Why Wayfair sees an opportunity at the high end

25:24But even just to showcase what we offer as a brand, we needed a large format store. So by 2021, we started working on that. And so the first one, 150 ,000 square foot store opened in Wilmette, Illinois, just north of Chicago in May of 2024. for. And that kind of out of the gate was quite successful. And so it led to two things. One, we've had kind of a kind of continual rapid iteration of experimenting with different things in the store and which has just driven the success in the store higher and higher over time. But two, these stores take about two years on average to open. And so we started the process to greenlight additional stores.

26:05And so this year, what you think about is basically two years after that first one opened. We have three that will open. One opened in Atlanta earlier in the year, then Columbus, Ohio. And then we have one a little later this year that opens in Denver, Colorado. And what we've announced for next year is five planned openings. So five locations. And then we're starting to sign the leases and do the development work for the openings that will be in 2028. So we're pretty excited about the opportunity. We've consistently seen the stores we have improving their performance. And then the new openings we've had have opened very strongly.

26:41So we're pretty excited about what we're doing. We've gotten a lot of feedback from folks who have just been retail merchants in this world for a long time. And they've walked our store on what they thought was particularly strong, not strong, what their takeaways were. And we've heard of very positive things. And so we see that also borne out in the customer numbers. So we're pretty excited. It's premature to say how many stores we could have, But we really think we could grow that footprint quite a bit. And we'll learn over time what the right amount of saturation and density is. But the United States is a very big market.

27:18And ultimately, we think there's an opportunity in Canada and the UK as well. But right now, we're focused on the US market for Wayfair stores. But we also have stores for all modern, Joss and Main and Birch Lane. And we last year opened two stores for Paragold. And so we see a similar opportunity across each of our brands. I want to learn more about what the stores are telling you and what you're learning. So one of the stores that you're going to be opening in 2027, Neeraj, is about 10 minutes from my home at the Ridge Hill Mall. Okay. And so I'm pretty excited about that. I'm hoping a little podcast studio could be set up somewhere there within the store and I could just be live from Wayfair.

27:58And I think a lot of possibilities there. The lovely Mrs. Scully is quite concerned. I'm going to be spending quite a bit of time over at the new Wayfair store when it opens. Well, this could be an opportunity for both of you to spend time there. Maybe the lovely Mrs. Scully can join you. I think she might be joining me quite a bit. But it's exciting because that seems like an incredible—that seems like here you are, Yonkers, Westchester, this huge market. Seems like a lot of opportunity there. And it looks as though you're looking at a lot of spaces where there used to be a big department store or there used to be a store that had a great big footprint.

28:32Yes? Yeah. So the stores that we're opening, I mentioned that the one in Wilmette was 150 ,000 square feet. Yeah. If you look at the announcements of what we've announced, you know, they range from a lot of them are, you know, 90, 100, 115, 120, 130 ,000 square feet. So they're all meant to be large footprint stores. Yeah. And the reason they vary in size is that we are working off existing real estate that exists. So we're doing nationwide searches. We're looking for, you know, the right location, the right box, the right economics, the right, you know, population. And we're just, there's a lot of markets that could support a Wayfair store.

29:10And the question is, where can we find an existing box? because when you talk about a two-year lead time, it would be longer if you were to try to build something from scratch. And frankly, significantly longer in certain geographies depending on the kind of permitting and the process involved. And a lot of markets are very tight on land as well. So it can be very hard to find a site location in certain places. But it seems as though you have the opportunity to redefine what retail stores are. And I wonder both what retailers you look at and hold up and say, these guys are doing it really well and there's something to be learned from them.

29:50I don't know if you think IKEA does a good job or what are the brands you think have really interesting models and what you think the future of retail really looks like. Because department stores have suffered over the decades, and that model stopped working in the same way that it used to. And a lot of furniture stores and just retailers in general and malls have struggled. So what does the future look like to you? I think the notion that it's sort of like customers don't want stores is not true, and the notion that customers don't want online is also not true. I think most customers want both.

30:26And depending on your use case, you may prefer one or the other. You may go back and forth. There's just times when one is preferable to the other. And what we're trying to do with stores is really live up to that vision that customers have of what their ideal environment would be, which is that they can easily shop with us without going to the store. But then there's experiences in the store, and there's people they can work with in the store, and there's things that they can do in the store that really will make the experience excellent. And for certain types of use cases, it may be far easier for them to be in the store than not.

31:00And we're basically trying to make these places just really comfortable, fun places to be. And I think that's the other trend in retail is that, you know, if the store is not somewhere you're excited to be, you probably will not bother going. So with Paragold, you've got two locations now, and it sounded like collectively you were all sort of catching your breath a little bit, having opened those two stores and kind of getting some data from them and seeing what happens. How are you thinking about that expansion, and how are you feeling? It sounds like you're feeling pretty good about the stores so far.

31:36Yeah, we're thrilled with the two Paragold stores. One's in Highland Village in Houston, and one is in West Palm Beach in City Place. They're both great locations. We're thrilled with the two stores and you will see us over time continue to roll out more stores. So we're trying to do it in both, on one hand, a very methodical and measured way where you roll out one or two stores. You then do a lot of iteration and you better understand exactly the model that's ideal. Then you roll out another batch, you continue to iterate, then you do the same thing again. So I think you're going to see us continue to move along this continuum.

32:11But yes, absolutely. We're excited about the stores. Are the Paragold stores, because of the brand partners and because of the level of merchandise, are they just a much more complex and complicated store to open for you? Well, I think each of our different store formats, each one's different. So Paragold, obviously, you look at the wall of fabrics and the customization capabilities, unlike the upholstery or the variants of products. And so there, you know, having folks in the store who can work with you, who understand the product lines really well, can even provide design assistance if you want that is really critical.

32:49You go into a Wayfair store there, you know, the sheer scale of the store is a different degree of complexity, different type. And then, frankly, the breadth of category. So there, you know, we sell kitchen cabinetry. And so being able to have a kitchen cabinet designer that can work with a customer and design their kitchen for them, you know, that's a very specialized skill. And that might be different than the person who's helping customers, you know, in upholstery, which would be different than the person who's helping customers, you know, over in housewares or in decor. So there's a lot of different things that we need to do to be successful and to make the store a fun place, but also very helpful to customers.

33:24And maybe they're talking about wanting to use financing and maybe they're talking about needing some design assistance. And maybe, you know, they're talking about a large project or maybe they're just, you know, want to look around and, you know, they're just picking up a hostess gift. And so we have a wide range of what we're there for. And so I think we just try to invent these stores as places that customers want to be that help them achieve their goals and do it in a fun way.

33:55We're taking a quick break to remind you about resource furniture. Some rooms need more than one good idea. Resource Furniture works alongside the trade to bring greater flexibility to thoughtfully designed spaces. Their Italian-made multifunctional systems combine sleeping, working, dining, storage, and seating in highly customizable configurations built for everyday use. From early space planning and renderings through measurement and installation, Resource supports the process from concept to completion. Explore the trade program at resourcefurniture.com. And now, back to the show.

34:41So with the Paragold stores specifically and with the Paragold brand, it seems like this is the big opportunity to win over the design trade and to get more of that customer base. And it seems like you've been focused on that. You reworked the trade program, and it seems like you're leaning into that. Tell me how that's going and how you're thinking about it and what you've learned some of the challenges are. I mean, it's going really well. We're seeing really nice growth. We talked about Paragold on our last earnings call, actually. Yeah, quite a bit. We talked about the size of the business, the fact that it's growing year to date.

35:21I think the number was 30%. And so we're seeing really nice success, and that model's working well. You mentioned the redoing of the trade program. I think that for designers, one of the challenges we heard is that, you know, the trade, our trade program is a little, there was, it was a kind of complicated in understanding how exactly it worked. It varied a lot by different, different categories, different goods, different product lines. And so kind of creating a program that was both very compelling, but easy to understand and then wrapping that with all the services and support we provide, that that would be a big win.

35:56And so we built that. We rolled it out. We're seeing it working very well. Designers often don't love when some of their resources suddenly have an access channel that their clients can access easily. And so that seems to be one of the challenges with Paragold and winning over designers is how do you allay their fears or concerns about the fact that now their client sort of has access to this product in a way that they didn't as easily before? Yeah. We used to hear that a lot more, you know, 10, 15 years ago. You think that's outdated? Do you think that's an outdated? We don't hear it that much anymore.

36:39In other words, for the high-end resources, if you're these brands that have beautiful product and just really invest into great product design and just creating beautiful items and collections, and then you think about today's world where a lot of the way that customers discover things might be on Instagram or other types of channels, not just through a design professional who someone may hire. I think what we've heard from brands is that they need access to tell their brand story out there. And to some degree, there's a little bit of a vacuum that got created and filled by a small number of retailers who kind of mono-brand type experiences because the great brands were hidden behind locked doors.

37:29Right. And so what's happening now is I think it's helping everyone in the industry. It's helping designers and it's helping the great resources because what happens is customers realize a lot more of what's available out there. It helps customers spend more in the category. It helps them really understand the breadth and depth of what's offered to them. And for designers who really want to help the customers achieve those goals, I think a lot of them have moved to pricing models that are more transparent, that allow them to actually make money in a very easy to understand way that lets them achieve their goals.

38:00And then it's let them offload some of the aspects of their job that they find more tedious to someone like us where the platform can help take care of a lot of their core needs, whether it be around logistics or the ability for them to access a wide range of resources and mix high and low if that's needed on the project or mix a broader set of items across. I mentioned all the categories we're in. So designers are not just advising on furniture items. They're advising across the whole range of home goods that we talked about. And there's really not other places they can go and really handle all of those needs under one roof with one sort of comprehensive approach.

38:38We provide a lot of project management tools. And so what we're seeing is that designers, by and large, are moving to a model where they say, well, I want to take care of my customers. Obviously, I need the economics to work for me. The customer is not opposed to that either. And I can move to a simpler model that's actually less work for me on the stuff I don't want to do. And it lets me spend more time on the stuff that I'm excellent at, that lets me differentiate. And so that's been pretty well received. We've seen by both the resources, by the brands, but also by designers. And that's why we've been seeing the trade program growing.

39:12Another challenge that the high-end industry has in general with online is that it is hard to make products look amazing and easy to distinguish between online. A$1 ,000 sofa tends to look the same as a$10 ,000 sofa. And I wonder how you deal with that challenge and think about that. Because obviously on the Paragold platform, you're showing much higher end merchandise. And how do you make it look that way? Yeah. So I think what we try to do is we put a lot of care in making sure that the product information is quite detailed around the types of materials, the quality. We actually do a number of things to try to convey it more clearly than some of the more generalist e-commerce platforms.

40:02they're very driven by how advertising plays on the platform and generally lower priced items trying to take share from the higher priced items by looking similar. We do a lot, if you look on Paragold, around helping brands tell their brand story. So not just the item story, but the brand story. So who is behind this item? Who's the designer? Who's the brand? What's the heritage of the brand? And that helps customers understand what they're looking at. So I think there's a lot to it, but it only really works if you specialize and focus on this category. And so that's our advantage versus a lot of our larger e-commerce competitors, where they're just general e-commerce platforms and they're just trying to like have more product there.

40:44And they're not necessarily looking at the kind of nuances of the category. Well, what you just outlined, and interestingly enough, Neeraj, when I'm in High Point and I talk to a lot of the CEOs, they tell me, yeah, no, we're really counting on Wayfair. We're really counting on Neeraj and the ultimate Paragold build out. They're really hoping that you are a huge part of the future of their distribution because we've described the challenging retail landscape and all of those big chains that have gone away and the department stores. They need you, Neeraj, it sounds like. And I'm wondering, you must have similar conversations with them.

41:26And I wonder how you think about that and what your perception of that reality is. Well, I think what's happening at the high end is no different than what's happening at Mass. We're not the only one who's succeeding. There's a number of successful retailers. I just think it's becoming less fragmented than it was historically. But you're finding successful retailers at the high end. They're opening up more showrooms. They're expanding the geography. They're basically providing deeper services to their core clients. We are aiming to be one of those retailers doing a good job and earning share from customers who want, whether it be the services we provide, the breadth of the selection we provide, the quality of the experience we provide.

42:11So I think it's just that share is changing hands. And if you look backwards and you say, oh, this is who had the share, why is it not staying the same? I don't think that's necessarily the right lens to look at it from because you'd have the same conversation if we're talking about where you'd go to buy a box of nails. And you'd say, oh, well, it used to be right on the main street in town, there was a small hardware store. And then that's now changed. And they all went to these mass merchants, Home Depot, Lowe's, Menards. And so now you can actually buy – it's a power drill. You say, oh, now I can buy it at Amazon.

42:50And so it's changed. But it's not that it needed to be that someone's gone away. It's actually that it's all about how the customer experience evolved. And it's summertime right now. And my family has a place in a small town in Cape Cod. and there's still a small hardware store right on the main street that does very well. But they stay very customer-focused, and their merchandise mix has evolved over time, and they have what you need right there, and it's very convenient. So it's not that everything changes, but things evolve, and those who stay customer-focused, I think, tend to do well. Well, and as you say, I mean, there are a lot of different ways of doing this.

43:34It's fascinating to see the RH model playing out, And I wonder what you make of that. And having restaurants and building these huge stores and palaces, I mean, what you think about that? And does any part of that look like something you would want to incorporate in your future plans? You know, RH certainly at the high end of the market, you know, has taken a fair amount of share over time. We actually think this is a great opportunity because the brands we work with, we think have excellent product. And we just think a lot of what they were missing was that distribution to the end customer, the reach that lets the end customer see the items, experience the items, and know what's available to them.

44:18And so that's what Paragold really is. Paragold's a platform that's allowing all the brands the reach to get to that end customer, and then the infrastructure, if you think about the customer service and the logistics, to allow that end customer to just purchase if they want. And it's also doing the same thing for the independent designers, because unless you have large scale, you're not going to build that infrastructure yourself. And if you consume it as an individual through third parties, it's a relatively expensive proposition and it's very time consuming. And so what Paragold really is, it's a platform helping the industry participants and the brands really reach the end market.

44:57Well, and at this point right now, from what you're seeing in the data, I don't know if you have a sense of what the mix is between the consumer and the designer, but roughly what is the breakdown and where do you see the big opportunity there? Well, so both are very meaningful. So it's not like 90-10 or 80-20. It's both are very meaningful. And frankly, we think the opportunity is on both sides. And we see Paragold is relatively small compared to the size of the end markets. It's very small. So we think there's just a large opportunity for that business to grow to be multiples of what it is today.

45:33And frankly, we look at Wayfair the same way. We look at all modern, Birch Lane, Joss and May in the same way. And it's just all around the notion of the customer having great experiences that gets them excited, helps them find what they want, makes it easier for them to buy things. And frankly, that's the other thing. When you make it easier for them to buy things, they buy more. So that's actually a way to grow the industry. So the peanut gallery for years has been able to say, oh, Wayfair, they're never profitable. They're always reinvesting the money, this, that, and the other. We learned later on in Amazon's evolution that Jeff Bezos could turn on the profitability when he wants to and crank it up and then to dial it back.

46:14Is that how you think about it? But to the people that sort of criticize the company because of the lack of profitability, what do you say to that? And how are you thinking about that today? I mean, if you look at our profitability, you actually see that the profitability of the business has been ramping quite nicely. If you look at free cash flow, if you look at EBITDA, if you look at net income, net income has lagged. Part of the reason net income lagged is we had some convertible debt that we've been purchasing back. And because we've done well, the cost to purchase the convertible debt back is higher than the cost we issued it at.

46:48And so you take a hit to earnings. This is just accounting treatment type of things. So if you actually look at free cash flow, you look at adjusted EBITDA, you see the ramp on net income, that'll just be a lagging metric, but you'll see it there as well. So we're actually able to do both, aggressively invest into the business and ramp profitability at the same time. And I think that's why general market sort of sentiment on Wayfair has improved so much is that I think the folks who have been paying attention have noticed that. I think there's folks who maybe aren't watching us as closely that maybe are a little slower to kind of internalize that, but that is what's happening.

47:24And so they'll just see that happen over time. Well, and that leads me to my next question, which is related, which is recently I had our mutual friend, Alex Shuford, on the show. And he talked about the fact that, truthfully, he was half imagining stepping aside and hopping on a sailboat and spending time in Nantucket. But AI and the future that he imagines, whether it's robotics, whether it's the AI technology itself, has reengaged him and has made him excited about what the future might look like on the manufacturing side and his ability to grow his business. I wonder how you're thinking about it and and what you've made of of that part of the conversation with alex you know so i think ai presents incredible opportunities so the same way alex um you know my take was he was very optimistic about the outcomes that could come with ai and part of what he wanted to do having a robot in in every one of his operations was around just helping demystify um the technology and and and help people understand that, geez, this can help us do what we do.

48:35This can help us succeed. This can help us grow. This can help, you know, even me as an individual, my career trajectory be stronger. I thought he did a good job describing that. And I share that same sort of optimist view of what the potential is of AI. It's definitely a technology that, you know, in my lifetime, you know, having seen the internet and cloud and mobile, number of technology shifts happen, And I would say this one seems more profound than any that I've lived through. And it does seem of, a lot of folks say it's of the magnitude of like the, you know, industrial revolution or something of the sort.

49:10I think that could prove to be very true. And so it's pretty exciting to be here and, you know, at the early days of it and then to figure out how to lean into it in a way that's helping the people on our team, helping our customers, helping our suppliers, you know, helping Wayfair be a better resource for everybody. Well, and I mean, obviously, AI is going to have a huge impact. Robotics, obviously, too. Sure. Assuming that all really happens. And the jetpacks that we were promised but have never yet seen. And I hope that happens in our lifetime, Neeraj. But is that part of the bright future that you imagine?

49:48I mean, what's the vision that you see five to 10 years from now? What do you imagine your company looks like? Well, I think we keep building out the services we provide. We keep building out stores. The technology, we're using AI to make everything in our experience stronger. And so hopefully we do a good job with that. And the experience we can provide relative to our competitors is I think you need to have as good or better an experience than your competitors. Hopefully we can do that and then some. And I think we can hopefully make it easier for the suppliers who work with us, for all the brands, for them to operate their business on our platform in an easier, more efficient way for them, which allows them to spend more time on product development and all the other things they can do to grow the business.

50:35So we see this as a big accelerant, a big opportunity, and we've really encouraged everyone internal in the company to really use these tools and lean in because it's just such a big opportunity. And so when you take the strategies we have, you couple what the AI opportunity is on top of that. And you also couple it with finally, you know, it's taken a few years, but getting past the COVID overhang, which had a lot of kind of cleanup associated with it. It puts us in a really exciting spot now. Well, and to that point, COVID seemed to have pulled so much business forward. Where do you think we are in that process?

51:12And do you think we have another year or two of this sort of challenging environment ahead of us? Or what do you imagine? You know, my general view, you know, folks tend to look at the market as sort of all or nothing, right? It's either a good market or it's a bad market. And I think there's actually all shades of gray as options. I don't think there's any quick fix to the market. But I actually don't think the market is going to be entirely frozen. I think it's slowly resetting. And then I think in the meantime, the real opportunity for everybody is just worry about your customers and, hey, what can I do to just get more share of this very large industry by doing a better job for my customers?

51:49What is it I can do that makes their life easier, makes things more enjoyable, that solves a problem, that provides something that others aren't providing, et cetera? And so when you go to market, is there any brand that's a holdout? Is there anybody that you're trying to get on the platform that hasn't said yes at this point? Or has everyone pretty much that you're interested in having on come on by this time? I mean, there's always still some folks who have not joined. But to be honest, I'd say the bigger thing we focus on, I spend my time at market really with all the partners we have. And so I've done that for years.

52:27And that's where the vast majority of our team is focused on the partners we have. And what are those conversations like? So when you spend time with your partners, what do you chat about? They want to know what we're seeing in the business. We want to know what they're seeing in the business. And then we spend most of the time talking about the things we're doing together. What should the priorities be? Where are the big opportunities? Okay, what are we going to get done over the next quarter? What are we going to get done over the next two quarters? How are we going to keep accelerating the growth that we're having together?

52:54And those are fun conversations. Well, I mean, it doesn't sound like you're too negative on things. It sounds like you're pretty optimistic about things. I mean, a lot of challenges before us, to be sure. Do you think people are going to be in high spirits when we get to high point in October? What's your sense? At least what I've picked up over the last stretch of time here is that people have been getting incrementally more positive on the market. And I think part of that is not necessarily that they're expecting or seeing some sort of miraculous rebound. But again, they're moving back into the driver's seat on driving their strategy and they're seeing things work.

53:30And so I would expect this fall market to be more of that. That's certainly what I'd be looking for. Yeah. Okay. Okay. Well, I'm hoping people will be upbeat. I'm incredibly grateful to you for making this time. It's such a pleasure to get to talk with you, and I thank you. Dennis, thanks for having me. I'm glad we were able to do this. Thanks for listening. If you'd like to keep up with the latest design industry news, visit us online at businessofhome.com, where you can sign up for our newsletter, browse job listings, and join our BOH Insider community for access to online workshops, a free print subscription, and much more.

54:10If you have a note for the podcast, drop us a line at podcast at businessofhome.com. If you're enjoying these conversations, please leave us a review on Apple Podcasts. It helps others to discover the show. This show was produced by Fred Nikolaos and edited by Michael Castaneda. I'm Dennis Scully. Thanks again for listening, and I'll see you next week.

54:38Thank you.