Niraj Shah - Developing Every Skill - [Invest Like the Best, EP. 252]

My guest today is Niraj Shah, the CEO and co-founder of Wayfair. Wayfair started life in 2002 as a collection of independent websites selling category-specific home furniture but became a one-stop-shop for the home category in 2011 when, at $500 million in sales, the team consolidated their 240 websites into Wayfair.com. Today, the business offers 22 million products from 16 thousand suppliers to more than 30 million customers. During our conversation, we discuss how the competitive frontiers in e-commerce have changed, what it was like to build out a proprietary logistics operation, and what makes the home goods market more attractive than other physical goods markets. Please enjoy this great conversation with Niraj Shah. For the full show notes, transcript, and links to the best content to learn more, check out the episode page here. ----- This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days, Canalyst has models on Robinhood, Marqeta, Grab, and everything in between. Learn more and try Canalyst for yourself at canalyst.com/patrick. ----- At WatchBox, the world’s finest watches are at your fingertips with an ever-expanding collection of luxury timepieces, all certified authentic and collector quality. WatchBox’s global team of expert client advisors is ready to help you find the watch you’ve always wanted. Step into the collector’s circle at thewatchbox.com/patrick ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:02:50] - [First question] - The global supply chain and its issues today in 2021 [00:05:13] - Why he finds the ocean leg such a problematic area and how to resolve it [00:07:04] - Overview of the physical goods market around the world [00:10:50] - The role of magazines and devout subscribers in certain sectors [00:11:50] - Are physical goods trends in flux or fairly steady and less geared to change [00:13:06] - From 240 separate websites into what became Wayfair as we know it today [00:16:36] - The competitive frontier of eCommerce in its early days and why they won [00:18:29] - Expanded logistics control, developing their brand, and becoming Wayfair [00:21:40] - Aggressively building for the future as a public company with investors involved [00:27:23] - Key differences between Wayfair, IKEA, Restoration Hardware and others [00:34:22] - Other areas of interest and drivers of future investment opportunities for Wayfair [00:38:39] - What excellent marketing means to him and why Netflix does it so well [00:42:02] - The margin profile of Wayfair and all of its major components [00:47:13] - Lessons learned from major mistakes while building the business [00:49:54] - Company culture and deliberately investing time and money into it [00:51:50] - Evaluating the importance and success of their adapt and grow philosophy [00:53:18] - How he would measure his own improvement as a CEO over time [00:55:17] - Thoughts on the dimension of competition as they scaled [00:56:57] - The most stressful episode of growing the business and what he learned [01:00:16] - What the best outcome for Wayfair would look like in the future [01:01:38] - The kindest thing anyone has ever done for him

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:43Patrick O'Shaughnessy?

  updating models, Canalyst is now used by over 400 institutions, including the largest money managers globally, and by a number of guests on the show. With detailed company-specific models and data on virtually every public company, Canalyst's clients are able to ramp up faster, update models instantly, and incorporate the highest quality fundamental data into any workflow. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/patrick. That's C-A-N-A-L-Y-S-T.com/patrick. This episode of Invest Like the Best is brought to you by Watchbox. Whether you're looking for a special gift or something for yourself, at Watchbox, the world's finest watches are available at your fingertips.

• 1:26Patrick O'Shaughnessy?

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• 1:48Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 2:14Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 2:39Speaker 02

  My guest today is Narashe Shaw, the CEO and co-founder of Wayfair. Wayfair started life in 2002 as a collection of independent websites selling category-specific home furniture, but became a one-stop-shop for the home category in 2011, when at $500 million in sales, the team consolidated their 240 websites into wayfair.com. Today, the business offers 22 million products, from 16,000 suppliers to more than 30 million customers. During our conversation, we discussed how the competitive frontiers in e-commerce have changed, what it was like to build out a proprietary logistics operation, and what makes the home goods market more attractive than other physical goods markets. Please enjoy this great conversation with Narashe Shaw.

• 3:23Patrick O'Shaughnessy?

  So Narashe, we're going to talk a lot about Wayfair, of course, and its unique, interesting history and the landscape of the business today, but there's a couple bigger-picture issues, one topical, one a little less so, that I'd love to begin with. Those two are the supply chain in the world today in late 2021, and also sort of the physical goods market, more generally speaking, and then we'll get to Wayfair. It's impossible not to ask you this question off the bat, given your purview on the world. Maybe just give me your impression of the world's supply chain issues today. This feels like something no one's ever thought about until now, and now everyone's thinking about it and talking about it.

• 3:58Speaker 03

  What I would say about supply chain is, obviously, supply chain has always mattered. It's such a big component of the cost of goods. It's such a big component of global trade, and optimizing it certainly has proven to be advantageous for those who've been good at it. I'd say what you're seeing right now is COVID was convincing how they transpired, took everyone by surprise, obviously. And at first, the onset of a pandemic, everyone reacted the way you'd expect, which is they worry that demand is going to fall. So the first thing that happened, obviously, is that COVID happened and started in Asia, and so production got slowed. But then, as it appeared in the Western world, everyone gets where demand is going to fall. So all of a sudden, people are cutting orders. Then, the opposite happens. People are at home, and demand actually does the opposite. They can't spend money on entertainment or services.

• 4:43Speaker 03

  They spend it on goods, and demand just goes through the roof. You say in hindsight, it's obvious, but the truth is, it was unexpected by almost everybody. So all of a sudden, there's been this race to catch up. Folks ordering goods and wanting to get them into the countries in the Western world. And the basic problem is, the amount of shipping capacity that's there is kind of a fixed amount. And the reality is, whether it be a port in China shut down for a few weeks to prevent COVID cases from spreading, or whether it be backlogs in Port of Long Beach or wherever, all it does is cut down on the amount of capacity because of a ship that's idle for 20 days. That's one trans-Pacific sailing, that one leg of it that needs to get canceled. You have this scenario where

• 5:24Speaker 03

  everyone's trying to catch up to this elevated demand. It'll correct itself, but if demand stays high, it's just going to take a long time. That's kind of what folks are seeing. Folks like us, who have some control of their logistics, where we have our own fulfillment centers, and we started our own ocean forwarding business a few years ago, you have some cards to play, but at the end of the day, you're still in the same boat with everyone else in the sense that there's finite capacity.

• 5:46Patrick O'Shaughnessy?

  If we think about the supply chain as the place something gets made, it's got to get to a boat, it's got to ride the boat, it's got to get offloaded at a port, get onto another truck, into a center, into someone's home. Where in that chain is the world the most interesting or problematic to you today?

• 6:01Speaker 03

  The acute problem is in the ocean leg, because that's where the capacity is constrained. There's plenty of finished goods sitting in the places where they're made right now, and there's plenty of capacity in the location where you store them, near the customer. But that ocean leg is super constrained. Other parts of transportation are a little tight, but the ocean leg is what's super interesting. In general, if I zoom out and talk about the future, I think the leg that's the most interesting is the final mile leg to the customer. But right now, that's not really where the biggest pain is.

• 6:30Patrick O'Shaughnessy?

  And so if we think about the ocean leg as being onloading, riding and offloading the ports and the ship itself, how does that resolve itself? I mean, how long does it take to build a ship? You see these aerial shots of the ships waiting off the port on the West Coast of the US. Is this other problem? Just maybe zooming in on the ports and the ships themselves. How do you think this gets resolved?

• 6:49Speaker 03

  One specific thing in the United States, you know, there's an announcement this week that some ports are going to start operating 24 by seven. They have not been. In Europe and Asia, they've been operating 24 by seven for many, many years. And so that's common. And so if you think about it, if you operate the port twice as many hours as you were, you're going to move goods twice as fast.

• 7:06Patrick O'Shaughnessy?

  Pretty good.

• 7:07Speaker 03

  Right. And to be honest, when you operate them at night, goods move even faster because trucks can get in and out easier because there's no traffic in the middle of the night. Whereas, you know, obviously during the day, there's traffic. So I think something like that helps. I do think the other thing that's going to help is while we're not in a post-COVID world, we're headed there. And so you're seeing travel picking up, you're seeing entertainment. I think goods demand will slow over time back to a more normal place. And folks will be building up their inventory back to a more normal place. And so this will take some of the edge off as well.

• 7:37Patrick O'Shaughnessy?

  If we kind of zoom back to the physical goods market, not so much acutely in this period, but just more generally speaking, when we first connected, you gave me this awesome taxonomy overview, if you will, of what the physical goods market globally looks like. Maybe you could do that for the audience here. I was kind of surprised by some of the percentages and some of the nuance. And that'll also be the bridge to get into Wayfair business specifically.

• 7:59Speaker 03

  The way I always describe it is that when you think about physical goods, and I always describe it X automobiles. You had a great segment talking about how the used automobile market works. And it's obviously a fascinating market itself. But if you look at it, X automobiles, 60% is all commodity goods. And I'll describe what they are in a second. 20% is grocery, 10% is fashion, and 10% is home. And what's interesting is 60% that's commodity, it's branded, there's a few competitors in every category. So if you're doing paper towels, that might be like Bounty and Scott and Seventh Generation, Bronny. And the goods are largely similar to one another. They're competing with some brand marketing, but they're largely interchangeable. Duracell double A batteries versus Energizer. So you can go down through all the categories and we could talk about dish soap or a 42 inch TV.

• 8:44Speaker 03

  But there's a few companies with a different name and different wrapping with largely the same item competing. That's 60% of the goods. And what is interesting is everyone who's ever gotten large in that has always cared about the next 20%, which is grocery. Grocery basically is a low margin business. But the thing about it is all of us buy groceries either once or twice a week. So the frequency is unbelievably high. And so the reason why did Target and Walmart open up the super centers and get into grocery in the 1980s? Why did Amazon go into fresh and then buy Whole Foods more recently? It's the same thing. They were really excelling at the 60 and the 20 gets you this frequency that allows you to sell more of the 60. Even those two are different. They kind of sit side by side for that reason. What's interesting is the other two, when you think about fashion, which is 10%,

• 9:29Speaker 03

  it's a large category and home, which is 10%. They operate super differently than the other two. And the reason is when you think about fashion or home, you do not want to own the same item as everyone else. In fact, you want to have a unique item. You want to have an item that expresses your style or folks compliment you, that you're proud of, that's comfortable. And in fashion, obviously we're talking about clothing and accessories. There is all branded. The seasonal cycles are really short. Again, you want that expression and style. So there you have the brands who are figuring out kind of how to operate on platforms, how to go direct, how to build a direct customer relation. What's interesting about home, which is 10% as well. So it's a very large end market, 420 billion in North America, 420 billion in Europe. Good sized market.

• 10:13Speaker 03

  What's interesting is the vast, vast majority of it's not branded. And so what happens is a customer, and the other thing is there's about 1,500 subcategories, but a customer doesn't buy any particular subcategory that often. So whether you're looking for planters, you're looking for a mailbox, or you're looking for garage storage, or you're looking for a bed, or you're looking for a rug, you have not bought that particular item in a long time. So what happens is there's a huge selection. You want to find this perfect item for you that's your expression of your style, that emotionally feels great, that's going to be comfortable and work well. And yet you have no idea how to start that because there's a large selection available. The aesthetic differences are significant, the quality differences are significant. And so it's an interesting exploratory type category where you really need to browse,

• 10:55Speaker 03

  to get educated around your choices, to understand your choices, to then pick what you want. So that 10% that's home is that's the world we operate in. And that's the only world we operate in because we look at it as it's a very large end market. It's different than the rest. You can help customers a lot by doing things differently. And that's where we focus. And so that I always kind of describe those four buckets because then when you think about them, what you would do for supply chain, what you do for last mile logistics, how you do merchandising. It's different when you think about each of these four groups. That's the benefit of being a specialist.

• 11:23Patrick O'Shaughnessy?

  You made this interesting point about what still has magazines devoted to it in these major categories. Maybe this is like an interesting observation of you watching magazines. It seems like such an antiquated thing that no one does anymore. What is the role of magazines still in the world in your view?

• 11:38Speaker 03

  There's basically only a few categories where people are interested enough that they'll basically pay to get content about it. The thing about where magazines exist for, people still pay for a subscription. Well, fashion magazines there exist and home magazines exist there. And they have real passionate followings amongst customers. And then there's another segment which does, which are automobiles. But then you start thinking about all these other categories. If you go back to talking about batteries and dish soap, or if you go back and talk about commercials, you really don't find them having that same degree of passion and excitement. And so there's something about these categories of fashion and home where the emotion is so rich, the satisfaction, the interest in trend, the desire to get ideas. And all these things are just really loved by people, right? They're just categories that are loved.

• 12:23Patrick O'Shaughnessy?

  Before we go into the Wayfair business and story specifically, and all the lessons you've learned there and what the future might hold. Is there anything about this broad description of the physical goods world that you think is most in flux or most likely to be influx? We could have this conversation again in 10 years. Will those categories in the rough percentages be kind of the same, do you think? Or are there major trends of change that are happening today?

• 12:47Speaker 03

  I think the percentages change very much. Obviously, COVID has helped people to spend more time in their home. They put more energy into making their home be that ideal place they want to be. They're entertaining more at home. But then again, only moves these percentages marginally because these categories are so vast. I think what's going to change is the way in which customers find the perfect items for themselves, the way in which they buy the items, the expectations around the convenience and speed of delivery, the expectations around all the hassle that's associated with shopping is increasingly going to go away to the point where customers, it's really, it makes that experience just more and more enjoyable and optimal. And I think when you look back, get surprised by, well, wow, people used to do that 10 years ago.

• 13:30Speaker 03

  I can't believe that. Old people used to do that 20 years ago. I can't believe that. I think we're still in the golden age where five years from now, 10 years from now, you'll look back and wouldn't believe how we do it today, for example.

• 13:39Patrick O'Shaughnessy?

  The Wayfair story itself is one that must have required an incredible amount of flexibility and dexterity on the part of you and your co-founder and teammates. And I think we have to tell the history in a little bit more detail than I typically would just because it's so very unique. And I'll just throw like a stat out there, which is back in 2010 or 2011. I think you had like 250 websites that you were operating in all different categories. And then that all got consolidated into what we know as Wayfair today. So maybe tell that early story, like what were you doing prior to me being able to go to wayfair.com and order these big items and the special logistics network, all of which we'll get into? What was the unique backstory behind that turning point in the business's history?

• 14:22Speaker 03

  We started to come in 2002. And as you mentioned, we basically started with this idea that we'd be in niche categories. And each one would have its own website. We would market that quantitatively online, would type measurement, we'd get in customers. The website was on racksandstands.com. We sold TV stands and speaker stands. And we're like, hey, folks are looking for a TV stand and you can get the search data. So you knew they were looking online. Hey, they'll come in, we'll be the best shop for them. And what ended up happening over time is rather than us just using search data and figure out what categories to go into, what happened is in four months, we became one of the largest online sellers of TV stands and speaker stands. And our suppliers started saying, well, people sell more of my beds than my TV stands. People sell more of my desks than my TV stands. So we ended up working our way through furniture over the first three years.

• 15:07Speaker 03

  Every subcategory you could think of for furniture. Then we did the same for decor and then housewares, then home improvement, effectively building out the categories that we're in today. As we did that, as we added the websites and the categories and marketed them, we kept growing. Two thousand and eleven, just under ten years old, we were about five hundred million in sales. But the challenge that we had had, we'd started working on it about three or four years prior, is our customers said they loved us. And then when we asked if they knew that we had two hundred and fifty other websites, seventy percent of them would say no. So we said, well, geez, we're missing this big opportunity. These customers are happy and we know they're going to have needs, but their needs tomorrow will not be for the same subcategory they just bought. Their needs will be in one of the other subcategories. So we need them to know who we are. Our company name at the time was CSN Stores.

• 15:51Speaker 03

  We put that on the top of every site. We started an email program to tell folks about the other categories. And we tried to do a lot of things to drive repeat. And we were successful. We doubled our repeat, but we only doubled it from twenty percent of our orders to forty percent of our orders. And even at the end of doubling that, seventy percent of our people, the customers, still told us that they didn't know we had other categories. And the reason was, we were expecting to do far too much work. Like, you need to really understand, what is this company? What else does this company do? If you think about where you shop, like, how often do you really ask that about a company? As if you're just a casual consumer. You basically don't. So we basically realized, hey, look, if we want someone to know we're the place for all things home, we need to build a brand. The brand needs to stand for all things home.

• 16:35Speaker 03

  It needs to be obvious from the first moment they come. And even if they're here today just for bar stools or just for, you know, a grill, great, let's make sure they're well taken care of. Let's make sure they just know in the back of their head, oh, man, that's a big home store. And so that if they have a great experience, they're just thinking, oh, man, maybe I'll go back to that same place. And that's what led us to launching Wayfair.com and just saying, like, hey, we need to build a brand. And it needs to become a household brand over time to chase our aspiration. And we're not going to be able to do that with two hundred and fifty different websites. So we need to change the business model if we're going to really go after this big goal.

• 17:09Patrick O'Shaughnessy?

  One of my favorite concepts in business is this idea of the competitive frontier. So if you're in a certain space, there are certain variables that, based on how you do in those areas, it's going to determine whether you win or lose in your space or in your industry. And since you've been doing sort of e-commerce and online for so long, all the way back to really its very first days, I'd love to hear how that competitive frontier, in your view, has shifted over time. So if I'm thinking about the stands business, speaker stands business, back early 2000s versus today, or versus the midpoint in the 2010s, what was it in those early days that really separated the winners from the losers in online retail?

• 17:50Speaker 03

  In the early days, I think it was all about really building up a large selection with good merchandising content that helps someone understand what it was, and then having a good delivery and service promise, so that someone felt comfortable buying. And it really boiled down to these simple things, and they weren't simple to do, but they were simple to understand, because customers basically came online and they were wowed by the selection. And then the question became, do they have the confidence to buy from that retailer who had this selection? And this is where the service promise, the delivery promise, the merchandising content, where all those things mattered a lot.

• 18:26Patrick O'Shaughnessy?

  And if you think about the logistics side of the business back then, how did it work? Again, we're going to get to logistics today, which are very, very different. Was it convenient to think of you as effectively like a very thin marketing layer between the supplier and the customer back then?

• 18:40Speaker 03

  We were. We were a marketing, customer service sort of layer, because at the time, we did 100% of the volume via dropship. Our suppliers were shipping from their warehouse to our end customer. We used our own FedEx and UPS accounts, et cetera. We had no physical logistics footprint at all. We operated with that model, actually, for a long time.

• 19:02Patrick O'Shaughnessy?

  If we could zoom all the way forward then to the way that Wayfair looks today, paint us that picture. So it's very different. There's a lot more logistics control. I think that's a huge part of the future of the business. And this seems to be true of all the biggest retailers, that they're getting more involved in the actual logistics side of things. I talked to the HelloFresh founder and CEO yesterday, and it's kind of a similar story of like more and more of their delivery share is controlled by them. I'm sure Amazon is something similar. So how has that evolved? And what does it look like today?

• 19:31Speaker 03

  Obviously, Amazon pioneered fast delivery with Prime. Obviously, customers benefited from that. What's interesting in our categories is that delivery actually matters more than even in most categories. The reason is the items are big and bulky, which means that the transportation cost is a much larger percentage of the revenue than in other categories. So optimizing that has a very big impact on retail prices. And the second big reason is our items, the nature of them, not only are they big and bulky, but they're prone to damage. So if you're not optimizing the logistics properly, you're just going to get a much higher damage rate, which obviously will hurt the customer experience and will be financially, obviously, very challenging as well. And so what we did, as we got to the levels of scale, you need to really take it on, is starting in 2016, so only in five

• 20:14Speaker 03

  years ago, we started basically building our own physical logistics operations. And what does that mean? That means today, we have 19 million square feet of logistics space. A lot of that are these large fulfillment centers that are million square foot buildings that are just built and set up to house these types of items that, again, as I mentioned, are prone to damage or larger in bulk here. And so how do you store them? How do you handle them? How do you sort them? There's ways you specialize around this. 30% of our revenue are in these items that are too big to go even via a UPS or FedEx or DHL type parcel carrier. And so for that, we built our own transportation operations where we have our own terminals. We have over 40 of these transportation terminals. And there we have trucks with

• 20:58Speaker 03

  two-person driver teams that basically are delivering these and often into people's homes or into their backyards. So these are scheduled services, and we're doing them with a degree of quality and care that basically try to make a customer's experience, take the hassle out and add the convenience in. And we're also trying to do it while doing very fast deliveries. And so the nature of adding more and more fulfillment centers, basically about speeding up the end customer delivery while taking out the cost. And the way we take out the cost is 80% of our goods are made in Asia. In Asia today, we have six consolidation operations and we, three years ago, started our own ocean forwarders, or our own NVO. And so what we do is we basically do break bulk in Asia to then forward position the

• 21:41Speaker 03

  goods into these fulfillment centers, trying to get them as close to the end customer as possible. That both takes out costs, because you take out extra transportation legs and that final mile leg shrinks, which is the most expensive leg, while also promising customer faster delivery, while also lowering damage, because it gets handled less often. It's one of the very few things in the business where you get this trifecta, where you can basically make the customer's experience better while actually saving money on costs by taking on the hard work yourself, which is building this infrastructure and the technology to power.

• 22:13Patrick O'Shaughnessy?

  It all sounds complex, interesting, and expensive. And I'm curious what it's been like building all this as a public company. When you're dealing with investors, you're choosing to aggressively build out a network for the future versus, say, like maximize margin today, or maximize free cash flow, or whatever it might be. It sounds like a huge, long-term reinvestment story. So I'm just really curious what that's been like as someone running a business like this that has to communicate that. Curious about the narrative and the communication. I'm curious about the sequencing of how to decide what to build first, why you got into freight when you did, et cetera. I'd love to go into detail on what this has felt like to build this out.

• 22:53Speaker 03

  We went public in 2014, and at that point, we're 12 years old, we're about a billion in sales. We thought we were in the super early days of the opportunity. I mean, today, our trailing 12-month revenue is about 15 billion, and we still think we're in the super early days. So you can imagine how we felt at the 1 billion. By the way, that predates our push into Europe, that predates the push into logistics. So what we did is, there's an old adage, when talking to investors, you're going to earn the investors you deserve. So tell your story. There's going to be a group of investors that are good fit for you, and you may not know exactly who they are, but they're out there looking for you as well, as much as you're looking out there for them. Best thing you can do is just be transparent and clear. And so one thing we did from the early days

• 23:35Speaker 03

  is we were very clear that our focus was on capturing the long-term opportunity. We were not going to be driven by near-term, short-term optimization decisions or near-term, short-term profitability orientations, because the truth is, we are in the middle of a very, very large market where there's a huge opportunity for the leader to take tremendous share, and it's a very profitable business. To do that, though, you need to be ambitious and go after these things so your near-term economics can get impacted. And so we told that story, we explained where we saw the opportunity and why, as we embraced logistics, as we embraced expanding in Europe, both of which, as you referenced, are very expensive undertakings, we explained why the size of the prize made the investment so sensible.

• 24:19Speaker 03

  I would say that what's happened, and it took years to play out, is exactly that adage. What's happened is if you look at our largest investors, they're long investors who typically have concentrated portfolios and do a tremendous amount of research, including their own primary research to get to conviction. They tend to think long-term, not just think about the next quarter or two quarters. In fact, a number of them despise talking about the next quarter or two quarters. They basically look at who can really compound over time. And if you look at the biggest companies, they tend to be not just transformational in what they're doing, but they tend to be focused on the long-term and going after a market where they just compound for many years. And so the way they end up large is just that they go up that kind of power curve over time. We believe that there's a huge

• 25:03Speaker 03

  opportunity in home, which is oriented around taking care of the customer in a much better way that's aligned with what they prefer and desire. And we think we can do that, but it requires sometimes doing these big things, as you mentioned, building out the logistics network. But I think by communicating that, and we're also very quantitative and pragmatic, so we measure everything, and so we explain how are we measuring what's working and not working, how are we making sure that we're only investing in things that we are able to show will pay back. I think that's the other thing that's gotten us credibility over time as well.

• 25:32Patrick O'Shaughnessy?

  You mentioned that the size of the prize and the profitability profile of the business make all of this worth it. What is it about retailers that seem to make this true? Like, if you look at the top of the wealthiest people in the world, they tend to run retailers, whether it's the Waltons, or Bezos, or LVMH, or whatever. And also, just a lot of the largest companies are retailers. What is it about the retail business that is interesting and attractive to you as a business model?

• 25:56Speaker 03

  To start with the first thing, it's just retail is a very large piece of GDP. So, you look at GDP and you start breaking it down. There's government, there's healthcare, and a lot of the large countries in the world, healthcare that was provided by the governments, may or may not be a private enterprise. And so, when you start looking at a piece of GDP, and you have a large piece, which retail is a large piece, that obviously, right there, means there's a significant opportunity if you could be a major piece of, huge piece. Sub-point I would make is, when you think specifically about home, most areas of retail, the margin gets fragmented because you have a brand, and the brand often has some pricing power, then you have a retailer who's distributing the brand, and so, they can only take so much margin because other retailers are distributing the same brands.

• 26:40Speaker 03

  And so, if they try to get too much margin, the volume for that brand will switch to the different retailer because they all have the same goods. What's interesting about home is, I kind of touched on this earlier, it's unbranded. And because it's unbranded, and because customers require that experience to get educated about what's available, to find that perfect item, because people want different items, it puts the retailer in a very different position to help the customer, and to add value to the customer through the way in which you help them navigate it, through product discovery, through educational content, through sales assistance. If you ask a customer, "Hey, show someone a chair," and say, "How much should this chair cost?" They could probably tell you the difference between whether it's a $99 chair, or a $499

• 27:19Speaker 03

  chair, or a $999 chair, but the difference between $99, $109, and $119, people would be hard-pressed to tell you that difference, and I just gave you a 20% spread in what the retail price is. And so, there's this concept in home where, if you can add enough value, the reason home retailers have higher margins is because they have to add the value, they have to invest in adding the value, so that costs them money, but then they can get it back through the retail and a gross margin. Well, if you can then do that at scale, you can offer the best of both worlds, you can offer the customer incredible value and still have a very good margin business. That's not true in every category of retail.

• 27:56Patrick O'Shaughnessy?

  I'd love to ask for points of comparison against two other, maybe well-known brands for two different reasons. So the two that I'm interested in, how you think about the major differences between Wayfair and them is IKEA and Restoration Hardware. And I picked those two because IKEA, it has a very specific brand to it, but also like I could furnish everything I need to with IKEA. It feels like their selection's pretty big, even if the number of SKUs isn't that big. And then Restoration feels like this premium, like high-end branded story. So, given that those are two interesting businesses historically, and we're sort of in the same category, maybe we could use those two as points of comparison just to understand the key differences that drive Wayfair's business versus those two.

• 28:35Speaker 03

  First of all, for both of those, you have one thing in common for the two of them, which is they have taken the traditional retail model of having a merchant and taking a point of view on style and product, curating down the range to a finite number of items, and saying, hey, we've done a great job curating this down. And if you're curious, you should come check it out, because it's a finite number of items. You get your head around it, and we have that item for you. In the case of IKEA, they focus more on offering very specific styles, Scandinavian style, at an affordable price point. And what they've done is they've basically created a lot of concepts of self-serve in that model, where you go through their maze, you put things in a cart, and at the end, there's no badge for you to take the stuff. You do a lot of the work yourself, and you do your assembly

• 29:18Speaker 03

  work yourself. But in exchange, they're saying, hey, I can give you a really incredible value. And so as long as you like that style and that quality level, hey, we're a great place for you. Only challenge with that model is, of course, by the time you say, hey, we're going to give you only this style and only this quality level, you've kind of taken a lot of the market out of consideration, but you've tried to say, hey, we're going to be the absolute best at this one piece. I think what you're seeing them do is they're trying to embrace online more and more, is they're realizing the one thing that's also changed for some customers is the expectation of convenience, meaning, hey, I can shop from home, and you can bring it to me, rather than me having to drive to the store, which might be 45 minutes or 60 minutes away from where I live. If I was driving somewhere, now your store offered me value versus the other guy, maybe it was the meatballs or whatever.

• 30:03Speaker 03

  But if I had an option of not driving anywhere... Maybe I can do this at 10:00 PM at night. My kids are in bed and I don't want to spend my Saturday doing this. That's a new twist that comes after their model was sort of honed and built. But you're talking about two phenomenal businesses here. IKEA is a phenomenal business. The Wayfair model is we have every style and every quality point. We'll help you find the perfect thing for you. So the odds that it's unique is going to be incredibly higher than if you go to one of these stores that have a much more curated assortment and will deliver it to you in a very convenient and easy way. And so we're going to basically try to just make the whole experience better for you. And if you want a more modest quality, modest cost Scandinavian style product.

• 30:45Speaker 03

  By the way, we're going to have even more selection still than in IKEA, even in that range. So you can still have a better chance of finding that unique, perfect item. Go to Restoration Hardware on the internet, again curated, but at the luxury space. So much higher end. From there, they built these beautiful stores, large, beautiful stores. But what they've done is they've put all the cost that expense into the cost of the item. Customers have to pay a tremendous amount for that item. We at Wayfair don't really sell in that range, but we have one of our brands. We have a platform called Paragold, which is in the luxury space. And Paragold goes head to head. What does Paragold do? Paragold has on it the few hundred brands that sit in the design centers around the United States.

• 31:28Speaker 03

  It's the few hundred brands that interior decorators and designers buy from. And when you look at what these few hundred brands have in aggregate amongst themselves, they have beautiful, amazing items. The selection in aggregate is tremendous. And so a customer now can find a very unique item in a very convenient way. Because what we've done is we've taken the inconvenience out of it. What we've done is we've made it available online, online in an app. We made it so you can browse it whenever you want. We made it so we'll deliver this item to you. And so before you couldn't get in the design center if you weren't with a credential designer. So that would have been a challenge to go there in person with a designer. And now you're going to only look at a couple of lines and what they have in the showroom. That's going to be a finite amount of selection. And so what we're trying to do is democratize access to the world's best brands.

• 32:11Speaker 03

  And so there, our proposition is if you're looking for the best items, you can get incredible items, much bigger selection, the convenience of delivery, and frankly, the price value gets a lot better. Even if you're still spending $6,000 for a sofa, it's going to be a higher quality sofa with far more options for customization. We're focusing on the luxury customer with our philosophy and our approach, which is how do we really focus on all the things the customer cares about and give it to them in the way that they would prefer? And that's applicable at both mass and at luxury.

• 32:43Patrick O'Shaughnessy?

  I find both of those comparisons so edifying in terms of what they mean. And you talk about in terms of Wayfair. Is there another company or more than one company that you think are interesting compared? I kind of chose those two slightly at random. Are there other companies or trends in furniture or the home category that you think are good points of comparison to teach us something about how Wayfair does things?

• 33:04Speaker 03

  What's interesting, I mentioned our trailing 12 months revenue is just under $15 billion. Less than 2% of the market, if you look at home goods, the B2B, B2C across Europe and North America. And yet we're considered one of the largest players. And so you go, wow, those two numbers seem inconsistent. You know, it's largest players and sub 2% market share. Why is that? And the reason those statements are factually true is the market is incredibly fragmented. And it's incredibly fragmented because if you start thinking about the categories, right? If we talk about furniture in the United States, there's the branded guys you mentioned, IKEA, Restoration Hardware. But very quickly, you have all these regional furniture stores. And the regional guys, virtually none of the top 100 furniture stores in the United States are national players.

• 33:47Speaker 03

  There's only a couple that are national, you know, IKEA, we obviously mentioned, Ashley would be national. But very quickly after that, you're talking about people who are regional. If we move out of furniture, we start talking about decor. Decor is super fragmented, ranging from independents to Home Goods, to Walmart, to Target, going through all the categories of housewares and home improvement. We sell about 50% of what would be on the square footage on the floor of a Home Depot or Lowe's. It's what they would call decor, and we sell zero what they call building materials, but we sell virtually 100% what they call decor. What do they call decor? Artificial Christmas trees, bathtubs, vanities, mailboxes, doormats, bird feeders, large appliances, lighting, flooring.

• 34:29Speaker 03

  By the time you add up all these categories, they're pretty sizable. And again, there's this opportunity to really be the customer's resource across all these categories where no one really is. Everyone sort of has a primary business. Home Depot and Lowe's primarily building materials, sell some of these other categories. Walmart, Target, primarily that kind of 60 and the 20, sell some of these other items. And so by the time you're done, you say, hey, there's just this big opportunity to be the specialist and focus on it.

• 34:55Patrick O'Shaughnessy?

  The specialist focus thing is so interesting, given that you've already done a lot of that, but you're still only 2% of the overall market. So it seems like with so much market share space to eat up, you can continue this long term thinking around how you invest and build up the infrastructure. So where does that lead us? Obviously, you're some part of the way through getting your own logistics network set up. But what are the other areas of interest to you as a capital allocator? As you think about going from 2 to 10 to 20% market share or whatever it might be, what are the key drivers, do you think, of investment opportunity for Wayfair?

• 35:30Speaker 03

  Logistics is obviously one. We talked a lot about that. But I mentioned a couple of times this notion of helping the customer find the perfect item. If you break that down, one aspect of that is having the most selection available. Because if you have the selection available, you've done this thing that hasn't been done before, which is you've amassed this world selection, brought it to a customer for them to choose, but then you've made their job very difficult. How do they navigate this huge selection? Because it can be overwhelming. On one hand, get the huge selection, then make it navigable, shoppable, in a fun and inspiring and easy way for the customer. And then help them understand what the item is well enough that they have confidence in buying that, whether that's our user reviews or not just text reviews, but customers

• 36:14Speaker 03

  upload photos of the actual item in their house and we collect a lot of information that others may not ask about. Or, for example, we scan the digital fabric, we scan, the fabrics have digital versions of it, and we'll offer, if you want, we'll mail you textile fabric, so you can actually fill the fabric of an item. Or what we're investing into, because a lot of where we're headed has a lot to do with the technology that we've been investing in, is we're probably one of the world's largest leaders in building 3D models. And with the 3D models, we then today render virtually all of the imagery we have, but in addition to that, you can then picture the item in your house. You have a thousand dollar computer in your pockets, you pull out your phone, and you can then see the item placed in the room that you would then have it in.

• 36:56Speaker 03

  And then there's some things that are still very much R and D, which is, we have a screen here in the office where you can rub your hand over a fabric and you feel the fabric. You feel it as if you're rubbing your hand over the fabric. Today, on your phone, with some of the haptic sensors, you know you get some tactile feedback, but it's pretty crude relative to what you need to feel the fabric. That screen we have in the office costs $5,000. Fast forward, it uses battery power that you can't put in a phone today, but now fast forward, think about what's happening in battery power on a phone, then what happens to the cost of these components as the years go by. And so what's going to happen is the device you have is going to become more and more powerful, the camera and the haptic responses in it. And so one of the things we've done is we've been building our own technology.

• 37:38Speaker 03

  We have 3,500 people in the company that are software engineers, data scientists, and product managers, designers, building these technology experiences. And so while our customer doesn't necessarily think of us as someone who's investing heavily into technology to make their experience better, the reason why the logistics network can work the way it is, or the way the product discovery and merchandising can work the way it does, or suppliers can do the things they can do on our platform or et cetera, is because of our investments in technology. And so I think this will continue to unlock customer benefits, which will unlock repeat. Today, seventy-six percent of our orders are repeat orders. And it just drives this virtuous by-wheel, where customers are happy, so they come back more often, they tell others about us. We keep investing in to make the experience better,

• 38:23Speaker 03

  which makes the next set of customers have an even better experience, which causes them to come back. And we keep going in that cycle in partnership with our suppliers on every axis. So we've talked a lot about what we're doing in logistics, or what we're doing in merchandising, or with suppliers with selection. And we're also doing this with how we integrate with our partners. We're doing this with how our marketing, we've built most of our own technology for our marketing and advertising. We're one of the largest advertisers in the United States, and that gets us reach to tell customers the stories that draw them in. And so we just have this view that e-commerce is around being a well-rounded athlete. So no one area makes up for the next area. So how do we have an ambitious plan in each area, invest into it, and do things with the benefit of technology that others are

• 39:07Speaker 03

  not doing, while always making sure these things are customer-aligned?

• 39:12Patrick O'Shaughnessy?

  You've obviously had a lot of history in the area of marketing. You just mentioned that as a key area that you spend a lot of money. You had this fascinating multi-website background, and advertising on the web, or digital marketing, I guess is the way I would put it. What does excellent marketing mean to you? And this is both a curiosity in the context of Wayfair, like how you've developed what you view as excellent internally, but also just as a curious business person, looking at other people doing marketing really well in the modern world. What is excellent? What are the dimensions of excellent marketing today in 2021?

• 39:42Speaker 03

  There's a few different pieces, a sort of a multi-level answer, because at the first standpoint, you need to understand what is it that you're offering customers, and you need to tell them that story. So if you want to have a household brand, the brand, it needs to stand for something, and it needs to be a promise you're going to put out there. And telling that story in a way that connects with customers, that helps them understand what it is you're telling them, and be curious enough to check you out, is really important. Say, most folks have seen Wayfair commercials, they've heard the Wayfair jingle, and over time, they've associated us as this fun and lovable home retailer that offers wide selection with great value and convenience. And so I think there's a marketing that needs to tell that story, and it needs to continue to add detail to it, to add preference and understanding.

• 40:28Speaker 03

  Today with marketing, you know, the old adage where, you know, I know half my advertising spend is wasted. I just don't know which half. I think the days for that have been left behind. So today, you can basically with very complex data science models, take in all the input, whether it be the television spend you have, or we send hundreds of millions of pieces of direct mail, ranging from postcards to flyers to catalogs, and knowing about those to what we do online, where we're a very large online advertiser. And you could basically take all that data and understand what impact each piece had on a customer to basically put back into what makes sense and what doesn't make sense to do, which for certain things comes down to like how many cents you would bid on an impression for that given customer. And in some sense comes down to like, oh, which customers would

• 41:12Speaker 03

  you put on the mailing list for this catalog or not? And maybe you put them on for a different catalog, maybe you put them on for every catalog, maybe they'd only be for the holiday catalog. You could do that very quantitatively. So I think there's an element where you need to have technology that's both powering how your online marketing works as well as the data science model to understand attribution. But then the brand marketing is as relevant as ever, and you need to be great at that and telling that story, whether it be through television, or through influencers, or through the variety of methods that are out there. So I think you're taking the old aspects of marketing that mattered, and you're adding this technology-powered capability set, and you need both. No one sort of covers off for the other.

• 41:51Patrick O'Shaughnessy?

  Is there another business whose marketing story you most respect?

• 41:56Speaker 03

  One who did both aspects incredibly well and continues to reinforce that cycle is Netflix. Netflix understood the performance marketing, grew up with that. That's the same way we grew up. Originally, it was a performance marketing, quantitative marketing piece. But as they wanted to become a household brand, they really understood all the aspects of brand marketing and how to convey and communicate that. And in their case, part of how they do that has to do with what content they support and develop. And they sort of understood that that is not just the product, but that's also the brand and the marketing. Look at how they've developed over time. I think anyone would be hard pressed not to hold that in high regard.

• 42:34Patrick O'Shaughnessy?

  I'd love to then understand a little bit more about like literally the nuts and bolts of the business itself and how it works. I spend so much time talking to software businesses or pure technology businesses that have very different margin profiles and therefore operate their businesses very differently. I'd love you to discuss just the margin profile of the business. What is the gross margin? What is the operating margin? And what are the major components of that equation? Because obviously those then become levers for improving the business over time. And if you're building this infrastructure, it sounds to me like leverage, like it's a lot of fixed cost investment that's happening, which can then create a lot of operational leverage in the future. So what does the margin profile of the business look like today? What are the major components? How does it evolve?

• 43:17Speaker 03

  In order to keep the value proposition very clean and to be able to do all the things for our customer want to do, we basically set the retail prices ourselves and we do a lot of the value and value chain. When you do that, you basically account for the GMV becomes your revenue. And what's interesting is if we were a marketplace, we just said, oh, we're just purely a marketplace. Because really, if you look at the supply side of the business, we are a marketplace. You would actually not account for the GMV as your revenue. You would only look at the gross profit as your revenue. So one of the issues is a little bit of like an optical illusion, which I'll talk about in a second. And so the GMV is our revenue. And then in cost of goods, we have the cost of the product and the cost of the transportation all the way through delivery into the customer. And that gets you to the gross margin line.

• 44:00Speaker 03

  And our gross margin in recent periods has been around 28%. And we've talked a lot about how there's still a long runway on how that can rise, be it the savings from logistics, the savings from a lot of the things that gain efficiency on our platform, the savings from some of the things we're doing in merchandising to add value. You mentioned the $104 share could be $106 and not lose any demand. And so gross margin is at 28%, but rising. Then we have customer service. We have a large customer utilization, thousands of people. And we pay the credit card interchange merchant fees. The two together are about 4%. So about two and two. Round numbers. That's 4% after that. And that gets to what we'd call the variable contribution margin. So to say that would be around 24%. And after that, you have like two primary costs.

• 44:45Speaker 03

  You have the cost of the team of people, the folks in customer service or the folks in the logistics operation. Logistics within cost of goods and folks in customer service were in that line I just mentioned. But you have the cost of the corporate team. And we have a large corporate team today. I mentioned the 3,500 people building technology. Well, there's another 3,500 or so who are doing everything from running the marketing, as we talked about, to merchandising organization, to finance, et cetera. So that you have the OpEx line and the other line you have is the advertising line, which I referenced. So what happens over time is your advertising keeps going down because repeat orders keep rising. And your repeat customer is highly profitable because if you think about it, once I know you and our average customer is spending $450 a year, customers spend more money in each successive year.

• 45:28Speaker 03

  And if you think about your home spend, on average for our average customer, the home spend is $3,000 to $4,000 a year. So our 450 is still pretty low relative to potential. And so what happens is when we don't know you, we're spending the first years with the contribution margin to find you and for you to buy. But year two, once we know you, think about it, I can mail you a catalog for a dollar. I can put a display ad in front of you on the internet for 10 cents. So I can actually be marketing to you fairly heavily and still be spending a very finite amount of money. When I look at it as a percentage of revenue, it gets pretty low. Advertising keeps falling as you're growing revenue per customer per year and as you're growing the repeat percentage. The OpEx headcount gets leveraged because even though you're growing that team, the revenue growth gives you leverage there.

• 46:13Speaker 03

  And then I mentioned the gross margin can rise for the reasons I cited. So what happens is we used to say that the long-term EBITDA profile was 8% to 10%. During COVID, we showed that our US business, which is more mature than the international segment, was already getting even to profitability in that range. And so what we did recently is we updated it. We didn't give numbers this time, but we basically pointed out that it can be substantially higher than that. Now, what's interesting is if we were a marketplace, if you know, if you took that 28%, you said that's going to be higher. And then you take eight to 10, you make that higher. Well, even if it was eight to 10 out of 28, all of a sudden you'd say we were a 40% margin business. So it looked a lot like a software business. What we're going to say is eight to 10, which is now going to be much higher, but off of the 100%.

• 46:56Speaker 03

  The margin looks lower, but actually your investment capability is actually identical. The reality is you're just tackling more of the cost structure because you can address the cost of goods and the shipping by being proactive and managing that. But the reality is the profit profile, which is how much money can I make off my take rate or my gross margin piece? It actually looks a lot like it would in any of these digital businesses. But the execution piece is more complicated because you need to make all the physical operations work in addition to the technical operations. Having just great software alone wouldn't let you function well if your supply chain didn't work or wouldn't let you function well if your customer service organization didn't work. And so we view e-commerce as that well-rounded athlete

• 47:38Speaker 03

  business for that reason, but we also view that as a competitive advantage because getting good at everything is just frankly, it's a difficult business.

• 47:46Patrick O'Shaughnessy?

  I mean, I love the well-rounded athlete concept, process power concept, like any great business. It's just complicated. There's no magic bullet. You have to do a lot of things very well. In that environment, there's also a lot of surface area for, I guess, things to go wrong. So how do you think about lessons learned from major mistakes in the business through history? Like what stand out as the few things that have gone the most wrong or decisions that turned out to be bad ones that were productive in the sense that you learned from them?

• 48:12Speaker 03

  We encourage folks to take risks. And one of the stories I always say is like, look, in a traditional company, larger company, you sort of don't want to be the person where something doesn't work. What do you do? You do two things a year, you don't do them until you know they're gonna work, you make sure they're gonna work well. Sure enough, both of the things you do work well, no failure associated with you, you got done the two things you promised you would. Hey, look, we want you to try five things. Well, what's the upside? Well, four of the five things worked. You'd be like, oh, great. Okay, so your upside is that twice as many things worked. I said, well, actually, that's the second best benefit. The best benefit is actually the fifth one, the one that didn't work. And the reason that's the best one is we have this really bright person who we put in charge of some area of the business.

• 48:56Speaker 03

  And we go out of our way, you know, we have a recruiting team of 400 people. We we put a tremendous amount of effort into finding the most amazing people and having a place where they want to stay. So now this really bright person that owns one area of the business, they're convinced all five are gonna work. It's the only reason they tried. And so the one that didn't work, there's something about it that they didn't know that they now got to learn. So every decision they're make now is now informed by this one new piece of information they just picked up, which lets them make better decisions tomorrow. And so because we use data to measure everything, learning is a key piece of making things better and better. And the way you learn is from what doesn't work. You don't really learn from what worked. Culture, I think, is a big advantage. And what it means, though, is to to pull it off, to your point about the complexity,

• 49:40Speaker 03

  you really need two key things. One, you need just the most amazing talented people that exist out there, which means you need to look really hard for them, you need to tell the story as to why they want to join. They want to work with other people like them, they want to work in a place that has a great culture. So you gotta go find them and retain them. And the second thing that you need is you need a culture that empowers them and helps them rather than inhibits them and makes, you know, creates frustration for them. And so we say, if you invest in your people, invest in your culture. And by the way, investing in your culture means protecting your culture because it will devolve over time if you let it. Those two things end up being your advantages. And you're gonna be competing against other companies that understand what the customer wants and understand the product offering just like you do.

• 50:23Speaker 03

  But you're gonna be able to out execute them if you focus on those two things.

• 50:26Patrick O'Shaughnessy?

  What does it mean to invest in culture? Like, that culture entropy thing rings very true for me, that it's just something that needs to constantly be fed and nurtured. And it's really more about what you do repeatedly than what you say, like on a wall of values or something. How do you think about deliberately investing time or dollars into culture?

• 50:44Speaker 03

  So we've rewritten how we express our culture in words three times through the history of the business. We haven't actually changed what we believe in, but we've gotten better at writing it down and crispening it. It's on our website. You can read it. It's our people principles and it talks about these nine principles under these three pillars. And we tried to get really crisp with the language. So it was very hard to misunderstand what we were saying. And the whole reason is we want to attract people who are attracted to that and we want to operate that way because that's what we believe. And so what we do during recruiting someone, we basically have a set of folks who are evaluating them along the axes of skill fit. And we have another set of folks who are evaluating them along the axes of culture fit. And the way we do that is we break down each of those principles

• 51:28Speaker 03

  and assign them to different of the interviewers to basically evaluate the person on just that lens. Then when someone's here, we invest a lot into telling people about the people principles, why they matter. I do a session with new managers during their first 90 days where I talk about what the people principles mean to me and then just do a Q and A with them, answering their questions. And then what we do in our performance review cycle is we review folks against the people principles. So we take the people principles and that's what you're rated against. Because it's what we care about, I forget what the quote is, but something about you can't get the good outcome if you don't measure it. There's a tighter adage, but I'm getting it wrong. But you know, that concept, well, this is what we care about. So let's measure folks against it. And by the way, if someone doesn't understand

• 52:12Speaker 03

  one, or how do we coach folks on it? And how do we help them build those skills? How do we educate them? And because if you're getting the best folks, you want to continue to develop them as well. And so we believe a lot in that and people and culture.

• 52:23Patrick O'Shaughnessy?

  One of those nine is adapt and grow. Again, is something that I think everyone that's thoughtful aspires to, right? Like get better personally, get better as a team. If you're using those nine things as like the language through which to evaluate someone in a review, how do you evaluate that one specifically? That seems like right next to it is innovate and improve, which is adjacent and probably some similar overlapping concepts. But drilling all the way down to the performance review, how do you decide if someone has done those two things effectively? Adapt and grow and innovate and improve?

• 52:51Speaker 03

  We kind of have two, three sentences under each one that tries to give you a little more about what each one's kind of angling to go after. But if you think about those two, what we're trying to say is part of being successful to the maximum degree is whether you want to call the concept of being a lifelong learner or being flexible and willing to change in the face of new information and new data. So some of that's a culture mindset around not being stubborn and basically being open and always paying attention and being curious, keeping your eyes open, asking questions. And then part of it's your own ambition. Are you an active participant on that journey? Or are you just sort of pushed and have to? When we find the folks we want, they're ambitious and driven. They're ambitious and driven on multiple vectors, not just around the business performance, not just around their own career

• 53:36Speaker 03

  ambition and responsibility set, but around learning, many axes. And the mental headset, in addition to exemplifying behaviors, in addition to investing your time in them, there are all these aspects of it matter.

• 53:51Patrick O'Shaughnessy?

  The concept of constant improvement is a nice one, but it seems like a hard one to accurately measure all the time. Like sometimes improvement happens and jumps, not in a continuous, more discreet, non-continuous fashion. So it's always interesting to me how people handle that. For you personally, if we apply that lens to you, what are the things where you get the most joy out of those discrete improvements in how you're operating as a CEO or as a leader, or just as part of the Wayfair story? How would you measure your own improvement over time? Where have you been best and what have you most enjoyed getting better at?

• 54:23Speaker 03

  I'd say the thing that when we started, and for a long time, you could kind of keep your arms around every area of the business. I'm very detail oriented. I like knowing what's going on. What you learn over time is you need to let go. And there's this concept of like, what's the right level to hover at? Because on one hand, you need to know what's going on. On the other hand, if you try to hover too deep, there are not enough hours in the day, or you're going to impede the team's ability to just own the topic and drive it forward. And so I would say the biggest thing that I've learned is a combination of, from a management practice standpoint, like, how do you do that? How do you hover at the right level? And then as you get bigger, you realize not everyone works the same way as everyone else. You're getting a larger and larger organization. And you basically also need

• 55:07Speaker 03

  to learn to modulate your style. And so what I found was like, when I was younger and we were smaller, You're a hammer and everything's a nail. I have the same approach on everything. And what you learn over time is that's not actually the optimal way to do it. It takes more effort. You have to be more mindful and you need to gain more skills if you want to modulate that. And I would say that's actually in the recent years, something I put more energy into because I'd say for the longest time I didn't do that. And then you notice sometimes you get better outcomes in some conversations and some interactions than others. And rather than say, oh, the other person should adapt to me. The truth is, on one hand, sure, you hope they do that. And why shouldn't you also try to do the same thing? And then you're going to maximize the odds of the outcome.

• 55:49Patrick O'Shaughnessy?

  Early on in the company's trajectory, usually competition isn't all that important. If you're doing something new and interesting, blue ocean out of red ocean. And you don't have to think too much about your competition. As a business matures, you have to do that a lot more. And I'm curious what you've learned about that dimension of leadership and thinking and steering a company. I think famously, Amazon had a Wayfair parody project or something that they wanted to match you in certain aspects. And their online furniture sales are serious too, like yours are. So maybe they're the obvious one to ask about, Amazon. But just generally speaking, how do you think about competition and whether you should keep your eye on the prize of what you're trying to do versus look on your flanks as you get bigger? To see what others in the same space are doing.

• 56:33Speaker 03

  In my experience, it's important to be cognizant of what your competitors are doing because good ideas can come from anywhere. You certainly want to be aware of what they're doing. But in general, the success, I think, comes from not obsessing over your competitors, but rather obsessing over your customers and understanding what your customers like, what's going well today, what's not going well? What are the next set of improvements that'll matter the most for our customers? How do we make those things happen? Perhaps it's something novel we need to do, or we need to create something or innovate on something. And that's really where you're going to get the gains. Your competitor in theory is trying to do that too. But if you are more focused on the customer and move with more ambition and speed and take on bigger challenges and are successful with that, you're going to outpace them.

• 57:17Speaker 03

  And so my view is like, you should watch your competitors, but the truth is, and be aware. But the truth is, what really matters more is how you pay attention and work on what matters for your customers.

• 57:30Patrick O'Shaughnessy?

  As you think back on the whole Wayfair journey to this point, what episode for you personally was the most stressful? So like, what happened in this period of time for the business that just had you the most stressed out or emotionally exhausted? And what do you take from that episode as a lesson?

• 57:46Speaker 03

  I typically don't get stressed out if something's going wrong, if it's in our control. Because my view is like, all right, well, do we believe in our plan? Do we have the right people working on it? Okay, let's work at it. And you can get the outcomes you want. Things will get better. When things are out of your control is when you tend to worry more. And so the most stressful period earlier, we chatted a little bit about the early story of the 250 websites and the migration of wayfair.com. And in that period, we had 250 websites that were well honed in how we were doing the online marketing for them and search engine placement. You know, everything about it had gotten dialed in over the years. Well, when we launched wayfair.com, you have this new site. It has no traffic. Then you have these old sites that have the traffic. And so you need to shut down the old sites

• 58:31Speaker 03

  and do permanent redirects to this new site. And the problem is, no matter how good your new site is, day one of this new site, someone is not going to feel like if they visited us at rastaf.com, they're at a bespoke store for TV stands. Or if they visit us at oldbarstool.com, they're a bespoke store for barstools. Now they're in Wayfair. Wayfair doesn't have the same visual merchandising it has today. It doesn't have the same brand it has today. There's this thing called Wayfair. They don't know what that is. They're in some barstool or TV stand department page, which probably is far from being optimal. And so what happens is you permanently do these redirects and your conversion doesn't start where it was. And then on top of that, you lose all your natural search traffic. And in particular, our natural search traffic, we kept redirecting, you know, tranches of sites,

• 59:16Speaker 03

  and it wasn't recovering. And we couldn't figure out why it wasn't recovering. And so our traffic at one point was down fairly substantial. It was obviously a source of some stress. Now, over time, we figured out some technical things that were inhibitors. We also figured out some improvements that we made to Wayfair that continue to drive up performance. And obviously, where it is today is many, many, many times bigger than it was then. That was definitely a stressful period because it felt like there was a portion that was out of our control and it wasn't always super clear during that period. This period lasted over a year of what to do. And so the lesson though is what we did is we just kept working at it, kept trying to figure it out, kept going back to maybe not being confident that we knew what was happening, why it was happening, but kept tearing it back down different ways.

• 59:59Speaker 03

  Entirely confident we didn't yet know exactly what was happening, why it was happening. And so we need to keep digging and perseverance and being tenacious, I think is a part of every entrepreneur's story at some point. When you hear these stories, Phil Knight wrote this book called Shoe Dog. It's the story of Nike from when he started it until they went public. So it actually doesn't talk about the last couple of decades. It sort of ends when they went public. It's a great book and you realize that today you think of Nike as this dominant company in footwear and sports apparel space. And when you read it, you realize that there's just many turns where it could have just gone away, gone out of business. And I think that's part of almost every entrepreneur's journey is this notion of having to be tenacious, keep working at things, figuring things

• 1:00:42Speaker 03

  out. There's twists and turns. Things happen that you don't know. If you're just willing to call it quits, then you're never going to get them.

• 1:00:48Patrick O'Shaughnessy?

  If we think to the future now, obviously you built something huge and substantial that's very recognizable. So distinct from that episode, I love that episode you just described. If you think five, 10 years in the future and put your rose colored glasses on, what do you think the rosiest version of this story becomes over that period of time for Wayfair?

• 1:01:06Speaker 03

  What's exciting is we have a household brand. That's great.

• 1:01:09Patrick O'Shaughnessy?

  Hard to do, yeah.

• 1:01:11Speaker 03

  We're still very far from potential because we can become the customer's go-to brand for all things home and we can get them to where they define home as broadly as we do. It's not just furniture. It's not just decor. It's not just housewares. It's not just appliances, not just home improvement. It's all of that. And we can provide that in an experience in a manner that they can't get anywhere else, whether that's the way we provide design advice, or the way we help them with decisioning, or the content we can provide, or the visual merchandising, or the fast delivery. I think through that journey, what's going to happen is we're just going to, we've been growing at a rate where we double every two to three years. We think that can continue for a long time to come. If you think about the concept of 2% market share and you just double that

• 1:01:54Speaker 03

  every two to three years, you can kind of see why that could continue for a while. And we get excited about the prospect of Getting that outcome through the vehicle of basically making customers happier and happier by giving them this ideal experience that they've had in their head, but doesn't exist in the world.

• 1:02:11Patrick O'Shaughnessy?

  Well, this has been so much fun. I think that the business is fascinating. I've been on a run of thinking through these just complicated, big, global businesses and how things are changing and technology, you know, a 3,500 person team devoted to things like technology is so cool and a business that's about home furnishings and decor, et cetera. I've learned a ton and I really enjoy talking to you, just like last time, and just learning a lot about what you build and how you've built it. I ask the same closing question of everybody. What is the kindest thing that anyone's ever done for you?

• 1:02:40Speaker 03

  Patrick, I've listened to your podcast and so I'd say that I'm aware of you asking that question. I was thinking about my answer before this and unfortunately I have to say my answer is going to prove to not be a novel one because as I've heard many folks credit the kind of support and encouragement that their parents gave them and I've heard many folks do the same with regards to their spouse. And those are the same folks I would go to. And my parents were super supportive when I told them I did not want to attend graduate school and I wanted to be an entrepreneur, which my parents were first generation immigrants from India and you know, education was the de-risk path to success. Graduate school was a step on that journey and chose not to do that. And obviously hindsight, whatever,

• 1:03:23Speaker 03

  it worked out just fine, but they were very supportive. They never even blinked an eye. That was the whole spirit through my youth. And then my wife is an amazing person. We've married 18 years and I have to say similarly entirely supportive, including sometimes a personal sacrifice of her. So I have to say that I don't have a novel answer for you, but that's my answer and I'm happy with it.

• 1:03:44Patrick O'Shaughnessy?

  Well, look, I think for those of us that can give that answer, in many ways be mine too. What a great piece of luck and privilege for that. I don't mind the common answer at all. It's a fantastic one. I wish everyone could answer it that way to some extent. Really, again, appreciate the time and all the insight today.

• 1:03:58Speaker 03

  Well, thank you. This was a great pleasure.

• 1:04:02Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week. [Music]