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Meet Wish, the $3 Billion App That Could Be the Next Walmart

“We think we’re going to be the second or third trillion-dollar-a-year marketplace,” Wish's CEO says.

As the words poured out of Peter Szulczewski’s mouth, I thought he must be pulling my leg.

“We think we’re going to be the second or third trillion-dollar-a-year marketplace,” Szulczewski, the CEO of shopping app Wish, told me. His company operates a family of e-commerce apps that sells a giant assortment of products at bargain-basement prices. “We think Alibaba will be first and then it’s either us or potentially Amazon depending on how quickly, or if, they win in India.”

Yes, that’s “trillion” with a T.

I paused for a beat to see if laughter was going to follow, but there was only silence. Alibaba launched in 1999, and its merchants did nearly $400 billion in sales in 2014. Amazon went live in 1995 and did an estimated $180 billion in gross merchandise volume in 2014. Wish? It only started selling goods in 2013 and just last year added other shopping apps like Geek and Mama that focus on specific product categories.

And yet, the growth Szulczewski has managed in under three years has him spouting what many people probably think is nonsense. He doesn’t care. Szulczewski says merchants are on track to sell at least $2 billion of goods through Wish over the next year. To come up with that figure, you have to multiply monthly sales (minus returns) times 12. Put another way, Wish hasn’t actually booked $2 billion over the last year, but it could in the next 12 months.

That helps explain why its backers, led by high-powered Russian investor Yuri Milner, valued Wish’s parent company, ContextLogic, at $3.5 billion when they invested $500 million early this year. That cash infusion makes it one of just two privately held e-commerce companies in the U.S. with a $3 billion valuation or higher (the other is Fanatics, an online seller of licensed team sports apparel).

Wish’s meteoric rise, accomplished mostly under the radar, can be traced to a potent combination of tech, advertising and discounting strategies. Unlike traditional shopping sites, Wish was built first and foremost to be viewed on smartphones, with a stream of product images that provides enough eye candy to keep people entertained during short sessions. It also employs a borderline-insane discounting philosophy that helps push shoppers to complete purchases before they click through to another app or look up from their phone.

The company has taken the direct-to-consumer fad to the extreme, connecting buyers directly to Chinese manufacturers who ship to customer’s doors from factories, cutting out middlemen and markups along the way. That helps explain the dirt cheap prices, from $7 sweatpants to $15 smartwatches, but also the long delivery times of two to three weeks.

The Path to a Trillion Goes Through Facebook

A large part of the company’s early success is owed to deep-learning algorithms that decide which products to show to a user in the app, as well as in ads on Facebook and Instagram. Facebook’s ad team has been blown away by how much more sophisticated Wish is as an advertiser than literally any other company, according to multiple sources, thanks to the automated way in which it optimizes its ads and its use of every new ad product that Facebook releases. Wish spends around $100 million a year on Facebook ads, other sources say, and was the No. 1 app advertiser on both Facebook and Instagram over the holidays, according to app data startup Sensor Tower.

“If we’re going to get to a trillion [gross merchandise volume], we have to be aggressive,” Szulczewski said without confirming or denying the $100 million figure. “And we’re going to be aggressive so long as the unit economics allow it.”

“We were just horrible at business development. … Honestly, we sucked.”

— Wish CEO Peter Szulczewski

But the company’s fast rise from obscurity means there are plenty of valid questions about how sustainable its model will be. Even if you ignore the startup’s heavy advertising spending and aggressive discounting, it’s not clear if the company will be able to continue to retain its huge user base with the quality of products it sells. It’s not uncommon for Wish orders to arrive broken or in a wrong color or size, according to customer reviews as well as my own experience shopping on the app.

It’s also not clear whether enough customers will accept that the occasional disappointing order is the trade-off for lower prices than they can find almost anywhere else, or whether Wish can manage expectations appropriately.

“That is the only remaining risk factor with this business,” said Geoff Lewis, an investor and board observer.

That big looming question poses a problem when predicting Wish’s path forward: Are we looking at the Walmart for the next generation? Or one giant e-commerce gimmick that is destined to become another cautionary tale along the lines of Fab.com?

‘The Walmart Crowd, but Younger’

Wish parent company ContextLogic was founded in 2010 by two University of Waterloo graduates: Szulczewski, formerly of Google, and Danny Zhang, who spent several years at Yahoo working on search and advertising products. The startup began with a focus on recommendation technology, using deep learning to place information like tweets and news articles in front of the people most likely to want to consume them. It later saw promise in using its technology in the online advertising industry, helping publishers position more relevant Google AdSense ads in front of readers. While its technology was promising, the company was in over its head trying to sell its services to big publishers.

 Wish CEO Peter Szulczewski
Wish CEO Peter Szulczewski
Wish

“We were just horrible at business development, and we couldn’t hire people who were good enough,” Szulczewski said. “Honestly, we sucked.”

The team eventually created Wish as a wish-list app, matching product images that the startup and users scraped from shopping sites and uploaded to the app with people who might like them. The company believed shopping on phones was the future of e-commerce and felt that its personalization algorithms were better than most retailers’ and that it could retain customers more effectively through push notifications than traditional retailers have with email.

The app gained popularity, but revenue was scarce because the affiliate model (getting a commission for driving users to a sale via links and text ads) that’s popular on the desktop is largely broken on mobile. Along the way, Wish realized that the products that were most popular were not the type of brand-name apparel the founders might buy. Instead, they were low-priced goods that were attractive to “value shoppers.”

The company began approaching no-name merchants, the majority of which were based in China and of the type you might find deep in Amazon’s and eBay’s shopping marketplaces. The pitch was simple: Shoppers have saved thousands of your products on our wish-list app, so why don’t you sell directly through us? It worked, and the type of people who were attracted to the app meant Wish had the potential to become popular with a huge mainstream audience and not just a smaller, more well-off population in and around big cities.

Hans Tung, a venture capitalist who joined Wish’s board when his firm led a $19 million investment in 2014, came away impressed from a meeting with the founders mainly because they were signing up sellers without feet on the ground in China — something he thought he could help with — and because of the audience with which the app was popular.

“Most of the orders were coming from heartland America or small towns,” Tung said. “I loved it because that’s the Walmart crowd, but younger.”

A few months later, Founders Fund led a $50 million investment in the company at a time when many big investors were staying away from e-commerce thanks to high-profile flame-outs like Fab.com and Lockerz. Even so, Founders Fund’s Lewis was surprised the company was still largely unknown despite its high rankings in app stores, its heavy focus on mobile and a browsing model that set it apart from Amazon’s search-heavy approach.

“The focus on impulse buying and value-conscious shoppers — that felt like something no one else was doing,” Lewis said.

‘Winning’

In late November, I ordered six products from Wish. They each took two to three weeks to arrive, which is one of the trade-offs customers make for the low prices.

A $4 watch arrived broken, with one half of the band detached and the minute hand stuttering in place. A $12 shirt came bearing a fake Tommy Hilfiger label (the listing disappeared from the app shortly after I mentioned it to Szulczewski). A $7 pair of sweatpants didn’t fit because I failed to check out the Asian sizing chart, which is much different than what we are used to in the U.S. (Wish’s Twitter account recently advised customers to order a size bigger than they need if they can’t figure out the sizing chart.)

I also ordered a $15 “smartwatch,” which my editor and I managed to set up well enough to get it to answer phone calls; many other features, however, were difficult to set up. A $2 glass iPhone screen protector seemed like a good buy, and a $1 wrist band looked like a fun toy for my toddler son.

Szulczewski and his investors said the company is working hard to weed out the worst products and merchants and drive business to the ones with the best reputations and highest customer satisfaction ratings. The startup has also established a way brands can issue takedown requests for products they believe to be counterfeit.

The company still faces an uphill battle in keeping quality high as it pursues further growth at low price points.

“A lot of merchants in China are very short-term focused with a mindset of ‘gouge while you can,’” said Tung, who was previously an investor at a Shanghai-based venture firm, where he backed phone maker Xiaomi. “How do you get them to think about the long-term value of a relationship?”

One industry analyst is harsher.

“Wish is most likely what I call a ‘firework phenom,’” Sucharita Mulpuru of Forrester Research said in an email. “These are Internet businesses that have a great pitch and get a whole bunch of people to try the business in a short period of time. Think Groupon or Gilt Groupe or Shoedazzle. But then they have trouble scaling — either the economics of the business aren’t great or the quality of the offer just isn’t that compelling. They struggle retaining customers, and it’s not as easy to acquire new customers because the lowest hanging fruit has already tried you.”

“I don’t mind having to wait weeks to get my orders because I don’t buy things that I need for a certain time.”

— Wish customer Shauna Porter

Szulczewski bristles at such critiques. He declined to disclose any customer retention numbers, but noted that 85 percent of buyers on a recent day were returning customers and pointed to customer ratings that are better than Amazon’s. The Wish app has a rating of 4.5 out of five stars in the Apple App Store, compared with 3.5 for Amazon. On Android it has a 4.5 ranking, compared with four for Amazon.

On December 1, Wish rose toward the top of the iOS App Store for all free apps in the U.S., not just shopping ones. It was No. 2, ahead of Facebook, Instagram and, yes, Amazon, only topped by Facebook Messenger. Szulczewski texted me a screenshot. I was shocked and asked him if the growth was “organic” or bought through heavy advertising spending. “Holidays,” he replied.

“But it’s nice to best Amazon in the U.S. and beat them where they aren’t even playing,” he added, forwarding an image showing Wish ranking as the No. 1 shopping app in Greece, Finland, Denmark, Costa Rica, Chile, Canada and Brazil. About two-thirds of Wish customers live outside of the U.S.

That same day, Szulczewski posted similar charts to his Facebook page, accompanied by a single word: “Winning.”

‘Boyfriend of the Week’?

There have been several critical components in Wish’s early success: A design and price point that lends itself to impulse buying; aggressive and personalized discounting; and online advertising expertise that is part of the company’s DNA rather than a nice-to-have. Over the last six months, I’ve heard praise for Wish’s personalization and ad-targeting prowess from more senior product execs than about any other company in e-commerce.

If a shopper shows interest in a given product, for example, Wish will often offer a discount if the purchase is completed within an hour. Sometimes, Wish will also offer a discount the day after you place an item in your cart. This discounting is being subsidized by Wish, which means the 15 percent cut it takes of each sale decreases to 12 percent after factoring in the price reductions, the CEO said. Even so, that cut of sales means Wish should be on track for at least $240 million in revenue over the next year if the last few months are indicative of future performance. It is as yet unprofitable.

But what if there were a day Wish didn’t have the funds to discount as heavily as it normally does? Would customers keep coming back? What about the long delivery times and iffy quality? Are value shoppers willing to make trade-offs on quality and shipping speed forever, or just while Wish is the new hot thing?

Shauna Porter, a 19-year-old from Cavan, Ireland, says she has bought 12 items since signing up for the app a year ago, including a six-euro skirt and several one-euro necklaces. She visits the main Wish app every few weeks when she is bored and likes that it carries stuff, at cheap prices, that she doesn’t see elsewhere. Yes, quality is very hit or miss, and yes, delivery times can be long, but neither seems to be a huge deterrent right now.

“I don’t mind having to wait weeks to get my orders because I don’t buy things that I need for a certain time,” she said in an email. “I only buy things that I want, for whenever, and don’t care if it takes a while to arrive.”

Kit Yarrow, a consumer psychologist and author who has spent time observing Wish, remains skeptical. She said history has proven the cheap thrill wears off once consumers are disappointed one too many times by a subpar product.

“This is like the boyfriend of the week,” she said.

Wish knows big improvements can be made. It wants to get its delivery times down so it can remove one remaining barrier to the impulse buying it is built on. The company is starting to aggregate some orders into its own facilities in China to try to make shipping them overseas more efficient. It is also starting to secure warehouse spaces in Europe, the U.S. and Canada to store best-selling inventory so customers can get those orders much more quickly than their current two-to-three-week delivery window. And it is opening up customer service centers in several countries so it can address all customer questions and complaints for its merchants, which helps explain why it already has 900 employees.

Recently, a report surfaced claiming that Szulczewski had told potential acquirers he would not sell for less than $10 billion. Whether or not that’s the case, Szulczewski is certainly talking a big game.

“If we own Europe and South America to a certain extent, and North America for the value-conscious consumer at least on mobile, I think we can get to a trillion,” Szulczewski said. “It may take eight or 10 years. But I think we’ll get there.”

This article originally appeared on Recode.net.