Off Brand

The Pandemic Was the Best Thing That Ever Happened to Wayfair

But what happens to the online furniture retailer as the world opens back up?

Illustration: Guillem Casasus 3D: Borja Alegre

Among the first things huge swaths of the American population did as they were suddenly forced to work from home in the early days of the pandemic lockdown was confront their need for a new desk. And an office chair. And better lighting. And, with extra cash from government stimulus payments, maybe some better patio furniture, an upgraded couch, and a new crafting table for the kids. With most home decor and furniture stores forced to shutter, they only had one place to shop: online.

This was great news, it turns out, for Wayfair, the e-commerce furniture and home décor stalwart that had plugged away for nearly two decades of unprofitability. The company ended up enjoying a blowout second quarter, reporting a massive quarterly sales leap from $2.3 billion to $4.3 billion. When founder and CEO Niraj Shah shared those impressive results with investors earlier this month, he credited these strange times. “Covid demand tailwinds benefited our sales momentum,” he said.

Translation: Wayfair had joined the ranks of companies like Zoom for whom the pandemic was a breakthrough branding event. Even more significantly, it also earned a profit of $274 million — the first time the company has been profitable since it went public in 2014. Shah didn’t shy away from proclaiming the lasting significance of this event, calling it “a turning point” for the business.

The spread of Covid-19 unexpectedly rushed the company’s timetable to reach profitability, and the market’s response has been enthusiastic in the extreme: Wayfair shares, which dropped under $25 in mid-March, have lately soared over $330 per share.

Indeed, as recently as this past February, the company had been asking investors to wait until 2021 for it to reduce expenses enough to finally cross the line to profitability. The company has been around for 18 years, and while shoppers have obviously become more open to buying furniture and home products online, it’s been a long grind — a process of building a supply chain, and spending a lot on marketing to establish familiarity and trust. The spread of Covid-19 unexpectedly rushed the company’s timetable to reach profitability, and the market’s response has been enthusiastic in the extreme: Wayfair shares, which dropped under $25 in mid-March, have lately soared over $330 per share.

But now it’s becoming clearer that this raises a new challenge: Can a company that had a singular breakthrough in a freakishly anomalous quarter really keep it up under conditions that are more, well, normal?

The challenge is already becoming clear. “From our data, consumers have already started to return to physical stores and online penetration levels in furniture and home furnishings have dropped from their peak in April,” Neil Saunders, managing director of the retail division of analytics and consulting firm GlobalData, recently cautioned. “While we believe online sales will remain elevated in home-related categories, which will be helpful to Wayfair, the trends of this quarter will not be repeated indefinitely.” In other words: Congratulations on your best-ever quarter — good luck living up to it.

For Wayfair, the “tailwinds” of the pandemic were powerful. This included nearly 5 million new customers — more than in the prior four quarters combined.

There are, of course, worse problems to have. For Wayfair, the road to profit has been a long one. The Boston-based company was founded in 2002 as CSN Stores, rebranding as Wayfair about a decade later. It steadily grew revenue to about $9 billion by 2019, assembling a huge web of suppliers — more than 11,000 as of last year, according to Vox — and selling millions of products, including some 80 house brands, across five websites. (In addition to Wayfair.com, it also sells through jossandmain.com, allmodern.com, perigold.com, and birchlane.com sites; all the sites feel vaguely similar, and sometimes the same product seems to show up across different channels with a slightly different name and price point.) But all along, the core bet has been the same: Home and furniture shopping will migrate from brick-and-mortar to digital.

That was happening gradually, until it happened all at once. And for Wayfair in particular, the “tailwinds” of the pandemic were powerful. This included nearly 5 million new customers — more than in the prior four quarters combined — expanding its total active customer base to 26 million. Repeat orders were up, too.

In that earnings call, CEO Shah and other executives naturally emphasized longer-term planning and trends, but they acknowledged the quarter’s unusual factors. In addition to consumers (by necessity) shifting spending away from travel, dining, and entertainment toward the home, suppliers (by necessity) were leaning extra hard on e-commerce vendors. Wayfair benefited from “favorable product pricing, and relatively cheap online advertising,” Baird analyst Colin Sebastian noted. Another plus: Amazon, rival to every e-tailer, canceled Prime Day, and for a time suspended sales of non-essential items like home decor. And, of course, brick-and-mortar rivals like HomeGoods and Ikea were forced to close their physical locations.

It’s unclear if the home-improvement boom can keep up its momentum. The unemployment numbers are still horrific — the latest weekly number of jobless claims topped 1 million, higher than expected — and the stimulus lifeline is fading.

As stores have reopened, Shah conceded, there has been some tempering in Wayfair’s growth rate in those geographic markets. While the company generally suggested both the fundamental shift to e-commerce, and its own growth and profitability, would continue, it did not provide specific third-quarter guidance. “While the unemployment picture is still quite tenuous, the competitive landscape is highly dynamic,” CFO Michael D. Fleisher offered, “consumers are justifiably nervous, and some government support is expiring.” Bottom line: The company is not making any promises about what comes next.

The current quarter will likely offer challenges not just to Wayfair specifically, but to e-commerce more broadly, and perhaps retail in general. For starters, Wayfair actually has competition again. For example, At Home, a big-box décor chain with more than 200 locations, pivoted to more online sales when its stores were forced to close during the lockdown period, but saw a big rebound in foot traffic and in-store sales when the closures lifted. Meanwhile, shipping costs are rising, and brick-and-mortar chains like Target are having success with order-online, pick-up-in-person offerings. Even bigger picture, it’s unclear if the home-improvement boom can keep up its momentum. The unemployment numbers are still horrific — the latest weekly number of jobless claims topped 1 million, higher than expected — and the stimulus lifeline is fading. Plus, how many new couches can people buy, anyway?

“Wayfair will almost certainly announce weaker results” in its third quarter, Motley Fool predicted, as consumer behavior adjusts to the return of in-person shopping . The key will be convincing all those new Wayfair customers to become repeat customers — the linchpin of retail — despite the return of more competitive options.

Wayfair and other e-commerce players have just enjoyed the upside of what seemed like years of consumer-behavior change jammed into a few months. But it’s sinking in that it was a highly unusual few months that will (hopefully) not be repeated anytime soon. Yes, the future of retail was forced to arrive early — but now it’s on digital-centric sellers to prove they can make it stick.

Author The Art of Noticing. Related newsletter at https://robwalker.substack.com

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