times the size of the Canadian market.
Wayfair launched its CastleGate (the company's name for its proprietary fulfillment and logistics centers) network in Germany last year and also opened its second global product-engineering center in Berlin. Shareholders can expect to see an intensive deployment of capital to Germany in the coming years, but given management's appetite for rapid infrastructure expansion, other economic powerhouse countries in Europe won't be far behind.
Image source: Getty Images.
2) Growth has outpaced capacity in Canada
Overall, the growth we have seen in Canada since 2016 has been tremendous and underlines that our offering is working very well with customers there. We see substantial growth ahead even off this larger base of revenue. -- Co-founder and CEO Niraj Shah
Wayfair derives nearly two-thirds of its international business from Canada, and the country has proven a valuable laboratory for global growth due to its proximity to the U.S. market.
In fact, Canadian sales have been so robust that the company's growth has outpaced its capabilities. CEO Niraj Shah pointed out that the opening of a CastleGate fulfillment center in Ontario last year has enabled shippers to land products directly from Asia into Canada, thus bypassing the customs and freight costs of serving customers via the U.S.
While the majority of Canadian merchandise purchases still arrive over the border from the U.S., as CastleGate expands operations, management expects costs and delivery times to Canadian customers to diminish considerably.
3) Continued investment in logistics
The dollar value of U.S. small parcel revenue being shipped from the CastleGate network continues to grow at pace, almost doubling in Q4 2018 compared to Q4 2017, accounting for approximately 26% of U.S. small parcel revenue in the quarter, up from approximately 19% in Q4 of 2017. And we will be targeting further growth this year.
In Q4, we continued to build out our large parcel home delivery infrastructure. Today, we are operating 35 of our own last-mile delivery facilities in North America, up from 27 at the end of Q3 2018 with the addition of Phoenix, Milwaukee, Columbus, Austin, San Antonio, Las Vegas, Kansas City, and Cincinnati. These give us coverage of approximately 74% of our U.S. large parcel home deliveries. -- Co-founder and CEO Niraj Shah
Check out the latest earnings call transcripts for companies we cover.
Wayfair exited 2018 with roughly 12 million square feet across its CastleGate fulfillment centers and WDN (Wayfair Delivery Network) last-mile delivery service facilities in North America and Europe. The company expects to add a massive 40%-plus in fulfillment and delivery capacity in 2019. The organization is targeting 3 million square feet in new CastleGate facilities in the U.S., 1 million square feet internationally, and 1 million square feet in WDN facilities in the U.S. and Europe.
CEO Shah's comments above illustrate for investors the crux of Wayfair's market-share strategy. While the company is methodically building out its capacity in Canada and Europe, it's continuing its relentless, full-steam-ahead drive to scale its distribution capabilities in major metropolitan areas in the U.S. Setting up CastleGate and WDN facilities in major markets also allows the company to serve smaller adjacent markets at a lower cost.
Thus, Wayfair is still fixated on creating what it describes to product wholesalers as a selling platform rather than a product marketplace. By handling merchandise from point of origin all the way to the customer's door, Wayfair is cutting sellers' costs and allowing them to retain more profit from furniture and accessory sales. The growth of the network should eventually begin to drive a higher percentage of each sales dollar to Wayfair's bottom line, as well.
