for joining us. I'm Curtis Nagle, the small/mid-cap Internet analyst at BofA. I'm going to cover Wayfair. I'm very pleased to welcome Wayfair's CFO and Chief Administrative Officer, Kate Gulliver, and James Lamb, who runs IR for Wayfair. Before being appointed to your current role, Kate, it was two years ago. Kate actually led the IPO of the company when she led IR and then served as the head of talent for Wayfair. Since her tenure as the CFO, the company's gone through a pretty substantial turnaround. This includes now five straight quarters of market share gains or starting to regain market share, return to customer growth, taking over well over $1 billion in costs now taken out, and driving sustainable EBITDA profitability. Now the company is targeting over 10% margins over the long term.
We'll go through a series of questions, and at the end, we'll open it up to anyone who'd like to ask any questions. But first, again, Kate and James, welcome. Thanks very much for joining us and the time.
Thank you for having us.
Yeah, we really appreciate it. I guess just starting from the top, the first thing I'd love to dive into is just how to think about the state of U.S. home furnishings, the potential arc for recovery. Basically, we had a situation or have a situation now where I think we're kind of two years into, I guess, what you could call a recession, Q1 off to a little bit of a softer start with a guiding Q1 or Q1 down about mid-single digits. So I guess just first, what do you see as the most important levers, I guess, to get growth going or improving into year-end? And I guess just as a kind of a side question, in terms of kind of what the baseline is for industry total sales relative to pre-pandemic, kind of where are we? So just kind of level setting.
Yeah, I can start, and then James, you should jump in. Obviously, you and the team have done a lot of work on this. So just to sort of use your exact language, level set a bit, we have had nine quarters of industry year-over-year decline. Of that, six quarters has seen double-digit year-over-year decline. And what you may be saying is, well, of course, it ran up so much in the pandemic. It inevitably had to come back. But what I think is interesting, and maybe, James, you want to go into this a bit, is how we think about what the trajectory would have been had you not had the pandemic.
Sure. So a simple way to look at it is it's a category that historically grows at a low single-digit kind of rate. So call it 2%-3%, right? That's over a long 30-year-plus timeframe. If you had erased COVID and simply applied that degree of growth and compounded rate from 2019 to now versus where we actually are as a category, it'd be about seven points dislocated lower. So we think that we're underindexed versus what would have been the case, and that's some opportunity.
That's on a dollars basis, not a units basis. There's obviously quite a bit of inflation that we're dealing with.
That's right. On a units basis, it's arguably even more dislocated down.
To your original question, obviously, the category is quite dislocated. In terms of what are the levers that move it from here? Obviously, this is a cyclical category. It will come back. People need a chair to sit on, a bed to sleep on, right? This is not something that people can forever not buy. I think that there are a few factors that folks can look at to sort of drive growth from here. Inevitably, there is obviously some housing element to the category as a whole. We always say Wayfair is less housing-related than folks think it is. I know you've done some work on that to show what the correlation is. It's less than other furniture retailers. But with the category this dislocated, that's obviously weighing on the category as a whole.
Even not housing directly, but as you think about interest rates coming back in, certainly, that would have, we think, some benefit on the category. If you look at the mix of discretionary spend on goods versus services, we're still a little bit out of whack from where we were in the pandemic. I think as those things continue to right over time, certainly, you'll see the category return.
Got it. Okay. So I guess under that context, as we've mentioned, you guys have been performing really well, I think, on averaging maybe 10 points above the industry. Could we dig into, I guess, what's been driving that? How much of that is pricing and inventory normalization? How much of that is things that you're doing on your own in terms of specific growth drivers? And I guess just what gives you confidence going through this year into next year that you can continue to compound market share gains, which you've been pretty clear that that's a target?
Yeah, great question. So even though the category has obviously contracted quite a bit, we're really pleased with our share position. We said on the last call we're at the highest share position we've reported in our tracking of the data. And throughout, starting really in Q4 of 2022 onward, we've been gaining significant share and pleased with where that's going. We think that that has really been driven by a return to form of our core recipe. So across price, availability, and speed, we actually lost share in 2021, 2022 when the recipe got a bit out of whack. That was driven by the inflationary environment in the category, lack of availability. We obviously don't inventory. So when the supply chain got backed up, it's just harder for us to get our hands on goods. And then speed, obviously, took a beating when the category backed up.
We believe we're now very well positioned across those key metrics and continuing to improve them. That's what's driven the share gain over the last year.
Curt, to your question on kind of the future state, we had our first investor day last August, and we laid out a growth algorithm slide where, again, you take that low single-digit compounded growth rate for the industry, a higher amount for further online penetration, and then a further amount for Wayfair-specific growth drivers. We're very confident that we could be a double-digit grower over the long term. So that would embed future share gain as a result.
Got it. Okay. And then we'd love to talk about some of the specific initiatives that you and Niraj highlighted on the call a couple of weeks ago, I think three in particular. Maybe just because it's a little topical, we'll start with the new brand campaign. I think you just launched it on Sunday, which is exciting. I think it's the first one you've done since 2018. So I guess just could we go into first, why now? How is the brand messaging changing? How are you communicating to your customers? And are you expecting a lift from this campaign in terms of revenue?
Yeah.
How much of it?
Yeah. So first of all, the new campaign, you're right. It did launch on Sunday. Welcome to the Wayfairhood. Encourage you all to check it out. As we started developing this campaign, it was really driven by a few factors. So one, to your point, the last really big campaign refresh we did was when Kelly Clarkson came on as one of our spokespersons, which was several years before the pandemic. And in sort of natural course of history of the brand, certainly a good time to revitalize. But to do that, you also want to be in a good position. So it would not have made sense to launch a new brand campaign while we were still getting the core recipe back into shape. So we had to get that core recipe back to shape before putting money behind a campaign.
Overall, I would think about it less as driving specific lift within the next few quarters and more a long-term push towards really investing in the top of funnel to continue to grow the direct traffic to the site to, over time, pull back more from the performance marketing, PLA-driven traffic. And so when we do our own research and where we have opportunities, obviously, the brand is quite well known. We think there's opportunity to continue to push our brand to the initial destination that folks come to. Our average customer, we believe, is in the market 6-8 x a year, but she's shopping with us or buying from us maybe 1-2 x a year. So there's a real opportunity for share of wallet gain.
As the Wayfairhood sort of helps demonstrate, there are a wide range of places where we can meet the customer that she's maybe not shopping at us today, and we want to get those incremental purchases. I think it fits really nicely, frankly, with the improvements we've made in the recipe. Then in the back half of the year, we've also talked about launching loyalty, which maybe was one of your next points. I think that the campaign and the loyalty piece really tie in together too. It's all about building that direct traffic and that real affinity for the business.
Okay. Well, why don't we go into the loyalty program? So I think you have an existing one now, tender-based, right? So tied to.
That's right. It's going to be tender-neutral.
Yeah, tender-neutral. So tied to a credit card. Yeah, maybe in terms of just kind of what the facets are, how I think the idea here is to push, obviously, more purchase frequency, but just the structure of the program and, yeah, how you see that as a tool to increase that frequency. 6-8 would be nice.
Well, you absolutely hit it right. It's really about driving frequency. And sometimes loyalty programs are about getting customer data. We obviously have a lot of customer data. It's not that. It's we want her to come to us for that incremental purchase that she maybe doesn't think to come to us for. And again, we feel well positioned to do that now. We feel that the offering on those parts of the catalog is quite strong, and we're very competitively positioned, which makes sense then from a point of launching loyalty. The tender loyalty program obviously limits the customer base that you can appeal to because they have to be folks that can actually get access to that card. And so we're excited about a tender-neutral loyalty program where we can appeal to a broader base of customers. We haven't articulated exactly what that looks like.
We've been modeling off of a number of programs that we think are quite robust and strong programs. We think sort of there's a variety of factors we can leverage from early access to promotional events to more dedicated customer service support to maybe a points component, TBD. All of that is very nonspecific at this point but is the kind of things that we've been exploring.
Got it. I would think that would certainly be a good way to leverage, again, all the first-party data you have.
That's right. We have the data. We can target folks for the program that we think the program makes sense for. We can help personalize the offering. So I think there's quite a bit that we can do with it. And again, it was the kind of thing that we wanted to wait until we were well positioned on the core recipe across these areas of the catalog before we went out and launched that.
Okay. That makes sense. We'd love to move on. So first, I guess, large-scale store in the works, right? So you have, I guess, maybe six or seven locations now for your sub-brands. But you're launching the first Wayfair big-box store, I think, 150,000 sq ft in Chicago, I believe, in May. We'd love to hear just kind of in terms of what the expectations are, whether from a revenue or maybe a scaling perspective. What gave you the confidence, right, to launch such a big location, right? You're obviously known for being an online destination. And then I guess what would you need to see to justify or to push further growth in terms of the footprint?
Yeah. So great questions. So let me start with first, why get into physical retail? When we look at the category, you can pick your estimate on where you think sort of penetration levels at in the category. But there's always going to be a substantial portion that's offline, whether that's 40%, 50%, 60% TBD. But we see no reason to cede that share. And when we think about the things that make a successful offline retailer, we believe that many of those we've already established and built over our 20-year history. So the brand, which we were just talking about, our deep supplier relationships and the access to that product, our customer file, and, of course, the logistics infrastructure in our space that's particularly critical to getting that product to your front door. Those are all areas that we've already invested in.
We've already built out, and we have a national capability on. So to us, it felt logical to open up this incremental channel. We wanted to test it out initially with these specialty formats, as you highlighted. Those are about 10,000 sq ft stores. And it's allowed us to test in a much lower cost, lower-risk way, the point-of-sale system and the staffing and the training of the team and what the customer experience is and the merchandising mix in the store. And we wanted to be thoughtful about what that looked like before opening a 150,000 sq ft store, which is what we'll be opening outside of Chicago. To your point on sort of what do we have to see, we intend to be quite thoughtful and, I would say, moderated in how fast we roll this out.
We, as with all things Wayfair, want to sort of iterate and learn. So it's important to us to get this store open and start learning from that before. We think there's a lot of potential, but before we go out sort of stamping out a lot of stores. And I think you saw the first evidence of that. And we opened the specialty retail stores. We learned from them. And now we're opening this first store. I don't know if anything you would add to that, James.
No. I mean, it's imperative eventually to address the full TAM. Clearly, the economics, the modeling, that's TBD in terms of details and disclosures. But you can surmise, and we've done a lot of work on that to make sure that the stores can be standalone, viable, and similar in terms of a retail economic model.
Then maybe just as a follow-on, do you see them perhaps more as supplementary, more complementary? I'll define complementary as added sort of existing customer sales, supplementary maybe more adding more customers, both?
I think it's both. So what we aim to do is, one, we want to pick you up on purchase occasions. Maybe you're coming to us, and you're buying your end tables, but you still feel like you want to sit on the couch in person. So that would be complementary to our existing customers, maybe adding on. Or maybe you're a customer that hasn't been aware of the full breadth of what we offer and is curious about us and needs to come in and see it in person. So I do think it's both. That said, at this point, we've been around for 20 years. We do know most of America. And so generally, a lot of people have experienced us in some way.
So I think there's less of, "Oh, I have no idea what Wayfair is, and I'm going to come in and get it." I think it's more of, "Oh, I wouldn't have thought to go to Wayfair for" one thing we noticed in the SRBs, for example, is people told us, "Oh, we didn't realize you did so much tabletop." We tend to think of you as core furniture. And yet, I can go in and buy a new linen set from you, and it looks great.
Got it. Then last one of the stores. I promised.
No. We love this. We're happy to talk about it.
Keep on it. I guess how to think about, are there any implications from a balance sheet perspective, inventory? So again, you're mostly a flow-through model, right? So not taking it on the balance sheet. Does that change with the stores?
Yeah. We're not taking inventory in the stores. Great question. And thank you for the opportunity to clarify. So we will be forward-positioning that inventory. It's supposed to be in our last-mile facility. It's in the store. And we're working with our suppliers on that. And no change to that inventory light structure.
Got it. Cool. Competition. So again, I mean, I don't know if we need to go through the iterations. I mean, you're taking tons of share, right? Inventory is in a great place. Pricing, that all makes sense. Maybe going a little more specifically, just in terms of some of the conversations we have with investors, Overstock is one that pops up, kind of TBD, right? So they're in the middle of a transition right now. They've stood up, I guess, Bed Bath. Now going back to Overstock, and that's traditionally been a furniture-heavy site. Mixing some other stuff now. But just in terms of, I guess, thinking about, let's say, it's the last six months, did you see a lift from when they took Overstock back on?
Just kind of how to think about that being as a new competitor, I guess, coming back in, new old competitor coming back in. Is that a potential? Do you see that as a threat or no?
Yeah. When we look at the competitor base, we look at the entirety of our category. I think it's important not to over-rotate on any single competitor. We've seen, in general, share shift has consolidated among the largest players in the space. Us, HomeGoods, we've seen as a consistent share gainer. But also Amazon, Target, Walmart, Home Depot, the folks that you would expect. That trend has been pretty consistent over the last many quarters. We're generally focused on sort of where is the sort of directional trends in the category. Obviously, we always pay attention to anybody. We've certainly been following the Beyond story. But they're relatively small today. So as far as the overall dynamic goes, they're a small player in a $400 billion market. Do we follow and pay attention to it? Yes. Is it causing undue churn right now?
Not that we're aware of.
How about Temu or Temu? I'm sorry.
Yes. I think I always see Temu too, Temu, Shein, and everybody, TikTok Shop, throw them all in. So for us, we are seeing them not really play in the categories where we are strongest. And really, if you think about the core furniture and décor, this, this, this rug, a lot of what they're selling is in the home space, what they're selling. Of course, a ton of what they're selling is apparel and other stuff. But in the home space, what we see being sold is much more the decorative accents, the much smaller, lower price point, frankly, under the de minimis threshold from a shipping perspective, of course. So less of a direct competitor to us than you've probably heard about from an Etsy or, frankly, from an Amazon. That said, obviously, we watch them and continue to watch them closely.
I think as we think about ongoing points of differentiation, Niraj spoke to this a little bit in his letter, not specifically to Temu, but in general, he talked about how in his shareholders' letter this February, he talks about how anybody can make anything look good online now, right? The merchandising can be spectacular, but the quality of what you get may be questionable. And so part of what we're trying to do is leverage all of that great data that we have, the experience that we're actually getting with going into physical retail and touching that product to be able to put more of a signifier on sort of what you're actually getting. And that'll roll out throughout the course of 2024. And so I do think those become important differentiators over time.
For sure.
Are they topical in terms? So you have Wayfair has a reasonably big base of Chinese vendors.
Suppliers.
Suppliers. Yeah. Are they topical or at this point, to your point, and de minimis is obviously something that is maybe an issue for them, right? But theoretically, could they move themselves up the value chain, or just is that just too hard to speculate on or just unlikely?
Yeah. I would never say that somebody's going to, so I probably wouldn't speculate on that. I think all of it is possible. With our suppliers that are directly based in China, again, those are largely furniture and décor suppliers. They're less around the sort of smalls, although we do do that business, but that's less of what we're focused on directly. So it's not as if we're hearing about any undue competition, again, on this kind of product.
Okay. Makes sense. Move over to the margins first, right? So again, enormous success story, certainly over the past two years now, almost, right? Sustainable EBITDA, cash flow, all that great stuff. On the call you laid out, I guess what I'll call a framework, and if I'm using the right terminology, please correct me, but.
Well, you didn't say guidance.
I didn't say guidance. I know that.
You're going down to mechanics.
Yeah. Yeah. I know it wasn't guidance, but the framework for this year, right? So I think a relative floor of $450 million or a bump of 50%, right? And then a framework of $600 million on flat revenues. Could we just walk through, I guess, the parameters as much as you can say on the revenue side within that range? Does that contemplate additional cuts, delayed hiring? Kind of what's baked into that and dig into that framework if you could?
Yeah. So what we were trying to do was really provide the framework to understand the magnitude of the ongoing cost savings throughout 2023 and then obviously the most recent restructuring in January of 2024. And how does that all flow through, and what should that materialize? So on a flat revenue basis, not that we're guiding to that by any means, but if you just think 2023 to 2024 holds, the incremental cost savings would get us to about $600 million we said we could get to $600 million-ish of Adjusted EBITDA or north of $600 million of Adjusted EBITDA. And that's really that $150 million of EBITDA impact from the cost savings action in January, getting the full flow through that, plus all the flow through of the 2023 work.
So that's all we were trying to do was say, "Here's how you might think about this." And then on the call, we further elaborated that we think $450 million, which is really the 50%+ on the 300-ish million of 2023, but that was a reasonable floor, somewhat irrespective of where the top line goes, right? And what we're trying to help folks understand there is, one, the magnitude of the cost savings and the actions that that's taken and how that's provided us some protection on that Adjusted EBITDA line. And then two, we do, to your point, have some flexibility in ongoing cost actions in 2024. So that $150 million of savings that we said we would get from the cost action in January, that's a net number.
We did intend and we do intend to hire back at a more junior level as we sort of continue restructuring to make that pyramid shape that we really want for the org. Obviously, that hiring can be metered out a bit. So that's a lever that we can adjust and pull as necessary. Then we've obviously talked for the last many quarters about the ops cost savings and how we make the decision on what we pass through to the customer in terms of price or customer experience and what we pocket and our flexibility in making that choice. So those are ongoing; that's an ongoing lever that we have throughout 2024 as well.
Okay. And then just kind of as an extension of that, and this was something I think you talked about in your share letter, for the next incremental $100 billion, I think the framework would be.
The next incremental $1 billion.
Did I say $100 billion?
Yes. I mean, I love it. I'd love $100 billion, but.
Not willing. Yeah. $1 billion, right? Flow-through is mid- to high-teens %, right? Is it fair to think that as just, again, continuation of that framework that's set up or anything else kind of incremental baked into that aside from the revenue?
Yeah. That's what we've already done. So that's not saying, "Hey, we have to take out more cost to get to that." That's not what we've already done. Incremental $1 billion will come in at this mid- to high teens-ish. If you just run the math today on the gross margin, less this customer service and merchant fees, less the AC R, you get to mid-teens, right? And we've said that the S&A doesn't need to grow for some time, that the OpEx expense doesn't need to grow for some time because we are already investing in these growth drivers. That cost is already baked into that line. And then it goes up to sort of that mid-teens. As you put any more volume through that supply chain, that's a large supply chain. It's built, frankly, can handle the COVID volume, right?
Now, it doesn't love handling the COVID volume, but it can handle significantly more volume that's going through it today. So you will get some leverage as you put more volume into that. And so that's how you get to that mid-teens or high teens. But that's not us saying, "Oh, we can get there if we take out incremental costs." That's not what we already have.
Okay. Terrific. Next, I'd love to focus on the gross margin. So I mean, that's been another clear area of success for you guys, consistent gains, I think, gosh, now at least three or four years now, just steady improvement. Long-term guidance, I think, suggests at least 500 basis points potentially, right, on a number of factors. So number one, just I guess focusing a little bit more near term, 2023 was a year of very strong gains, right? Going into 2024, right, I think a little more limited. So just kind of walk through, I guess, kind of what's driving that differential. I think some of it is a degree of reinvestment and just kind of what gets us back on the arc of, I guess, larger margin gains on the gross line.
Yeah. Maybe do you want to talk about the overall walk from sort of the 2030, 2031 to 2035, and then we can talk about 2024 versus 2023?
Yeah. Happy to. So just for the audience, a number of years ago, when we were in the mid-20% range on gross margins, we laid out about 1,000 basis points of opportunity to get to the mid-30s. And today, we've captured about half of that, right? And it's really coming from four different vectors. You've got just pure economies of scale, right? As we get larger in volume, we can command better wholesale prices. You've got the logistics network that Kate touched on, right, whereas we put more through our proprietary fulfillment center network. There's gross margin benefits to us. You've got services like supplier advertising, for instance, which is very high gross margin. And then you have merchandising and mix, right? As the pie of our revenue shifts more towards things like our high-end brand Perigold, some of the specialty retail brands, those are higher margins.
And so there's a mixed benefit as well. So all four of those things have gotten us to where we are today. And at Investor Day, from the, again, 30%-31% to the mid-30s goal, we laid out the disaggregation of what those components would look like from here. And supplier advertising is going to be about 200-300 basis points. That's a more nascent business for us. A lot of opportunity there. We may touch on that in a moment. The logistics component is about 100-200 basis points. Again, that's supply chain. And then we grouped the other two in other, which is, again, kind of economics of scale plus merchandising index.
Yeah. And I think that's sort of the holistic view of how we get to that mid-30s. And then as you think about, well, what can you add in 2024 versus 2023, obviously, 2023, we had a much bigger focus on the ops cost takeout. And there candidly was some low-hanging fruit that had crept in during the boom years of the pandemic. Our volume doubled overnight in Q2 of 2020, right? And so when that happens, some messiness enters your supply chain. So there was some low-hanging fruit that we took out. We said more than $500 million of cost savings in 2023 and that we'd make decisions on how much to pocket versus pass through.
We passed around we pocketed actually a little bit more than we would have said would be optimal in Q2 and Q3 because we were just actually achieving it faster than we anticipated. And then as we looked at 2024, like any good logistics player, there's another round of cost savings. We should always be doing that. But this gets harder each time you do it. So part of that is how we think about how quickly we can achieve that and then how we think about how we pocket versus pass through. And on those three levers that James talked about, you can get some of the ops cost benefit without incremental volume. You can certainly get some of the supplier advertising without incremental volume because we're so low penetrated today.
But to get the full merch benefit and the full ops cost and the full supplier advertising, you definitely need some volume going through that.
Okay. Then, yeah, why don't we touch on the supplier advertising? So yeah, again, targets 2-3 points of potential margin gains. Where is that program now? I guess what is not so much the impetus, but so if let's just say I was one of your vendors and one of the CMOs, right, why Wayfair? Why not another program, right? And I guess how do you balance it can be tricky between you don't want to have too many ads in people's faces, right? And just I guess, yeah, going back to the point, what makes Wayfair a desirable place, right, to advertise? And yeah, I'd love to just hear your thoughts on that.
Yeah. So a few things. So one, if we think about where we are today, we said it's about 1% of revenue today when we gave our investor day in August. So it's relatively small, right? And obviously, this flows through at really nice margins. And it shows up in our P&L. Just so everyone's clear on that gross margin line, it's a contra revenue. And if we think about why we think we can push that more now, throughout 2023, we had two changes in supplier advertising. One was that we were able to open up more supply. So exactly to your point around how do we think about the customer experience, we were very hesitant to just turn on Sponsored SKUs and sort of let it rip because this is a considered purchase. It is a browsed purchase. It's very emotive. It's very personal.
It's not a, "Let me find the lowest iPhone charger that I can find," right? And so we wanted to test out what level of Sponsored SKUs was appropriate to not then degrade the customer experience and the customer trust in the offering. And we were able to open up some supply based on that testing. So that's, one, gotten better. Two, the actual tech that we use for the suppliers for their bidding to be able to see the efficiency of that ad spend has also improved. So they can actually look at the efficiency of that and understand it. I will say in our category, many of these suppliers are mom-and-pop businesses. They may not have done this before.
So there was certainly some handholding from our team to help educate them on how to think about the returns that they should be getting, to think about the balance and trade-off of supplier advertising versus wholesale cost versus investing in different promotions. That's sort of an ongoing conversation that our category team and our supplier advertising sales team has with these suppliers. If you think about why Wayfair versus other sites, I think it's more on Wayfair, how do I optimize my spend across those buckets? As the supplier, I can drop wholesales, or I can spend in advertising, or I can spend on this promotional event, or I can actually put my product through CastleGate and get a two-day flag. That's much more to the discussion is how do I balance across those things and what's the right mix?
That's very specific to the supplier. This is on Sponsored SKUs specifically. I can get the brand in a little bit, but that's very specific to the supplier. It really changes depending on what their objective is. So maybe they're over-inventoried on a product. In that case, the Sponsored SKU might make sense more than anything else to just boost it up into the top of the sorter and blow through a bunch, right? Or they're trying to launch a new product. Maybe they want to push that up and get some real sales history on that product. So that's really the discussion. The branded piece in our category, obviously, there's less brands. So most of the branded marketing that you see on the site is a Kohler or a Moen or a GE appliance.
The parts of the category that are branded, that's less inventory over time, obviously, than the Sponsored SKUs. Those folks, they know exactly what they're targeting on the returns and how to optimize that and how to use that.
Got it. Okay. Makes sense. International. So it might be one of the more, I guess, controversial parts of the story, lagged on revenue, lagged on EBIT a little bit, trailing the U.S., right, on a macro level. So I think that makes sense. And just less scaled, right? However, right, I think at least the past two quarters, it's seen a pretty nice uptick. I think Canada might be part of that. U.K. is part of that. Love to just kind of dig into what's driving that. How do we think about investment in that region and kind of what would have to happen to get to a point where first, you kind of break even and hopefully, we get to a point where you're generating EBITDA? Is it a matter of scale or just how are you thinking about the return and profitability framework for?
Yeah. Yeah. Great question. So over time, we think that the international business should operate on the same cost structures as the U.S. business and from a profitability perspective, be no different than the U.S. business. As a reminder, the international business today has Canada, the U.K., Germany, and a very small business in Ireland. The U.K. and Canada, to your point, have had slightly better macros than Germany. And we were also farther along in our journeys in those countries pre all the disruption. Our brands were more established. I think we've seen over the last 12-18 months, though, is a really concerted effort to dramatically reduce the drag of the international segment. And so when we've done these cost takeouts, they have not been specific to the U.S. market. They have been broad-based.
And that has included significant headcount reductions in Europe, which is the European business, obviously, is headquartered there, and ops cost efficiencies across that network as well. And so you're seeing that benefit show up, actually. If you look at the reported segment EBITDA, the losses have dramatically mitigated over the last several quarters. And so the drag is much less than it used to be. Over time, as I said, we think it can look very similar to the U.S. There's no structural difference that we see in how it looks relative to the U.S.
Okay. Staying, I guess, on the just broadly international kind of topic, kind of who knows, post 2024, we might see another round of tariffs. How, I guess, are you preparing to do this? Obviously, after going through 2018 and all the disruptions from COVID, I mean, I'm sure far more prepared and nimble. And I'm sure diversified your supply chain. But yeah, if we were to get another round of, I guess, China tariffs, how quickly could you respond? And would that be, I guess I mean, who knows in scope, but less of potential headwind or disruption kind of near-term as you adjusted relative to a few years ago?
Yeah. So I think you're absolutely right that we, along with everyone else, have certainly gotten more nimble in how they think about supply chain management. And through 2018 tariffs, 2020 tariffs, even the mix of where goods come out of has evolved some, right? Southeast Asia has grown in prominence. Mexico has gotten a little bit better for our category. So yes, there has been, I would say, sort of a healthy evolution from the initial round of tariffs in 2018.
I think what is unique about us is that because we offer such a broad range of selection, because we don't inventory the product, we're not working with one particular supplier to manufacture a chair to our specs, our ability to boost in the sort order a product that's coming out of Indonesia versus a similar product that's coming out in China because now that product coming out of China is less price competitive, we have total ability to do that. And we can also flip to adding more suppliers, I think, much faster than other folks can. That said, there is. I don't want to minimize it. There would be an initial period of digestion. Everybody goes through that. And certainly, because we don't sit on inventory, as the tariffs come out, you see sort of an initial, and you saw this in 2018, initial uptick.
And then we were able to manage it back down faster than other folks because we could pivot where that supply base came from much faster. And we're now set up better to do that, again, like most folks, I think, but we are set up better to do that than we were in 2018 and 2020. So it's definitely something that we're mindful of. And we continue to work to make sure that we have our CastleGate forwarding business comes out of many places in Asia, not just out of China. So we're able to bring containers from different parts of Asia into the U.S. and Europe. And we have a lot more flexibility than we've had historically. I don't know, James, if you would add anything to that.
Nope. I think that was very comprehensive.
I apologize all the time on the mic. So just before I go into my next questions there, anyone else who'd like to ask a question? Please go ahead.
Hi. A little bit on international. You guys specifically called out the U.K. in the last earnings call. Can you walk us through that market a little bit more in detail relative to the competitive dynamics, relative to the U.S., etc.?
Yeah. So the U.K., we have been at for a bit longer than Germany, which is part of why we called and the market's doing a little bit better, which is part of why we called it out. Our brand has actually gotten more established there. Our brand awareness and recognition is better than it is in Germany. Maybe you want to speak a little bit to the market dynamics, some of what we spoke about on the call in terms of the competitive dynamics out there.
It's substantially similar in that it's very fragmented, but the names of the players are different. So you have a few multinationals, a few larger regional folks, and then a very long tail. To Kate's point, what we're encouraged about is the market share data that we can track there is showing an inflection up as well. Given the aid and awareness, given some of the changes we've made to our playbook over there, we're very excited about what's happening.
A group of us went in November. We were visiting our Berlin office and our London office. We walked a bunch of stores in the U.K., Dunelm, John Lewis. These look and feel like similar retailers in the U.S., right? To James's point, names are different, but it's not that the competitive dynamic is substantially different. I mean, IKEA is a bigger player over there than it is in the U.S., but otherwise, fairly consistent experiences.
Maybe I'll just end with one and just like any good internet analyst, I have to ask about AI. So in terms of, I guess, just I mean, it was touched on a little bit, I think, in the analyst day, but in terms of what you're doing now, in terms of how you're utilizing to drive any efficiencies, I mean, a whole number of possibilities, whether it's customer service, logistics, back office, how much is that in place now? Is that kind of a factor in the model? And how do we think about the, it's a broad question, but the opportunity from efficiency, from margins, from the speed of doing business, I suppose?
Yeah. I mean, I think that's one way that we'll see benefit from AI, right, which is on the cost side. But I think we'll also see benefit on the top line and how people engage and do search and how the personalization can happen. I want to disagree. We've been using AI in the form of machine learning for some time. That's how our pricing models work. That's how the personalization on the site works. The real unlock is obviously in generative. And part of how we are utilizing that today, for example, is on the customer service side with some of the generative plugins that we're working with, the generative tool can actually draft the initial responses. And then a human still does need to review those responses before they go out. Over time, does that step go away? Maybe. Probably.
Right now, it's not advanced enough to forgo that human step. This is a complicated enough category that we think it's important to have that element. As you look at places where you could see ongoing efficiency, we are exploring everything from how does copy get written to on the finance side, frankly, I think it's going to unlock a lot in accounting. I think there'll be real opportunity there. Legal document review is another one that we're testing out. We're exploring it up and down like most folks are. I think we have a deep partnership with Google. We've been able to leverage that for exploring, particularly around the cost efficiency unlocks. I think that's where you'll see it show up first in the P&Ls on the cost side. You should also see a real benefit on the top line.
I think somebody that has a large 1P dataset like us certainly has a benefit there in how they leverage generative.
How big is the customer file length? Let me just.
$8 million now?
Over $85 million?
Indeed. Got it. Okay. Well, I think on that note, we'll end it there. James, Kate, thank you so much for your time. And really appreciate your joining the discussion.
Happy to do it. Appreciate the opportunity. Thanks all.