Wish, the Online Dollar Store, Is Losing Momentum Before IPO

(Bloomberg) -- A global pandemic should theoretically be perfect timing for an e-commerce company to go public because homebound shoppers have fueled a record-breaking surge in online sales.

At least that’s what Wish.com is counting on.

In a filing last week, the upstart web store best known for cheap trinkets shipped direct from China said it plans to sell 46 million shares for $22 to $24 each, which would value the company at up to $17 billion on a fully diluted basis. Wish, which is expected to price Tuesday and start trading the following day, could get a lift from the successful public offerings of tech industry counterparts DoorDash Inc. and Airbnb Inc., both of which popped out of the gate.

But analysts say there are already signs that Wish, which posted a net loss of $176 million for the first nine months of this year, is losing momentum despite spending heavily on ads to attract customers. Even more worrying, they say, is a recent hike in postal rates between China and the U.S. that could push up the company’s costs.

“They’re underperforming the e-commerce market both in the U.S. and Europe,” says Juozas Kaziukenas, founder of the research firm Marketplace Pulse. “That, to me, is a concern.”

A Wish spokeswoman declined to make Chief Executive Officer Peter Szulczewski available for an interview, citing the pre-IPO quiet period.

The origins of Wish, officially known as ContextLogic Inc., go back to 2010, when Szulczewski and co-founder Danny Zhang started an online advertising company. When that failed to take off, Szulczewski hit on another idea: invitint Chinese merchants to sell cheap products directly to U.S. buyers. The timing was propitious because the community of sellers supplying e-commerce giant Alibaba Group Holding Ltd. were now looking for opportunities abroad. Szulczewski renamed the company Wish.com and in late 2012 began hiring Chinese staff to recruit sellers and handle customer service.

Wish grew so quickly in the early years that it attracted the attention of Amazon.com Inc. Chief Executive Officer Jeff Bezos. Typically, when a potential rival emerges, the Seattle giant strikes up a relationship with the upstart, the better to get a look under the hood and maybe even see if it’s worth acquiring. Szulczewski and Zhang were invited to Seattle, where they spent the day describing their vision. The pair got the impression that Amazon executives didn’t think much of their business model. But when Wish continued to grow quickly, Szulczewski was invited to sit down with Bezos. A suspicious Szulczewski declined the meeting and continued to build his company, raising $1.8 billion from investors including GGV Capital, Joe Lonsdale’s 8VC and Founders Fund. (Zhang left Wish last year.)

Scrolling through Wish’s feed today, shoppers see a smattering of products, from $8 AirPod knockoffs to 50-cent baby dolls. The items have little in common, except that they’re dirt cheap.

Katie Plummer is an Amazon Prime subscriber but sometimes finds herself on Wish buying random items -- mostly for her dogs.

Earlier this year, Plummer, 34, bought flashing lights for 95 cents to clip onto her mutt Stanley’s collar, so she can see him during nighttime walks. Then she bought a dog whistle and a $2 seat belt to keep the 35-pound pooch from flying out of the car. Plummer didn’t mind that it took months for Wish to deliver the items to her home in Concord, North Carolina.

“Amazon is convenient,” she says. “Wish is more of a dollar store on your phone.”

Wish generates about 70% of its sales from impulse buyers, not from searches for specific items, according to a filing. That could be a problem, says Forrester retail analyst Sucharita Kodali, who notes that Wish isn’t entirely comparable to dollar stores, which sell such essentials as groceries that pull people in regularly. And unlike Amazon, she says, Wish doesn’t sell everything.

“It’s random tchotchkes,” she says. “It’s cell-phone accessories and skirts. It’s not everything for all people. It’s not even some things for some people.”

Despite the stampede online this year, Wish said third-quarter core marketplace revenue -- which includes commissions collected from merchants -- increased 17% compared with the same period last year. That trails the 37% growth in U.S. e-commerce sales during the same period, as logged by the Commerce Department.

In its IPO filing, Wish attributed the “moderated” third-quarter revenue growth to pandemic-related issues that slowed deliveries and prompted fewer shoppers to click the buy button. That could be a sign that while Wish’s customers are willing to tolerate extended shipping windows, there is a limit to how long they are willing to wait. It took an average of 62 days for U.S. customers to receive their Wish orders in the second quarter, compared with just 27 days in the first three months of the year. Shipping times improved last quarter, falling to 22 days on average.

Meanwhile, sales and marketing expenses are a considerable burden, costing Wish $1.1 billion in the first nine months of this year, or 64% of its $1.7 billion in revenue. And while the company spent a greater percentage of revenue, 78%, on marketing for all of 2019, a company filing acknowledged that these expenses will continue to comprise a majority of operating costs for the foreseeable future.

“They are quite literally buying sales,” Kaziukenas says. “I don’t know where that goes in the future, as Facebook and other marketing channels become more expensive. That’s a channel that will continue to eat into any sort of profitability.”

For years, Wish benefited from low shipping rates through the Universal Postal Union Treaty, which subsidizes small packages from China. The company notes in the IPO filing that the hike in rates that took effect in July are likely to increase its shipping costs. Unless Wish begins bringing more products wholesale into the U.S. and Europe, it could be difficult to continue selling so many items for less than $5, says Kaziukenas, who researches online marketplaces.

Last year, the company launched Wish Local, which lets customers pick up orders from nearby brick-and-mortar retailers. (The stores can sell through Wish, too.) In an interview with Forbes in July, Szulczewski said, “If you think about it, Walmart has about a billion square feet of retail space. If we have a million stores sign up for our service with about 1,000 square feet per store on average, we have a virtual Walmart.” So far, about 50,000 stores have signed on, according to the IPO filing.

Ordering from Wish is far from perfect, according to Plummer, the North Carolinian customer. She ordered two “dog mom” key chains in April for 95 cents. They never showed up, so she got a refund in September. She has tried the local pickup option and hit some snags. Her most recent Wish order was a pair of earrings priced at $1 on Oct. 19. She selected a nearby computer store as her pickup location.

But because Wish orders take so long to arrive, Plummer usually forgets about them -- which is a problem because Wish gives customers only 15 days to pick them up. Plummer missed the window and was charged a 39% restocking fee.

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