Good. All right, let's get started. Good morning. Thank you everyone for joining. My name is Nikhil Devnani. I'm Bernstein's U.S. Emerging Internet Analyst, covering Wayfair. It is my pleasure today to be hosting Niraj Shah, Co-founder and CEO of Wayfair, as well as Kate Gulliver, CFO and former Global Head of Talent. Niraj and Kate, welcome to the SDC. Thank you so much for being here.
Thank you for having us.
Before we get started, I just wanna remind everyone that you can submit questions via the QR code in your conference agendas, or you could go to pigeonhole.at and use the passcode SDC 2024, and I will try to incorporate those in the discussion today. So with that, let's get underway here.
Niraj, in your last shareholder letter, you talked about 2023 being the year of reset. You talked about the challenges the industry went through, changes that you made to the business from a headcount perspective as well, come out of it stronger at the other end of it. We'll get into the discussion of demand trends shortly, but can you just level set for the audience in terms of, as you describe it, your core recipe, where things stand today for Wayfair, selection, availability, logistics? How do you feel about how the business is positioned at this point in time?
Sure. Thanks for the question. Yeah, what I would say is, you know, the roller coaster of COVID certainly threw us for a loop, as I think it did many others. But by the end of 2022, I think we had gotten the recipe back intact. And so selection, availability, price, speed, these are kind of core dynamics of why we continued to take market share for a long time. And by the fourth quarter of 2022, we were back taking market share. And so now, you know, for the seven or so quarters since then, we've consistently taken market share, outpacing the market by a fair margin.
It's on the back of sort of great execution on our strategic agenda, as well as making sure that recipe is continually getting better in ways that our competitors, you know, cannot necessarily do. So I think the cost structure stuff that you referred to earlier was one of the things that got out of whack during COVID, and so part of getting the execution tight was also cost discipline, also prioritization. But I'd say all of that started going the right way, you know, over a year and a half now.
In terms of that cost headcount perspective, can you kinda contextualize for folks just how much kinda cost came out of the business over the last couple of years? You know, obviously, what has the impact been on productivity, you know, with the smaller workforce today? Have you seen anything? Has it actually improved? I guess, what have been the learnings from, 'cause there were some fairly big changes made on that front, so what have been the learnings from that?
What I'd say, you know, when you think about the cost, you know, series of actions we took, the headcount was a piece of it. There was also efficiency on the advertising spend, and then there was a very large amount of operational cost savings. So in aggregate amounts to, I think, just shy of a couple of billion dollars. But, Kate, do you wanna go into maybe some more?
Yeah. So on the headcount piece specifically, you obviously publicly announced the two RIFs. The total of that cost takeout is just around $1 billion from those two actions. And that included the actual cash comp expense and also the stock-based comp expense, right? So the aggregate. And if you think about the cash comp expense, if you look at our SOTG&A line, our SOTG&A line, you would look at Q2 2022 compared to actually our most recent quarter, and it's $150 million out on a quarterly basis of that line. So, you know, it's $600 million annual out just on that line, and that's not the only places where headcount action was taken. Headcount action was also taken, you know, on the customer service and merchant fee line. So really up and down the P&L.
So the total magnitude on headcount in particular is quite high. Also, in operational cost savings, as Niraj mentioned, we spoke to more than $500 million of cost out actions there that would primarily impact that gross margin line. There, we said some of that we may choose to reinvest in the customer experience, some of that we will pocket, and you can sort of see how that flowed through on the, on the gross margin. I think your second part of the question was around h ow has that impacted productivity when it comes to the headcount piece. And if we think about, you know, the various restructurings that we've done, the most recent one was really around org design and getting to what we consider to be a clean org design.
Really reducing layers, and reducing seniority, frankly, to have more of that true pyramid structure. The idea there being that we actually were creating some inefficiency with folks having to, you know, sort of go through numerous meetings to get something done, produce more content that was necessary to get to a decision. I think most people would tell you that it actually feels more efficient, and that productivity is improving as we remove folks.
And I think historically, we've seen the business, you know, hire to support growth in that SOTG&A line. But when you think about what you've kind of learned from the last couple of years, I mean, philosophically, has your view around hiring to support growth in the future changed? Is it, you know, a different framework as you think about it going forward today?
Yeah, I think, you know, we started the company in 2002, and through the vast majority of our history, one of the things we prided ourselves on was being very lean. I think there was a period of time where we did have, you know, very large amounts of headcount growth in the kind of corporate staff, which is the piece of headcount you're referring to. And I think our, you know, hindsight view of that is that a lot of that led to inefficiency. So I think our view is that we would rather have a focused team that we can support with technology resource, which is historically the model that we had that worked very well. We have a large technology organization.
And drive gains that way, rather than just do it with, you know, sort of, large amounts of, corporate headcount growth. Now, as you grow, you may need some headcount growth, but also there's a lot of efficiencies you can unlock with technology. So, you know, I think there's a netting effect, and you can redeploy people on new efforts. And so I think that's kind of how we think about it, and we've had success with that, not just recently, but in the past as well. So we'd view the period of time where we took a different approach as more the aberration and not something we're looking to go back to.
Being it's 2024, I guess I have to ask in terms of the tech helping with productivity, the degree to which certain maybe AI tools are being used internally, some companies are starting to talk about this more now. Is it just very early still, or are you actually internalizing and rationalizing some of these tools?
So we've always been an aggressive adopter of technology, and I would say that's a big piece of how we've won. You know, proprietary logistics is one piece, a large technology organization, just, you know, a couple of thousand people, building, you know, things that give us competitive advantage is another reason. And so there's kind of a set of reasons why we've won. We believe that those are really powerful. So when you think about AI and machine learning, you know, these are things we've been using for a very long time, and how do you price a catalog of, you know, 20 million items, you know, well, and these types of things. The more recent advances in generative AI, I think, unlocks a whole new set of things.
Where I'd say we've made a lot of headway are on things that drive efficiency, reduce costs, you know, allow us to scale volumes. That's in things like, you know, merchandising content, marketing content, helping, our customer service agents, where thousands of agents respond to customers more effectively and articulately and both, and faster. And so there's a set of low-hanging fruit that we've been aggressively going after. And I'd say we also have some efforts on what I'd call a little more R&D, which is around h ow can we change the shopping experience for customers, in ways that would be nontraditional relative to how it's been done in the past, but perhaps could be more engaging, and more effective for them.
So I'd say we generally will watch what others are doing, but we will also wanna be relatively fast in doing things ourselves, whether that's adopting someone else's tool or building our own so that we can get that advantage.
In terms of where demand is at this point in time, I think you've described it as bouncing along the bottom. You know, do you think we're finally at kind of that tipping point in kind of category demand overall, and how do you think about that within the context of your growth this year?
Yeah. So what I would say is, you know, having seen some normal recessions in the business, I would say that curve is relatively easy to predict relative to the current period where you have this COVID era that's very unusual, that sort of was the precipitating event to the period we're in now. And so what I would say is, you know, if you look at demand levels now for the total market, we're below 2019 levels in nominal terms, and in real terms, we're far below 2019 levels. And so even with the early boon of COVID demand, if you wanna call that a pull forward, you know, and you try to fill in the area under the curve, we're still way off trend, trend.
So you'd say, okay, well, you know, you could use, you know, whether it's the great financial crisis or demand during the Great Depression, and you could use things that kind of like both were three-year negative cycles and try to project, but it's hard to say that that's a one for one. What's very clear is demand is quite weak and far off of trend, even after accounting for any sort of pull forward. And so that's why I characterize it as bouncing along the bottom. What we haven't yet seen is that recovery start. So that makes it hard to say whether we're fully at the bottom. Does it weaken a little more? Does it start curving up and firm up? Obviously, housing is another factor. Housing then is impacted by interest rates, projecting interest rates.
You know, perhaps in the conference room down the hall, Jamie Dimon has good, good, good insights into that, but that's hard to project, right? So you have a relatively kind of tough environment for the category, but it's also been weak for a while. So that, that sort of leads us to this kind of bouncing along the bottom view, but without clarity on turning up. So what we've done is we've focused on the things we can control, which is you mentioned the recipe earlier, you know, price, availability, speed, price, or sorry, price, availability, speed, availability, selection. And the question is like: How do you take market share in a tough market? It's easier to take market share in a good market. How do you take it in a tough market?
Well, you know, you get in front of customers with. In our case, we have a brand they know and love. We get in front of them with an offering that they are really excited about, which is, you know, great items, merchandised well, with great delivery options. And, you know, i t's interesting when you talk about it being a weak market. It is a weak market. It's still a huge market, and so there's demand every day. And what we've found is that the same way we've taken share in good and bad markets before, if you put forward a great offer, you can pull them in, they'll buy from you, and you can take market share. And that's what we've been.
So the reason we've been doing much better than others is entirely on the back of market share and what's been a declining market, and we believe we can continue to do that. And then what happens is, when the market firms up and turns up, you know, that market share drives real growth.
What do you think replacement cycles are like for some of the stuff that you sell? We're four years on from some of the initial COVID buying. Is it five years? Is it 10 years? Like, what is typical replacement cycle, and when does that start to kick in?
You know, it varies by the types of items. You have some items that are a little more, fashion, style-oriented, that people will replace more frequently than what you described, and then you get some of the more durable items that'll be in the time frames you described or maybe a little longer. So you have a whole spectrum of time frames, and you know, what you're seeing right now with the demand environment, it's not that any particular segment is particularly weak, particular segment is particularly strong.
The demand environment's soft kind of across the board, and I think people, you know, there's a lot of pent-up enthusiasm in various consumer survey work we've seen. So our view is, again, this bouncing along the bottom, we could take market share, and we believe that it's going to firm up and turn up. It's just exactly time boxing. It's hard to tell, but we use the phrase bouncing on the bottom because we don't think there's a lot further to fall before you get to that point.
Just on the market share point, if you could just sum up. So you're flattish at this point in time. Industry, you estimate, is what? Down high single digits, something in that kind of ballpark?
High single to low double.
Double.
Low double. And that delta is pretty big. So when you think about the sustainability of it, how do you frame that? Is that a durable kind of delta?
Yeah, I mean, again, you know, I'd just refer to our history. You know, whether you look at just the history since we went public in 2014, when we did $1 billion in revenue, and by 2019, we were doing $9 billion in revenue pre-COVID. You know, now we've been settling around $12 billion in revenue. You know, we've taken market share there. Obviously, we started at zero a decade before we went public, you know, and ended up at $1 billion, you know, from 2002 to 2014. So we've always taken excess market share. And, you know, because the market's sort of like a 3.5%-4% growing market, right? So it's only growing at a certain rate.
We've always outgrown that by a fair margin, and I think we have a recipe, a brand, an offering, technology that's gonna let us consistently do that.
And maybe in terms of one of the mechanisms for taking market share, maybe a follow-up for you, Kate, is just around, you know, pricing and how that factors into it. So, you know, you're well within the bounds of your kind of gross margin expectations, but, you know, last year there were a lot of excess costs in the system, right? There was too much inventory, there were freight costs, there were replacement costs that were high. Those came out, those funded some of the AOV compression, some of the AOV compression that we saw in the industry and helped drive some demand. As you go forward, it feels like some of those costs have normalized now, and, you know, consumers are responding to promotions, consumers are responding to pricing.
Is that a lever you tweak, to try and drive some of that, to meet consumers where they are and meet some of that demand?
Yeah, maybe let's start with the AOV, just to talk through that story, and then we can go to sort of the broader pricing. What you're referring to on the AOV is that, as inflation crept into the system, we actually saw AOV sort of rising rapidly, end of 2021 through 2022, right? And so AOV is actually generally not a number that we're targeting. We're targeting things like order growth and trying to get that frequency and that demand, the AOV being an output of items per order, the unit price and the mix. And unit price went up quite a bit when the inflation came in. Since Q2 of 2023, you've seen that inflation start to come out. To your point, you had suppliers that were working very actively to bring that out.
We were passing that on to our customers. So it was really trying to renormalize that, average unit price, and that's what drove those AOV declines throughout 2023. And what we said, when we spoke to the first quarter was, we think we're now through that period. So we think we're through the period of deflation that was, you know, hitting on the AOV and back to what would be sort of a more normalized AOV, you know, growth, which is, you know, a few year or over time. So that's, that's sort of the AOV story itself.
Now, how do you use price as a lever to drive demand? I think is the second part of your question. What we have said, you know, is as we look at it, we want to make sure that we have competitive prices, absolutely competitive everyday prices, and we certainly track that. And then we focus on partnering with our suppliers, actually, to fund these promotions. So you mentioned the promotional environment. We've certainly seen, and we've said this for some time now, that promotions are really, you know, significantly outpunching every day, and are a very important part of the calendar right now.
Because the customer in a time where the category is out of favor, she needs a reason to come in and shop. And so even if she's not buying the promotional item, she needs a promotion messaging to bring her in. And what we'll do is we'll partner with our supplier partners on dropping price for the promotions. The reason we've been able to maintain and grow gross margin during that time period is those drops are largely funded by the supplier.
In terms of everyday, I don't know, take rates, for lack of a better word, is there any shift in strategy around that piece of it?
No, I would say there's, s o you're absolutely right. The way that we would implement every day prices would be, one, we partner with our suppliers on making sure that their wholesale prices are very competitive, and we have a deep relationship with our suppliers and a very strong partnership with them around that. And two, you know, we could certainly drop take rates on our side, you know, to manage everyday prices. The question really is h ow much does that stimulate demand. And so what we're constantly, you know, vetting, and this has been our approach, we have a highly algorithmic pricing approach, and what we look at is, where's the demand curve, and, you know, what is the value right now in terms of driving gross profit dollars.
So we think about , you know, how are we driving gross profit dollars over time? When does it make sense to change take rates on a particular class or category? And when does it make sense, you know, to not change them? And those are the sort of constant balancing acts. But I wouldn't say that that's a new philosophy or approach by any means. It's very actually core to our DNA.
Is there still more in the cost of revenue side that you're doing to fund some of this? Because you did a lot of that last year.
Yeah, so we spoke about it last year. It was the first time we sort of were public about, you know, actions on, really our supply chain side to improve the costs there. And what we said, we, we outlined that as more than $500 million. And what we said was that we would make decisions around when we pass that on to the consumer versus when we pocketed that. So when we actually took it in the gross margin, you saw our gross margin grow quite nicely throughout 2020, you know, sort of the back half of 2022 throughout 2023. We did say in Q2 and Q3 2023 got a little bit ahead of us as those savings materialized faster than we could appropriately invest them.
But as we thought about sort of the path versus reinvestment decision, that really goes back to that pricing question. When is it appropriate in terms of driving gross profit dollars on this multi-quarter basis? You know, we always are evaluating what are the cost actions we can take in our supply chain. Like any good logistics player, there's an ongoing, you know, piece of work there around efficiency, and then the question becomes: Do you pass it through or do you pocket it?
Niraj, earlier you mentioned building a brand people love. Is it hard to build a brand online? Because cynically, I could say the costs, the switching costs for consumer are very low. One Google search away to a competitor marketplace. You know, talk about maybe how difficult it is to build a brand online or not, if you kind of reject that idea. But just, how do you build loyalty around Wayfair, given the ability for consumers to price compare? You know, how do we make sure that this is not a market that's just a race to the bottom?
Yeah. So I think, to really think about it, first, you have to take a little bit of a step back and just remember what we sell. So home goods, you know, the majority of the subcategories we're in, the majority of the revenue we have are in categories that do not have national brands. And so, you know, while we sell coffee makers, which you may know, you know, Cuisinart or, you know, Mr. Coffee or what have you, you know, when you're looking for a bar stool, you're looking for rugs, there are no brands. And so first thing is, you know, how do you find that item you want? There's no brands, there's a huge selection. You have aesthetic desires. You want the right quality level.
And so there's a lot of kind of consumer questions that can affect how you shop. It's not a commodity item where just on page one, you'll pick your three pack of iPhone cables. Then there's sort of the kind of how is that item gonna be delivered? What happens if I have a problem? You know, what kind of specialized services do you offer that might make it easy for me? I want, you know, two folks to put it in the room that I choose, take away the packaging or assemble it, or, you know, I need a warranty, or I want to use financing. So there's a lot of nuance around how, what kind of services make it work for a consumer.
And so you both have how do you offer that, but you also, you know, you have to have the capabilities to deliver it. And so the Wayfair brand, which we've built up over time into a household brand in the U.S. and Canada and the U.K., you know, sort of stands for providing all of those things. And our biggest competitors are more generalist players where their core categories are different categories, whether it be grocery or general merchandise or building materials. And so they all participate in the categories we participate in, but generally as an aside, where it's a nice adjunct category versus their main focus. So I think when you have something specialized like that, you can build a brand around it, that consumers can get to know and appreciate, and then therefore become loyal to.
And then there are mechanisms, you know, for example, our app. So we have a lot of folks who downloaded the app, who then are regular users of the app. We offer them advantages. We have app-only sales. There are app-specific features and functionality. And so these things make it easier to be inherently more loyal because they have a mechanism, you know, where they're already logged in. We already know them, that we can provide levels of personalization through some of the proprietary technology we have that makes shopping more, you know, exciting. We have products that others don't have, offerings that others don't have. We're going to have a loyalty program later this year. And then, you know, obviously, we have the scale where we can then conduct, you know, brand building exercises from a marketing standpoint.
So we just launched a new brand campaign earlier this year, and, you know, to spend that amount of money producing the campaign, running it on television and social, you know, we can afford that because if you look at it across the revenue base, it's a relatively small amount of money. If you look at it in absolute dollar spend, you'd have to be a meaningful player to be able to do that. Just the same thing as with logistics. You cannot absorb cost of logistics network or make it work well if you don't have a certain level of volume. So then you start talking about, like, well, who are we really competing with. And then all of a sudden, we're competing with folks that don't specialize in the category. I think that's the reason we can, we can successfully do it.
I think there's only a small number of categories that afford themselves sort of that opportunity where they're different enough. You know, automobiles is one. You know, generalist retailers tend not to sell automobiles, with the exception of eBay Motors, you know, doesn't really happen. You know, and so it's... That's, that's a series of reasons why.
Does the long purchase cycle factor into this, where maybe that lends itself to a structurally higher reacquisition cost because the customer comes back a few years later? Or when you look at your cohort curves and the amount you spend on retention and engagement, when that person is back in the market, do you still get a good amount of leverage on that relative to your initial kind of customer acquisition cost?
Yeah. So our average customer is buying from us twice a year, and it's visiting, you know, many, multiple times. So we have a good amount of engagement with customers. I do think there's a big opportunity for our share of wallet to grow because our average customer twice a year is spending a little less than $600 a year. And the $600 is a relatively small percentage of the few thousand dollars that they're spending on average. And so we do view that opportunity, gaining share of wallet, as meaningful. And so when you think about things like the brand campaign and the loyalty program and some series of things we're doing, how can they, you know, what would be some of the goals we would have? I think some is to show up the share of wallet.
In terms of selection and assortment, obviously a big component of the offering, and your advantage there. How do you keep suppliers loyal to Wayfair, such that they're not starting to cross-list on, you know, Amazon and Walmart down the road? Does it matter to you if they do start to cross-list? How do you think about loyalty of suppliers, such that 10 years down the road, you know, you still have that advantage over your competitors?
Yeah, so other than our, you know, upper end platform, Perigold, you know, suppliers across mass, which is really what you see on Wayfair, they, they are on all the major platforms. Now, what they sell on a Walmart, a Home Depot, an Amazon, are more the commodity items. Those items are generally available from numerous suppliers. They're the opening price point type items. There's a lot of volume in them. There's limited margin in those. We have them as well as everyone else has those. That's sort of the base volume that's kind of, on the other platform. Then as you come up, you know, off that bottom, up through the middle, there's a huge amount of selection available. We tend to be the dominant platform selling those items.
But the suppliers, I don't want you to get the feeling that the suppliers are exclusive to us. That's not really, w hen we talk about exclusivity, that's not really what we're talking about. What we're talking about is that the core items that Anchor are offering you, we talk about tens of millions of items, but the, you know, tens of thousands of items are the core offering. Those items are increasingly exclusive to us. And one of the things that we can do that makes the shopping experience great for consumers is to have those opening price point commodity items, we can make it easier for them to explore past that and find that perfect item.
Whereas if you go on the generalist platforms, you flip from page one to two to three to four to five to six, you're seeing the same commodity styles over and over again, because that's what their volume is, and they're just sort of getting those items from all the different suppliers. If that's what you want, you can get that item anywhere, but they're very hard platforms to actually shop.
Maybe switching gears to your fulfillment network. I think you have over 22 million sq ft of, you know, logistics footprint now. It used to be 16 million sq ft a few years ago. Obviously, demand has been up and down. So I guess, how underutilized is that logistics network at this point in time?
Yeah. So I guess, I'll say a couple things, and then, I don't know, Kate, if you want to add anything to it. So first, from a logistics standpoint, there's a few different things we do. So we have freight forwarding operations, so 80%+ of goods that we sell are made abroad. So the freight forwarding is the kind of the ocean freight, consolidation abroad, ocean freight, and moving the items to fulfillment centers, either ours or our supplier's fulfillment centers. We have fulfillment centers, which are these 1 million sq ft, you know, large warehouses. And then we have transportation operations, where we're moving these items, and for the large items that require two people to deliver them, we're delivering them ourselves.
Where there are smaller items, although our average smaller item is still 30 lbs and 3 cu ft, we're sorting those, and then we're injecting those into a small parcel carrier, like FedEx. Our warehousing, which is the bulk of the 22 million sq ft, is the minority of the volume, because the majority of the volume comes from supplier warehouses. But for the fast-moving volume items, there's advantage for them to go directly from where they're made, through our warehouses, through our transportation, to the customer. And so those are the items in there. Due to the kind of fluctuating volumes, we do have capacity in that network, and that's one of the nice things. As we grow, there's real leverage because there is a fixed cost aspect to our network.
But I think it's important to understand the components, because a lot of our strategic advantage comes not just from the fulfillment centers, but it comes from the transportation before and the transportation after. Because these are these big, bulky items, the transportation is both the biggest cost driver, it's where the damage occurs, it's how you can deliver it quickly and in a way customers like it. The transportation is a lot of the secret sauce.
Yeah, I would just add, so it's a huge part of the customer experience doing that, and often when we'll engage with customers and understand what they value, having a high-quality delivery experience, I'm sure many of you have ordered furniture before, you know, that is a differentiator and very meaningful in the space. To the point on the capacity, what we've said is that there is capacity in the network today. It was largely that network that got us through COVID. Now, in COVID, we were obviously running too hot in that network. But it gives you a sense of, you know, the incremental volume that could go through the footprint that we already have. And that footprint, particularly in the U.S., allows us to reach the vast majority of the population centers within two days.
That's very important for us from a competitive perspective. So we not only have capacity, but we're in the right locations. And so we're excited over time, as the volume continues to grow, to get more leverage out of that fixed cost base.
I guess just to follow up there, beyond the cyclical bounce back that eventually happens, do you feel like you have the logistics infrastructure now where the capital intensity of the business structurally comes down going forward?
Yeah, so what we've talked about there is there are sort of three components to the network, right? There's the CapEx labor, and then there's the PP&E within that, there's the supply chain network, and then there's actually physical retail, which over time could become a more meaningful portion of that PP&E, based on what we see and what we like there. So if you look at the last two years, you've actually seen us come in quite a bit. A lot of that was driven by, as we got the labor tighter, that CapEx labor number came down. On the supply chain side, you will see ongoing maintenance. So there's, you know, the CapEx involved in building a new SC, we don't need to do any of that right now, but there is ongoing maintenance in that.
But what you might see is a shift from the supply chain pieces, you know, towards the physical retail pieces over time. We've said , you know, we have this store that just opened last week. We want to sort of test and learn, you know, get a little bit in the pit, understand, and then, you know, build from there. But that's how I think about the overall mix. And what you've seen us guide to, just as a reminder, this year, we, you know, we spoke about roughly $80 million-$90 million a quarter, and that would obviously be a nice step down from last year.
Maybe just to segue there to the stores. Obviously, you opened your large format mass market store last week in Illinois. When I read your commentary around the fulfillment network, you know, a few years ago, it started as a small experiment and then grew from there. When I read your commentary around the stores, it feels like it's starting as a small experiment, maybe grows from there. I mean, strategically, do you wanna be building a scaled brick-and-mortar network? Is this just an experiment around marketing and touchpoint and consideration? And how do you think about the investment against that mandate?
Yeah. So the store, the first large format Wayfair store opened last Thursday. It's in the northern suburbs of Chicago. It's a 150,000 sq ft store, so that's a relatively sizable store. Sort of, you know, the average Home Depot might be around a 100,000 sq ft, and the average Walmart Supercenter, so the largest format, might be 200,000. So kind of halfway in between a Home Depot and a Walmart Supercenter, just giving you context of the size. So as a home destination, you can kind of picture that and say, well, what are the other kind of destinations like that? Generally, the only kind of nationwide brand you come up with, maybe IKEA, you know, Nebraska Furniture Mart has large format stores, only, you know, a small number of them.
And, you know, we span a pretty broad set of home categories. So our belief was, hey, if you think about a retail store business, you have a number of costs. The store's one set of costs, but then you have the cost of fulfillment network with the inventory in it. You have the cost of the delivery capability and transportation. You have the cost of building a brand or marketing what the store is. You have the cost of creating the assortment, the offering, you know, the merchant merchandising work. And those latter four costs, we already have in our business. Those are sunk costs from the standpoint of what we do today. And so, you know, suppliers own the inventory, we have the delivery network, we have a brand, we have a large customer list. We have those things.
So what we don't have are the stores. Then, you know, everyone's read a lot of research about how, you know, the omni-channel experience offers customers an advantage of they can operate in whatever format they want. If you look at consumer electronics and office supplies, which you'd say are relatively straightforward categories, they were very quick to go online. But even as they went online, they actually put it now at around 50/50, online/offline, you know, 40/60, 60/40. And they've kind of stayed stable in that range. So now when you talk about home, you say it's like visual, it's tactile. You may wanna finance it, you may want assistance, you may wanna shop with your friends. I can give you a lot of reasons why you could say the store experience is important.
At the same time, you know, being able to shop the hours I want, access that very large selection, not have the hassle. There's a lot of reasons to shop in. So our view is, we believe both from a brand standpoint, basically, it all accrues financially. From a financial outcome standpoint, there's a very big opportunity to get that larger share of wallet, high profitability, by having the ability for a consumer to flex in either direction. But, you know, we're not gonna kind of recklessly pursue that. What we're gonna do is, we're gonna prove that out. And so our first store in Chicago, you know, which has now been open just a handful of days, is off to a great start. You know, we'll, we'll, you know, with a small number of locations, we'll prove it out.
If it is, in fact, it's as powerful as we think it could be, and powerful is not just kind of brand halo and kind of consumer satisfaction, but it's also financial metrics in terms of profitability, we will continue to expand it, for sure.
I won't ask you about the impact of guidance in the store being open a week.
Kate loves updating guidance.
Yeah. Just be clear, we have one store open, it's been open for four days, so.
I guess at the Investor Day bigger picture, you were, you were talking about revenue growth. You know, to me, it sounded like comfortably exceeding 10%, based on the various growth sets that you outlined. And at the same time, you were talking about margins ramping up more than 10%. And if you look at that walk, the midpoint looked kind of like 15%. So I guess at a high level, can you do both simultaneously accelerate the business and expand the margin substantially? Does the industry need to consolidate more before you get to that point? How should we think about the ability to do both at the same time?
We can definitely do both. I think the industry has been consolidating, but it's not a light switch. It's like it's happening over time, it will continue to happen. But I think Kate can talk you through, but like, I think Investor Day, we did it. We provided a nice framework.
Yeah, in fact, I would argue that it's easier in some cases to get to these gross margin pieces as we continue to ramp, and then the overall leverage margin. What we talked about at the Investor Day was gross margin. You know, right now it's 30%-31%, getting to, say, 35%-ish, right? And then we talked about a few points of leverage on the SOTG&A line and on the ad spend line. A number of those pieces are actually helped by revenue growth. So if we start with the gross margin, we talked about three levers there. One, the ad supplier advertising piece. One is leverage, and ongoing efficiency in our supply chain network, and then the third is sort of merchandising mix.
On the first one, we said we can continue to increase penetration there, sort of irrespective of top-line growth. Top line growth would help that and accelerate it, but we're so relatively small from a supplier ad perspective today, that there's opportunity there. We said in August at the Investor Day, that it was only about 1% of revenue, so relatively small, and we said that could go to 2 points-3 points gross margin over time. The other two pieces, you know, ongoing supply chain leverage and efficiency and merchandising mix, are certainly aided by revenue growth. We talked about some of the supply chain pieces, you know, just a few minutes ago. And then we talked about leverage on our ad spend and leverage on our SOTG&A.
On the ad spend, you know, over time, there are, you know, we talked about some of the initiatives that we have to drive frequency and ongoing loyalty. You also hit sort of an absolute dollar basis on some of the top of funnel spends, and you don't go beyond, you know, sort of on TV and some of these, you know, bigger top of funnel pieces. Then on SOTG&A, I think, you know, we've talked quite a bit about the fact that we think the cost structure today in that line item can support a much, you know, business that continues to grow. Then in particular, we already have teams against a number of our growth vectors. So we have a physical retail team, we have a team against Perigold, we have teams, you know, against the international segment and against B2B.
These teams already exist and are working and building those businesses, which will all contribute to our, you know, growth drivers going forward. But the cost for those teams is borne in that SOTG&A piece today. So I, I think, you know, not only, you know, can we continue to, you know, grow gross margin and ultimately grow EBITDA margin, you know, certainly top line recovery would aid in that acceleration.
I think the fixed cost leverage. It makes a lot of sense. I think on the variable side of things with ads, Gross Margin levers, again, I mean, philosophically, how do you think about reinvesting some of those dollars to drive growth, right? If you have to make that decision, you know, what is the priority in terms of d oes it make sense to run at a mid-single-digit margin for a little bit longer to get the business growing faster, or is, you know, the prioritization that ramps in margin structure?
So I think we try to put it into one context. So what, the way we price, we look at kind of a curve, you know, the demand elasticity of how you price. With advertising, we look at payback periods, same concept on pricing. So in other words, if you have a lower price, you're going to then get lower margin dollars today, generally, even with the higher volume. But then what happens to the repeat orders? And so what period do you end up with more dollars? And so we kind of try to put everything into that same context, because growth in and of itself is not inherently valuable. And so the question is, you know, what compounding effect are you getting from it?
You know, I mentioned when we were talking earlier about AI and machine learning. I said, you know, we've been using this for years, and that's part of the way our pricing system has been developed over the last, you know, 10, 15 years, basically. Started with, obviously, how do we price, how do we price relative to competitors? But where it gets to is, you know, what are the long-term effects of the prices today? What are the long-term effects of prices on this tranche of the catalog relative to that tranche of the catalog? And so we kind of take that all into account. So I wouldn't say, you know, it's not a priority of growth or profit.
We have a ramp on profits that we have a clean line of sight to, and then the nuance decisions are kind of more in the context of sort of these trade-off decisions I just described.
On the growth thing for the addressable market piece, maybe bottom- up discussion. You have a customer file that's 85 million large. How should we think about new customer adoption of the service at this point in time? That's a decent number of households. What does the new customer funnel look like in the U.S. for your business at this point? Is it more about re-engagement of lapsed users? How do we think about the pieces of that?
A few thoughts. One, the customer file, remember, it's both consumers and also businesses. Wayfair Professional, we have a B2B business as well. But we have a large file, as you said. 80% of orders, you know, we give this number out every quarter, 80% are repeat orders, and so that's a customer who bought before coming back again. But we do have new customers, coming and buying for the first time ever. And so, you know, a nd I'd say that's healthy, but ultimately, there's a very large opportunity, obviously, in getting customers to come back more and more often, getting larger share of wallet. You know, when I refer to a few thousand dollars, that's a share of wallet on the consumer side for the Wayfair brand.
The share of wallet on the business side is a much larger dollar amount per customer that's available. Obviously, when you get to Perigold, it's a larger amount per consumer. There's obviously fewer consumers there. So we kind of have these different segments that we're all going after. But we don't think of it as if you want one or the other, you want both. And then the set of things you do to grow both are basically the same thing. We talked about the recipe, we talked about the offering, we talked about making the brand stronger, we talked about launching the loyalty program, we talked about that one store that we have open. These are the things that would both attract new customers but also drive repeat.
So rarely do you have something that's going to really drive repeat or really drive new a nd then, you know, worse, one worse the other. Both of the customers benefit from the same types of advances. Yeah.
And in terms of order frequency, you know, why do you think it isn't higher than two times a year today? And are there lessons learned from cohorts where the engagement is much higher that translate to, you know, how you can kind of grind that higher over time?
Yeah, I think, some of it is the nature of the categories we're in, and it, our categories are disproportionately, you know, larger items, higher ticket items, bought less frequently. So there's that dynamic. But we do have a number of categories that we're not as well known. The customers who know us for these categories then buy more frequently from us. We generally find that customers love us across the spectrum, regardless of how well they understand all the subcategories we're in and how frequently they're coming. So when you think about the brand campaign that we launched earlier this year, one of our goals is to deepen the association and the preference for Wayfair across a set of categories they may not think of us for. The loyalty program has similar goals.
There's a set of things that we think we've seen that behavior in cohorts of our customers. We think that we have that opportunity with other cohorts of customers, but there's things we need to do to increase the awareness, the understanding of what we offer, and, you know, bring them along, bring the customers along. And so we're working on that. We think that is, yeah, that's definitely an opportunity.
How about the international part of your story? Can you just talk about the prioritization of that business? And I guess when you step back, why does it make sense for Wayfair to be investing abroad, given the size of the opportunity in the U.S.? What is driving that decision to allocate capital there versus just deploying it back into the core U.S. business, where you already have scale, you already have increased awareness? You know, why pursue U.K., Germany, other markets like that?
Yeah. So, ultimately, the market size in Europe is similar to the market size, opportunity we have in North America, so it's a very large opportunity. In the UK, I mentioned we have a household brand name. We've been in the U.K., of the international market, the longest. We have a sizable business there. We're quite advanced. Germany, we've been in for, less long. We don't yet have a household brand. We're kind of ramping to that end. The reason to be in it is that the costs we incur for that business relative to the opportunity are relatively small. And also, the US business is not, it's not a business that's, you know, starving for investment. We are aggressively investing in the business. You know, I mentioned the store we opened in Chicago.
Well, you say, well, you could open six stores. Well, we don't think it makes sense to open six stores at once. So it's not that we're starved for capital, so we open one store. It's the pragmatic way to do it, is to open one store, open another store, make sure you get the model working, iterate as needed, hone the model, then when you hone the model, open some more. You know, so capital is not the thing that's gonna grow the business. In fact, the business is profitable and scaling nicely, and it, you know, does not require more capital.
It's not the limiting factor right now.
Right.
What does it take for that international business to become more profitable? Is it just a minimal, minimum level of scale that it needs to get to? Is it just a matter of time?
It's a minimal level of scale, and you both have a tough macro right now, and a lot of the work we did over the 18 months, where we talked about cost and efficiency and rightsizing the team and rightsizing all the investments, is, you know, we strengthened the unit economics of those businesses substantially. And so we like that profile. And so where we are today is the cost of operating that business, the loss it incurs, is actually quite small. And it's at a viable financial profile looks quite good. So even if it takes longer to get to breakeven, it's a better path, and it's a less expensive path than it was before.
And we've spoken about this publicly before, but just as a reminder, obviously, in the segment disclosure, we allocate the overhead costs across the two businesses. So the actual sort of Europe, you know, baseline costs and international overall baseline costs ends up being lower than what you see in the segment disclosure. And I share that only because, you know, when we think about the ongoing investment there and the return on that investment, we feel quite good about the potential.
Maybe a follow-up on the advertising piece. I guess, why haven't we seen more leverage in that line to date, given the increased repeat behavior that we've seen across the business? And I'll tag on an audience question as a follow-up. Like, what percent of your traffic at this point is coming from Google versus direct to Wayfair?
Yeah. So, so our direct traffic has actually been growing. Have we ever given out a split on this?
We haven't given out a split. What we did talk to before was a dynamic, sort of in the late 2022 or back half of 2022, through, you know, 2023, where our direct traffic had been, free direct traffic, same thing, had been, lower than what we typically would have liked, because the category was out of favor, and that was causing some deleveraging, you know, in that ACNR line. As we spoke to that dynamic, which was not surprising, given that the category itself was not one that called for shopping, and you really had to get in front of the customer to get her in. And then we've talked about, on our most recent call, we spoke about the new neighborhood campaign. One of the goals over time, that the campaign, you know, will be a multi-year campaign.
We're not expecting results from that and, you know, within a quarter timeframe or anything. But one of the goals over time would be that direct traffic would improve, and that we're starting to see, you know, nice signs there. Other pieces that would help drive that would be the loyalty program that we've talked about launching towards the back half of the year. So certainly, you know, we're focused on how do you continue to grow that direct traffic, whether it be app growth, email engagement, direct nav, you know, all of those components.
And then on the ad costs, I think the way to think about it is, the ad costs, you know, as I mentioned, with pricing, with advertising, we're measuring the payback periods and what impact any spend we have has on both, you know, kind of how long before we get paid back, and then what are those cohort groups look for the future after payback. So you can think about that, like an IRR yield. And so on advertising, we don't necessarily look to manage that number down. What we look to is actually keep the payback very tight. And we've been able to pull our payback in, so shorten the period of time for payback over that last 18 months, as we've kind of driven a lot of efficiencies in the business.
But we've been able to deploy money productively, even with the tighter payback. And so given that trade-off, we would rather do that, get those customers back, get new customers, drive those gains. And so we measure it as what the profit we're getting is after all the cost. You know, are we net increasing our profits or not? And because we are, we've chose to do that. And so I think it's hard to decompose these lines and just say, oh, this one should go down, profits will go up. Because if you look at okay, so then which tranche of it would you cut back, and do you get more or less profit? If you're gonna get less profit, you wouldn't wanna do that, even though optically, you know, it might be.
Yeah, it might look good for a quarter.
Makes sense. In the final minute or so here, Niraj, you know, we talked about a lot today. How would you kind of sum up the journey Wayfair is on at this point, as you look out several years? What do you wanna leave investors with, the direction that the business is going in?
So I guess the thing I would summarize is, you know, kind of a little bit of what I started with, but, you know, I think COVID threw us for a loop, but I think we've now, w e're, we're just about two years back on track, taking market share, doing far better than competition, building moats, sort of advancing sort of our position as the go-to place for all things home. And we think, you know, even at $12 billion in revenue, that's a very tiny amount relative to the TAM we're going after. And when you think about who are our competitors, what advantage do they have versus us? What advantage do we have versus them?
You know, so who's gonna get bigger pieces of that as the market increasingly consolidates, which I think is inevitable in today's world, where you need access to the logistics and the technology and these things that are very hard to do if you're small. I think you can kind of see the role we could play in that with a large headway. And then when you break it down into our segments, so we talked about Wayfair Professional, Perigold, or international business or our specialty retail brand, Wayfair.com, you can kind of see how each of those now are taking market share, advancing, and doing so profitably, or growing the profit profile or reducing their losses for a segment that's losing money, and we're gaining ground.
So I think we're kind of well back on track in what's been a very tough market, and then I think the market's bound to. It's a cyclical market, bound to firm up and grow. So I think I'd leave you with sort of, kind of the view that we're well on our way again in the journey after what was a tumultuous period, you know, three and four years ago.
Great. Niraj, Kate , thank you so much for your time. We'll leave it there. Thanks, everybody.
Thank you.