Wayfair’s Steve Conine on the Amazon Threat, Adopting A.I. & More

Xconomy Boston — 

The prospect of Amazon putting your business in its crosshairs is enough to give any executive some sleepless nights. Wayfair co-founder Steve Conine seems undaunted.

Over the past 17 years, Conine and Wayfair co-founder and CEO Niraj Shah have built the Boston-based company (NYSE: W) into one of the largest online sellers of home goods, offering more than 10 million products from more than 10,000 suppliers and employing nearly 11,000 people. The company generated $6.2 billion in revenue during the 12-month period that ended Sept. 30, the most recent financial results available. Although it’s not profitable, Wayfair is valued at $8 billion as of this writing.

But Wall Street has shown more concern in recent months that Amazon’s (NASDAQ: AMZN) growing ambitions in furniture and other home goods could stunt Wayfair’s growth. Wayfair’s market valuation slid more than 5 percent in late October after Amazon announced a new in-house furniture brand, the Boston Business Journal reported. That came a month after the Seattle-based e-commerce and tech giant launched a site called Scout that collects shoppers’ preferences in categories such as furniture, lighting, and home décor; Wayfair’s stock dipped as much as 7 percent the day Scout was announced.

Amazon’s home goods revenue has been growing fast. A One Click Retail report released last year estimated that Amazon’s furniture sales reached $4 billion in 2017, more than triple its 2015 furniture sales, giving Amazon the largest market share in the online furniture retail sector.

In early September, I sat down with Conine (pictured above) at Wayfair’s headquarters in the Prudential Center, which ironically is also home to one of Boston’s most popular shopping malls. When I asked him about the rising Amazon threat, he gave the sort of diplomatic, straight-forward response I’d expect from a football coach sizing up the next opponent: stay focused, stick to the game plan, and everything will turn out just fine.

“If you are delivering an experience that is superior in the customer’s mind, you will continue to do well,” Conine says. “At the core of it, it’s kind of as simple as that. Just keep focusing on the customer.”

Maybe it’s a naïve outlook. Maybe it’s just Conine sticking to the message crafted by him and the public relations team. Or, maybe Wayfair has the right formula to win in e-commerce for home goods.

The growing competition in this segment of e-commerce, which Conine claims is still in the early stages, could have implications for several industries, including home retail, supply chain logistics, and new technologies such as augmented and virtual reality. My wide-ranging conversation with Conine covered those topics and more, including Wayfair’s partnership with augmented reality firm Magic Leap, his company’s artificial intelligence investments, and his thoughts on the future of bricks-and-mortar retail. Here are the highlights:

Xconomy: What are some key investment areas right now for Wayfair, as you try to improve upon the e-commerce experience for customers?

Steve Conine: There’s a lot of things we’ve talked about we’re doing on the visualization side, so the sort of cutting-edge side. That would be augmented reality, virtual reality, and how do we help you visualize stuff in your space and get comfort that what you’re buying is going to fit with the look you have—or it’s going to physically fit in the space that you have.

We do a lot with merchandising on the site, so, how do we create beautiful looks and styles and things that you’re excited about? So, we have a lot of house brands that we’ve created.

When you get down to the actual part of, OK, now I want to make a purchase, well is it a good value, how fast is it going to get to me, how convenient is that whole experience? We continue to chip away at that.

We’ve talked a lot about how the majority of our large parcels now all ship in our network. Our ability to actually take control of that has been transformative. When Niraj and I started this business, like two guys, you don’t really have that much clout over the national transportation carriers. As soon as you hit scale, you can actually take it over and can deliver the experience you want to deliver to customers. So, we’ve been able to invest in that area in a way that the economics work phenomenally well. It creates an amazing customer experience. [Editor’s note: Wayfair’s logistics operations include running its own warehouses and, in some regions, operating its own delivery trucks and hiring the drivers, a spokesperson says.]

If today you’re like, “Oh, well, I’d rather go look at it in a bricks-and-mortar store,” and there’s reasons why you might want to do that, every year we’re chipping away at those barriers and making it easier and easier for you to say, “Oh, you know what? Yeah, I kind of would like to see it, but I can have it here tomorrow or two days from now, so, OK, I’ll just do that.” It’s way more convenient because you’re like, “Well, I can spend all afternoon driving around trying to find it, or it’ll just be here on Tuesday.”

We’ve talked about how designer services would be something we’re offering—helping customers feel comfortable with the styles they’re getting and that they’re going to look good in their space. We have a very economical on-site designer services offering now, where if you want to redo a room, go on to [the] Wayfair [website], and [for $79 or $149] we’ll have an interior designer work for you and help you design your space.

X: How much does A.I. play into what you’re doing?

SC: A substantial amount. We have over 1,900 engineers and data scientists on the team. Niraj and I are engineers by background. We are super quantitative and data-driven as a shop. We also happen to have probably the best set of training data in this category.

The most obvious [A.I. applications] you’d see as a consumer would be personalization things, where you come on our site. I think we are exceptionally good at surfacing products that you are interested in—quickly. And if we’re doing it right, you won’t even notice it because you’ll feel like, “Well, I just searched for bunk bed, and the bunk beds I saw, out of the 30 you showed me, 10 looked pretty good.” Well, you know what, five years ago, you would’ve said one looks good.

Personalization is probably the most obvious one. I think, if you get deeper into the company, we have an adtech team inside Wayfair that is probably bigger than a lot of adtech companies. And there’s a huge amount of A.I. inside that world that’s trying to figure out how do you track customers, how do you target them when it’s appropriate, and in channels that work with good payback?

And so, that’s a team we’ve been investing in very heavily.

We do a tremendous amount to try to build very complicated demand forecasting models using machine learning. That helps on our side because we can have products that are in stock in the locations they need to be.

It helps with our supply chain, too. Our suppliers look at us as an amazing platform to run their businesses on. We have over 10,000 suppliers on the other side. They’re using our platform to then compete in the market, bringing their products to life, getting them in front of large groups of customers, to generate demand.

And so, we are increasingly using A.I. and our expertise there to help them out. It’s not something they’re going to go and invest in, a large team of data scientists to go build complicated demand forecasting models. But we can do it for them, and it’s super beneficial. We have products in stock when we need them to be.

X: What’s the path to profitability, and do you have a timeline for that?

SC: The U.S. business is right around breakeven, and it has been profitable for a number of quarters. We ran this [entire] business profitably from 2002 to 2010, when we were a private company.

I think as an entrepreneur running this business, we definitely have a long view. And shareholder value, in my opinion, is created with a long-view time horizon. As long as we have opportunities that we are super confident have yield, and we have the cash balance to do it, then we will continue to be aggressive investors against the opportunities that we see. [Editor’s note: Conine and Shah are Wayfair’s largest shareholders.]

We don’t have any specific timeline we’re aiming at [to become profitable]. We don’t feel a burning timeline.

The public markets—it’s always a cacophony of people giving their opinion.

One thing about investors I think is that they can be really good sounding boards and free consultants, and you learn a lot from ideas they have. But you also have to be very thoughtful about sticking with a long-term investment mindset. And if you can do that, I think you can have more success because there’s a lot of people who probably miss that, and they tend to play a shorter game, and as a result they’re trimming their long-term value creation.

X: How do you win against Amazon?

SC: This business, retail, it’s a business of, it’s the old adage, the customer comes first. If you are delivering an experience that is superior in the customer’s mind, you will continue to do well. [Home goods] is a category that it’s much more emotional, it’s much harder for people to describe, it’s non-branded, it’s not part number-driven. Most of our customers find products through browse, not search. And so, the characteristics of this category, they’re different than core, mass-market retail.

As a result, the mouse trap you build for that is going to be optimized for that. Sure, you try to do a bit of everything well. The problem is, you can’t do everything great. And so, we’ve built a machine, and we focus purely on home. We try to make sure we’re doing everything with that focus, exceptionally well, so in the customers’ eyes, we’re building an experience that really sets us apart from anyone in the marketplace.

I think that’s what, over time, you just keep doing, and it builds the durability of why customers care, why they want to keep being loyal to you. You see it in our repeat metrics and you see it in the customer behavior we have. We increasingly have the majority of our orders are through repeat customers and our repeat [business] is growing very nicely, and active customers continues to grow very nicely.

At the core of it, it’s kind of as simple as that. Just keep focusing on the customer. This category is different enough.

X: The idea has been thrown out there that Amazon would try and buy you. Would you ever sell to them?

SC: We don’t comment on that at all.

X: Do you see ever selling to another company, or do you want to stay independent?

SC: We don’t comment on that at all. We’re definitely long-term shareholders, is what I’d say. We have a long view on this business. I think there’s a big opportunity ahead of us.

X: Wayfair is one of the early partners for Magic Leap. Can you talk about that partnership and your company’s vision for augmented reality and virtual reality?

SC: My belief is, at some point in the not-too-distant future, every home in America will have a 3D model tied to it. If you give us access to it, we can use that to show you styles and designs in that space that look amazingly well.

In parallel, there’s a lot of these device manufacturers that are coming along and creating devices that you can then use to visualize stuff. Magic Leap is one we’ve been working with for over a year now. They have a very innovative way of projecting light into your eye and creating augmented reality images that have very high visual acuity.

I don’t think in the next few years you’ll have [market] penetration high enough where most of our customers have these devices in their homes. I think at some point in the future, the technology that they’re developing may become fairly commonplace in the world. We need to be researching and at the forefront of that space today because it will be a transformative event in shopping for the home, in our belief.

In the interim period, there will be some really fun, we think exciting, use cases that come along. We’ve created a few for [Magic Leap’s] initial platform. If you’re in your house wearing the device, you can pull things out of the browser experience and put it in your space. You can see what it looks like.

The light projection they do, it’s strong enough you can put a bed on top of a bed. The digital bed will mask out the bed that’s there. You can do some design without having to move your furniture around. It’s a really interesting technology.

We believe at some point, customers will just consider it second nature to be able to pull something off our Web page and just view it, whether it’s through a camera or video feed in their space, or whether it’s through a more advanced device.

X: Wayfair is opening its first physical stores this holiday season, with a pop-up shop in Massachusetts and one in New Jersey. Is the future of retail a hybrid between online stores and brick-and-mortar shops? What does Wayfair look like 10 years from now?

SC: I think bricks-and-mortar retail is going to probably need to be dramatically reshaped from the way it looks today. My hope would be that there is a vast greenfield out there ready to be reaped, that someone, we will figure it out. I’m sure others will find models that work using physical locations as well.

Pop-up shops are an early experiment of, hey, let’s see what we learn from that. Depending on what you learn, it’ll evolve in a certain direction, and you might hit a dead end, and you’ll back out of that one and try a different one. But my belief is that there is probably a very interesting solution that customers would love that you can get in front of them and help them out in different ways.

X: Any thoughts on automation in retail and logistics?

SC: The category we’re in tends to not lend itself to a lot of automation because it’s big, bulky stuff. Our average package is 30 pounds. Amazon’s is like 3. There are definitely categories where automation works very well.

We try to strike a balance of using automation where we can. But at the same time, the nature of the category is one where it’s less friendly to conveyor belts and computer robot picking and small bin sort of stuff.