3 Decisions Wayfair Must Make to Ensure Long-term Success

As the home furnishings e-tailer continues to build its top line-it remains a Wall Street darling, with its stock nearly tripling over the trailing 12 months-its losses are piling up nearly as dramatically. Adjusted EBITDA losses tripled for its fiscal 2018, announced just recently, although the company shows positive net revenue using nontraditional accounting measures.

The short-term news is far from bad on many fronts. The numbers of active customers, orders per customer, repeat orders by existing customers and overall orders were all up. And some were up substantially, representing advances most retailers-online or in-store-would kill for. As a tech-based company nearing the end of its first decade under its current operating model, it is certainly the envy of other maturing startups.

But for Wayfair, the hard part is really just starting. Of course, there is the issue of profitability under standardized accounting rules. If Amazon is the ultimate role model for online retailers, at some point Wayfair will need to start making money before investors start growing tired of all that red ink.

But in the meantime, Wayfair faces three moments of truth-three tines in that fork, if you will-that will largely define how it evolves over the next three to five years.

1. Supply chain First and foremost is its supply-chain management. For much of its history, the company eschewed the distribution model legitimized by Amazon of having an ever expanding number of centers around the country to expedite deliveries to customers. Wayfair instead leaned heavily on its supplier base for direct-to-consumer shipping, never actually touching the product itself.

That has changed more recently as the company has moved into a so-called middle mile distribution model that manages the supply chain from the factory to domestic shipping points. Now it says it's going to focus on last mile distribution, opening facilities in key cities around the country. It now has 35 such centers and said it will add 1or2 more per month throughout 2019, which could double the total by the end of the year.

For a company that touts free delivery as one of the cornerstones of its business model, having this network in place-as opposed to the external service providers it had been using-is critical. It is also ultimately very expensive.

Wayfair will need to continue to drive revenue to keep all of these new facilities humming and fully utilized. And it will need to stay on track boosting order sizes so as to take maximum advantage of this infrastructure. All of those are very big assumptions.

2. Physical Stores If there's one thing that's been proved in the business of online retailing over the past 24 months, it's that e-commerce doesn't work in a vacuum. Virtually every internet seller, from Amazon to Warby Parker to Casper, has shown that it needs physical stores to round out its business strategy.

Wayfair has a long way to go. It has exactly one-count 'em, one-store, an outlet location near a distribution center in Kentucky, and this past holiday season, it opened a pop-up store or two as well.

Wayfair has said it is not opposed to stores but doesn't see them as a business unto themselves, but rather as marketing vehicles to drive online business. Whatever the justification, Wayfair needs stores-and lots of them.

And unlike locations selling eyeglasses or being used as quasi-showrooms for fashion apparel, Wayfair stores will need to be big to show all of that furniture, along with the lighting, housewares and sheets and towels. Figure 10,000 square feet at a minimum but more realistically 20,000, 30,000 or even 40,000 square feet.

Even with the glut of excess retail space out there, this is going to be an expensive and time-consuming process. And the longer Wayfair waits, the further behind it will fall to both Amazon's more aggressive play in home furnishings and legacy furniture retailers that are starting to get their omnichannel acts together (finally).

3. Branding Wayfair began life selling media storage racks under the name racksandstands.com and at one point had as many as 200 different websites for specialized product categories. It was only in 2011 that it consolidated most of the businesses under the Wayfair name, and that has been the flagship ever since.

But the company still continues to operate at least five other sites, catering to subset niche segments of the marketplace: AllModern, Joss & Main, Dwell Studio, Perigold and Birch Lane. And while there is some cross-branding across the multiple sites, it's fair to say that many-perhaps most-customers do not understand that all of these are operated by one company.

As such, cross-merchandising and linking all of these pieces are made that much harder. Wayfair finds itself in a similar market position to Williams Sonoma, which also has a family of brands. But Sonoma has embarked upon a marketing initiative over the past two years to strengthen the connection between its brands, offering a corporate umbrella and promotions that cut across the various nameplates.

If Wayfair decides to continue to support its half-dozen brands, it will have to create something similar. That's another marketing cost, but the alternative is to assimilate some of the secondary brands into the parent Wayfair label. Either way, it is something the company will need to deal with sooner or later.

Make no mistake: Wayfair is playing by the traditional startup rulebook, building its top line and worrying about the bottom line later. It worked for Amazon, and it is the same strategy other tech companies like Uber and Lyft are using.

Wall Street understands all of this-until it doesn't.