Wayfair’s Earnings Miss Portends More Trouble For ‘Disruptor’ Brands

On Thursday, Wayfair reported quarterly earnings and to say they were a disappointment is an understatement.

Despite a red-hot home furnishings market, the supposed great acceleration of e-commerce ( mostly not true), and a cumulative investment of many billions of dollars in infrastructure and marketing over 20 years, the company managed to post a 14% sales decrease for the quarter, a significant operating loss, burn through over $300 million in cash and bid adieu to both its chief financial officer and several million “active customers.”

I’ve been challenging pure-play e-commerce’s ability to scale profitably for years, and more broadly questioning the continuing profitless prosperity of “disruptor” retail concepts. While I believed that Wayfair and many high flying digitally-native brands would crash back to earth far sooner, irrational investor ebullience, along with the pandemic, kicked the proverbial can down the road.

At long last it looks like reality is taking hold. Wayfair’s stock is down massively today and is off about 75% from its high last year. But it’s far from alone.

Warby Parker, Allbirds, TheRealReal and many other online shopping darlings have taken massive hits to their valuations as investors are waking up to the challenges of building sustainable digital-first companies. While these brands are to be commended for their innovative business designs, they’ve also become quite adept at lighting fire to large piles of cash. It’s unlikely to get easier any time soon.

While inflation and supply chain woes may explain part of these brands’ profit shortfalls, the underlying troubles appear more pernicious. It turns out that many of their market share gains are likely coming from both unsustainable pricing models and over-investment in marketing.

For Wayfair in particular, they seem highly dependent on leveraging their massive infra-structure investment, needing to improve gross margins and dialing back substantially on ineffective marketing. But raising pricing and pulling back on ad spend in the face of weakening consumer demand seems like a recipe for de-leveraging their fixed costs.

Digitally native vertical brands are faced with essentially the same challenges, but many of them are hoping that opening physical stores will get them on the glide path to profitability. Yet Warby Parker, the one disruptor brand that actually has dozens of relatively mature brick & mortar locations, is still far from breaking even.

It’s one thing to say that “rent is the new CAC” (customer acquisition cost), talk about the halo-effect of stores and how brick & mortar expands the total addressable market. It’s another to actually open, scale and profitably operate a successful fleet of stores beyond a handful in largely no-brainer locations. This story is far from over.

A couple of rough quarters, particularly as we transition to a largely post-Covid world, is not automatically cause for panic. But as we are now two decades past the first dot.com bubble bursting, there are plenty of lessons we should have learned. To paraphrase what I wrote last year in my book Remarkable Retail, this era is sure to have its own Pets.com-or perhaps quite a few.

As I’ve been saying for quite some time, the retail apocalypse narrative is largely nonsense.

I wouldn’t be as confident that we won’t see a disruptor one.

Originally published at https://www.forbes.com.