We recently had a one-on-one meeting with Mr. Mark Tayler, CFO of Temple & Webster Group (TPW). TPW is a pure play online retailer of furniture, homewares, home décor, arts, gifts and lifestyle products. Given we do not cover the stock, the main purpose of this call was to get an initial understanding of the Company’s business model as we develop our knowledge on the stock. TPW offers investors a high growth e-commerce business which is positively leveraged to the shift to online in furniture and homewares. Once the scale is built, the Company will have ample margin opportunities. Below are the key points from our discussion.

Company overview
Founded in 2011 by 4 founders with a vision of doing furniture & homewares retailing differently in Australia. The market at the time and evenly currently is largely dominated by offline / bricks & mortar players. Further, the Company felt the customer experience could be significantly improved. The founders wanted to approach the sector with clear differentiations – Digital (online only), strong content and inspirational type shopping experience. The Company went through a rapid growth period to its IPO in 2015, including the acquisition of a leading U.S. retailer Wayfair’s Australian-based business and acquisition of #3 player Milan Direct (at the time) in the online homeware & furniture market.

Multi-brand strategy didn’t work
At the time of the IPO, the Company took a multi-brand strategy to the market. Multi-brand is a difficult to execute in a small market such as Australia, given the costs duplication (including more restricted marketing spend as a standalone businesses, 3 brands, 3 teams, 3 tech platforms, 3 back offices) and the risk of cannibalisation of sales (some overlap in products).

Lessons learned – brands consolidated, took the best of each
The multi-brand strategy changed after Mark Coulter (one of the founders and previous CEO) came back into the business. Management consolidated the 3 brands and effectively took the best parts of each business: adopted the direct sourcing capabilities of Milan Direct (TPW acquired for $20m), sourcing product from China & South East Asia; adopted the Wayfair business model (which was the drop ship, asset light business model) and the underlying technology (which Wayfair in the U.S. still uses today); and adopted the Temple & Webster brand (which was the dominate brand out of the 3). The consolidated business quickly started to show it was gaining traction in the market – increasing the customer experience, building out the product range, building out team (best category & digital marketing team) and increasing the Company’s profile. The onset of Covid-19 accelerated the Company’s growth (accelerating the online adoption curve).

Management team
Three of the four co-founders are still active in the business today. TPW has over 500 employees. The Company is very focused on building out a team who are the leaders in their segment. Management believes they have the best category and digital marketing team in Australia. It is a young, high growth and innovative company, which means it attracts the right talent. This is also a key competitive advantage for TPW vs offline retailer trying to build an online capability, as most digital focus talent wants to work for an innovative company only focused on online vs a company with an offline heritage or focus. Management believes one sign of TPW strong innovative culture can be highlighted by the fact more people now want to work at TPW (strong job ad replies). The founders are still involved in the business are still involved in the hiring process of each employee in Australia.

Key elements of TPW’s business strategy
(1) Focus on strong execution to achieve and retain the #1 position in the online market for furniture & homeware. The market here for online is at approximately 10% penetration vs U.S. where technology / apparel is at 30-40% penetration. Management wants to focus on growing fast, growing their current market share of ~15% to 30% (where Wayfair). (2) The leadership position will mean as the shift to online takes place TPW will benefit disproportionately from this shift – management noted they have been taking $0.20 – 0.40 in every $1.00 which has shifted from online to offline. (3) TPW is only focused on the Australian furniture & homewares, which is approximately a $16bn p.a.

This is only a snippet of the full report sent to BanyanTree Investment Group clients.
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