What retail apocalypse?
Online home goods retailer Wayfair is opening its first namesake store, near Chicago, following a string of other digitally native companies that have turned to brick-and-mortar for growth.
In an ironic twist for a company that became a $12 billion powerhouse by persuading consumers to buy couches and beds online, Wayfair is leaning into the most basic building blocks of retail. That’s because no matter how far tech has evolved, shoppers still can’t try out a new mattress from their laptops or phones.
“If you think about the categories we’re in, they’re typically very visual categories, or very tactile, or, you know, considered purchases, because it’s reasonably expensive and you’re going to put a lot of care into picking the right item,” Wayfair CEO and co-founder Niraj Shah told CNBC.
“Depending on what purchase someone’s making, they may prefer the in-store experience and getting to work with an associate,” he said. “Or they may want to discuss financing or want design help, and we can provide all of those experiences. We provide them online as well, but sometimes, in-store can be either more pleasurable or more effective.”
The 150,000-square-foot megastore in Wilmette, Illinois, is set to open May 23. Wayfair follows other direct-to-consumer brands that have opened stores, including Warby Parker, Figs, Casper, Glossier and Everlane.
Wayfair’s retail ambitions come as online-only companies look to plot their next phases of growth in a landscape that has evolved since their companies were founded, making it harder than ever to run a profitable e-commerce business.
Privacy changes on Meta and Apple iOS have made it more difficult for marketers to target customers in advertising campaigns. Companies also face more competition from Chinese-linked upstarts such as Shein and Temu.
Returns and the scams that come along with them are a never-ending, money-losing game. With the proliferation of online marketplaces on Amazon, Walmart and Target, just about anyone can be a retailer — and brands can find themselves competing against their own manufacturers.
Many companies that started by selling directly to consumers now offer their wares in department stores and big-box retailers, but even that brings pitfalls. Brands that earned their competitive edge by gathering enormous amounts of data on their customers don’t have as much visibility when they’re working with wholesalers, nor do they make as much money.
They’re also subject to the whims of their partners and could be taken off the shelves with little notice or risk losing a primary revenue source if that wholesaler suddenly goes under or sees sales fall. When brands have their own stores in addition to websites, they have a lot more control over mitigating those risks.
Plus, torrid e-commerce growth during the Covid-19 pandemic has moderated and fallen to below its pre-pandemic low, U.S. Census data shows. Given the seemingly inextricable role online shopping plays in most Americans’ lives, some may be surprised to learn that the vast majority of retail sales — about 85% in 2023 — still happen offline, according to Census data.
“For some of my companies in our various experiences, [stores] can be your very best channel from an economics perspective — if you have a really good brand,” said Larry Cheng, a founding partner at Volition Capital, a technology growth equity fund that invests in software, internet and consumer companies. “It’s not going anywhere, it’s additive to online sales, it’s additive to attracting new customers, the economics can be great.”
What to expect at Wayfair’s store
Wayfair’s new location will look somewhat like an Ikea in its size and on-site restaurant, but its assortment will offer a range of diverse styles as it works to become a one-stop shop for all things home.
“You’ll see furniture, you’ll see the marketplace, which is very decor centric, but we have home improvement, which includes large appliances, kitchen cabinetry, tile, doors, hardware, you’ll also see housewares, small electric, there’ll be storage and organization,” Liza Lefkowski, Wayfair’s vice president of merchandising and stores, told CNBC.
“You’ll see a number of categories outside of furniture, but that are very core to your home,” she said.
For now, Wayfair is opening just one large-format store to complement a handful of smaller shops it opened under its specialty retail brands All Modern and Joss & Main.
In the future, Shah is envisioning a “whole portfolio of large-format stores” with a nationwide footprint.
Brick-and-mortar is back
Wayfair’s physical store ambitions reflect a bigger wave of brick-and-mortar openings.
In the early 2010s, new store openings largely outpaced closures, until the tide turned in 2017. Nearly 8,000 retail storefronts were shuttered and only about 5,000 new ones opened that year, according to Coresight Research’s U.S. and U.K. Store Tracker Databank.
The spike in store closures sparked headlines about the so-called retail apocalypse and warnings that stores would die off as shopping moved online.
For a while, that seemed to be true. New store closures outpaced openings until the trend changed in 2022. For the first time in five years, more storefronts opened than closed, resulting in 1,575 net new openings. There were 307 net new openings in 2023, and there have already been 521 net new openings in 2024, as of May 10.
Discount retailers such as Dollar General, Five Below, Burlington and TJX Companies have fueled a lot of that growth, said John Mercer, Coresight’s head of global research and managing director of data-driven research. But direct-to-consumer retailers are playing their part, as well.
Take Warby Parker, the glasses company credited with starting the direct-to-consumer movement. In May 2023, the retailer said it believed it could open more than 900 stores in the U.S. It opened about 40 in 2023, and has 40 more planned in 2024. The new store openings contributed to a 12% jump in revenue in 2023 compared with 2022.
Figs, which sells scrubs and other products for health-care professionals, sold its products exclusively online until it opened its first store in Los Angeles in November. It has another planned in Philadelphia for this summer. CEO Trina Spear told analysts during the company’s first-quarter earnings call May 9 that 40% of the people shopping in the Los Angeles store are new customers.
“And this is in our most penetrated market of Los Angeles. So, that’s great to see,” Spears said. “Health-care professionals are like everybody else, right? They want to engage with brands both online and off, and we’re seeing that in our Century City store.”
Other privately held direct-to-consumer brands have also expanded into retail stores, including bedding company Brooklinen, furniture store Burrow and apparel brands Everlane and Untuckit.
“Pure plays on [e-commerce] are saying, ‘We’re getting to a certain number, we’re doing fantastic on [e-commerce], but we won’t be able to hurdle this number no matter what … if we don’t turn on another channel,'” said Rebecca Fitts, who previously served on Warby Parker’s in-house real estate team and is now the senior vice president of business strategy at real estate advisory firm Alvarez & Marsal Property Solutions.
“I don’t think every brand is going to get to a store count of a Warby, but they’re certainly looking at those lessons, and it bodes well,” she said.
High cost of entry
If direct-to-consumer brands could all open stores and suddenly boost sales and profitability, they’d all be doing it. But retail fundamentals can bring a steep learning curve for companies that started out as online disruptors.
Expanding into physical retail is challenging and expensive.
Companies looking to open stores need to figure out a physical location, along with furnishings and supplies, and the logistics, such as transporting inventory, said Amish Tolia, the co-founder and CEO of Leap, a start-up that helps brands open retail stores. They also need to determine how to drive foot traffic and operate a store, he said.
All those components require “time, energy, budget and resources, right? And so for as long as we can remember, besides a multi-brand department store, if you want to go set up your own fully branded retail environment, the barriers to entry have always been incredibly high,” Tolia said.
Some direct-to-consumer brands have already been burned after they expanded too quickly and demand fell.
Allbirds, whose market cap has gone from $4.1 billion following its initial public offering to about $114 million, rapidly opened dozens of stores over the last few years, bringing its total count to about 60, as of the end of March. But the shoe and apparel seller now plans to close 10 to 15 “underperforming” locations in the U.S. in 2024 so it can focus on “maximizing the productivity of our remaining stores,” executives said during the company’s first-quarter earnings call May 8.
Mattress brand Purple has also opened about 60 stores, but it said during the ICR consumer investor conference in January that its showrooms are perhaps “the toughest part of our model right now” because about a third of its locations “are problematic for one reason or another.”
“So, we’re going to slow [store openings] down a little bit in the coming year and try to figure out, how do we make sure that we get them to where they need to be so they’re profitable,” said Purple CEO Rob DeMartini. “They’re great brand beacons. But they’ve got to make some money.”
Wayfair, which hasn’t turned an annual profit since 2020, will face the same challenges as it embarks on its retail expansion.
The company spent about $348 million on capital expenditures in 2023 but has also slashed costs to save hundreds of millions of dollars and strengthen its cash position.
Wayfair said it’s starting slow and plans to roll out stores carefully, taking time to see what’s working and what isn’t before making future investments.
“The challenge with it is the capital expenditure upfront,” said Cheng, from Volition Capital.
“But ultimately, all of these brands, there’s not like this one channel that is the silver bullet,” he said. “The good brands, they work across all of them.”
