While traditional retailers are beefing up their digital presence, online furniture retailer Wayfair is opening a big-box outlet store.
The store, which will open in Florence, Kentucky, on Friday, isn’t the first physical location for the online retailer (it experimented with pop-ups in Massachusetts and New Jersey last year). But the rationale behind it goes deeper than just making a brand statement in the physical world. The store will feature items that were previously returned and in good condition, along with discounted items, helping Wayfair save on delivery and recoup a greater portion of the costs from returned goods. It will be located in the same building as a Wayfair warehouse where returns are processed, and it’s also near its distribution center in Erlanger, Kentucky.
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A company spokesperson told Digiday that given the store’s proximity to product distribution and return centers, it makes sense for the company to offer that inventory to the local community at a lower price. The company currently has no plans to build more outlet stores, the spokesperson said.
For e-commerce retailers, excess inventory, whether from returns or older merchandise, can be a major drain on resources. According to Appriss Retail, merchandise returns resulted in $351 billion in lost sales in the U.S. Some brands, including Untuckit, are offloading excess inventory on Amazon, but thanks to the logistical complications of furniture retail, putting that inventory on a marketplace isn’t necessarily the most cost-effective move.
“This strategy is much more cost-effective for them because there’s an [additional] cost to putting items on eBay or Amazon and dealing with individual purchases through them,” said Kevin Dugan, a spokesperson for Apex Supply Chain Technologies.
A physical outlet store is a major cost-saver for offloading excess inventory, especially when mounting delivery and supply chain-costs put pressure on margins. Sending an unwanted item through the mail can result in additional costs; by putting an outlet store next to a returns and distribution center, Wayfair is knocking out a few steps where it would incur additional expenses. Wayfair has invested significant resources in building out its in-house logistics and digital capabilities and, as a result, has yet to turn a profit. According to Hendrik Laubscher, marketplace research director at e-commerce marketing agency Buy Box Experts, Wayfair’s biggest challenge is logistics costs, returns, cancellations or mistakes have significant impacts on margins.
Wayfair is reliant on drop-shippers to ship items to their warehouses, which then ship the item to the customer, he said, in a recent report. This model can result in additional costs to the retailer if there cancellations, the incorrect products being shipped and products damaged due to poor packaging.
Reducing logistics costs is important for Wayfair. It is still market leader in online furniture, but other contenders, including Walmart and Amazon, are upping their game on private-label furniture brands. Walmart has the advantage of an extensive store network, while Amazon can offset fulfillment costs with revenue from other business areas.
Alice Fournier, vp of e-commerce and digital at Kantar Consulting, said Wayfair’s launch of a physical store for excess inventory is likely a trend that will continue with other online-first brands. Other large consumer brands are also grappling with the challenges of what to do with excess inventory: This week, Under Armor reported that in the fourth quarter of 2018, it reduced inventory by 12 percent. Under Armour has been selling its extra inventory on “off-price channels,” with items that are as big and bulky as furniture, a physical store is more practical because customers like to see and feel the products.
“Online brands will get to a point where they need physical retail — people love to touch feel with furniture,” said Fournier. “It’s a good strategic approach to combine managing returns with managing inventory [through the outlet store.]”