Wayfair Isn’t Playing Fair, Say Suppliers In Explosive Lawsuit

By Virginia Van Zandt

The ways of Wayfair aren’t fair, say a number of its longtime suppliers in a recent federal lawsuit.

In legal filings, the embattled online retail giant and the mom-and-pop shippers and warehousers that supply the furniture for its customers have exchanged explosive allegations about fraud, unauthorized access to bank accounts, and a scheme to cut out U.S.-based companies and replace them with others in China.

This sharp-elbowed lawsuit couldn’t come at a worse time for the Boston-based furniture maker as its stock price has declined 60 percent and its revenue has shrank 9 percent in the third quarter of 2022.

The trials of Wayfair offer a number of lessons from executives, ranging from communications strategy to financial planning.

Wayfair is facing a plummeting stock price, high costs, and declining revenue – and has become embroiled in a contentious lawsuit with several of its long-term suppliers.

Wayfair filed a suit against Mulhouse Furniture Corporation, a longtime supplier of Wayfair-brand furniture, in November, along with other suppliers in the Los Angeles area. Wayfair alleges that the warehouses conspired to intentionally create inaccurate shipping labels and send empty boxes to customers, leaving Wayfair to eat the cost of sending a replacement item while the suppliers received multiple payments for sending a single item.

The Boston-based Wayfair is seeking $1.5 million in damages from its suppliers, who deny any such scheme occurred. That’s not a typo. That’s one and one-half million dollars.

In their response, the suppliers claim that Wayfair preemptively, and without court approval, withdrew the money from their bank accounts just days after filing the lawsuit by clawing back previous payments worth $1.5 million.

Still, Wayfair’s lawsuit has raised eyebrows given the relatively tiny amount of money that the company says was compromised in the purported shipping scheme.

On the surface, the total cost of shipments involved in the alleged scheme represents a drop in the bucket for a $6.4 billion-market-cap company. But it coincides with Wayfair’s new cost-cutting campaign, as the retailer looks to salvage its bottom line in response to heavy pressure from shareholders.

The losses in question amount to 0.85 percent of the total $139 million in sales generated by Mulhouse on Wayfair’s behalf over the last eight years. That’s well below the 4 percent threshold that Wayfair anticipates in its loss allowance deductions for reimbursing suppliers, according to the Mullhouse filings.

The suit was filed just 20 days after Wayfair CEO Niraj Shah detailed “aggressive” plans to break even and return to profitability.

“We have taken a hard look at our cost structure holistically to identify areas of improvement and take action aggressively,” Shah said during the company’s November 3 conference call with investors.

The effort to slash spending was prompted by a series of setbacks for Wayfair’s business, which boomed during the early days of the Covid-19 pandemic but rapidly declined as consumer behavior normalized. Customers have flocked away from the platform, Wayfair’s profit margins have deteriorated, and its stock is now down 60 percent over the last year. The company laid off 1,750 employees in January.

The company’s financial struggles have placed a target on its relationship with suppliers in particular.

Compared to its industry peers, Wayfair has an unusually inventory-light business model that enables the company to receive payment from customers before paying its third-party suppliers, whereas other retailers pay suppliers upfront. This system can amplify Wayfair’s cash flow during boom times — but it causes additional strain during slowdowns. If revenue is down, they have less money coming in to pay the upfront costs.

“Wayfair is shrinking faster than the online houseware/home furnishing industry,” Peter Cohan, a venture capitalist and Professor at Babson College, told Forbes. Professor Cohan believes that the company’s stock will fall in 2023, citing declining revenues, weak prospects, lack of industry growth, and declining market share.

Wayfair was targeting potential savings of half-a-billion dollars between operational changes and reductions to headcount and third-party labor costs on the November 3 conference call, said CFO Kate Gulliver.

Mulhouse Furniture claims that Wayfair is seeking to drive them out of business to gain easy access to the warehouse’s $10 million stockpile of furniture at a steep discount. Its legal filings also point to Wayfair’s rapid expansion of its overseas supplier network, particularly in China, where the retailer has added thousands of new lower-cost suppliers in the last few years.

“Upon information and belief, to save costs, Wayfair aims to put U.S.-based suppliers out of business and replace them with smaller operators working directly with its office in China,” Mulhouse said its filings. “In doing so, Wayfair can reduce the cost at which it purchases furniture and increase its margins.”

As tech giants, retailers, and manufacturing firms slash costs and trim payrolls in the face of an economic slowdown, these efforts can quickly complicate any ongoing litigation. Wayfair’s dispute with its U.S.-based suppliers would not look so suspicious if it hadn’t been telegraphing that it’s making sizable cuts and seeking cheaper alternatives in China. Executives need to look holistically at the messages they’re sending, so they don’t end up saying one thing to investors and another thing to lawyers and judges.