A few months before online home décor and furniture store Pepperfry’s scheduled launch in January 2012, 59-year-old Jugal Kishore got a call from the company’s founders. They introduced the company as an online furniture player and said they wanted to meet him with a business proposal. Kishore, who runs a furniture business in Boranada, Jodhpur, making beds, sofas and other household items, said the eventual meeting proved to be an eye-opener for him, given that the group of educated big-city men he met says they planned to sell king-sized beds, sofas and coffee tables on the internet. At first, he laughed and shooed them away.
But it was not easy to ignore the persistence and persuasion of Ashish Shah, co-founder and COO, Pepperfry for too long, and Kishore finally gave in. The deal was simple — Kishore’s firm, Appu Arts and Handicrafts, joined Pepperfry as one of the online store’s vendors and began accepting online orders from shoppers via the site, a concept Kishore found difficult to understand back then.
“It took at least three months for any real business to come our way. Before joining the site, we were doing annual business of ₹30 lakh; now, with more volume, the figure has grown to ₹3 crore a year. The speed at which this business has grown has surprised us. I used to think it is not possible to courier heavy furniture items from Jodhpur to Chennai but I have been proved wrong,” says Kishore.
While he is a happy man today, one of Kishore’s other concerns before joining Pepperfry was the company’s demand for best quality and minimum profit sharing. “While still on our own, we were running the business as a family comprising 60-odd members. It was only later that we doubled the headcount, since we began hiring and training karigars from our village to handle the higher volume. Even at a 5-7% profit margin, which is lower than earlier, we are able to maintain the requirements of the clients,” says Kishore.
And he is not alone — Jodhpur is home to over 1,000 small and large furniture traders. Rajasthan already contributes about 11% to the total furniture manufacturing volume in India, thus showing up on the radar of other emerging online furniture retailers such as FabFurnish, Zansaar, Urban Ladder, Mebel Kart, Locville and CustomFurnish.
Some assembly required
The surge of online stores in the ₹80,000-crore furniture market, which is 90% unorganised, began in 2012 with the entry of Pepperfry in January, FabFurnish in March and Urban Ladder in July. The online furniture market, still a small part of the overall organised business, is estimated to be around ₹700 crore in value. In terms of funding, Urban Ladder recently surpassed Pepperfry after raising fresh funds from investors. “If you map the e-commerce trends in the global markets and in India, you will notice that the country has been following a similar pattern but adoption is much faster. First came the online ticketing business, where there is no high product transaction, and then media, music and fashion. By early 2007, fashion was already making waves, and that’s when we thought it’s time to look at online furniture. By 2010, we had started work on the concept,” says Shah of Pepperfry. A hardcore e-commerce guy, Shah started his career in this sector 15 years ago and has been associated with it since.
Pepperfry says the biggest chunk of its customers comes from the 30-45-year age group. “We had no self-doubts when we started out with Pepperfry. We were very clear that the property will fill a need gap with a clear positioning — variety and value play,” says Shah.
“We have realised that buyers browse at least 650-700 items on our site before making a purchase decision. If they are looking for a large bed, they browse at least 400 beds before making a purchase. In the offline world, such buyers would only move within a catchment area and still be able to view only half the number of options,” he adds.
On the site, on the other hand, buyers can check out beds in the ₹9,000-25,000 range. In terms of reach, Pepperfry has the largest distribution, catering to over 200 cities. While Jodhpur is its main sourcing hub, the company is looking at developing other furniture hubs, such as Puducherry, Thrissur, Saharanpur and the northeast.
Starting out with 11,000 SKUs in 2012, Pepperfry has since scaled to 85,000 SKUs; the company is aiming to double its SKU count by the end of 2016. It works on a marketplace model, wherein the company sources furniture items from vendors and brands (although private labels form the bulk of the business and contribute 60% of total volume).
While the top 10 cities contribute about 60% to Pepperfry’s top line, the company has seen a significant rise in orders from smaller towns, including Mohali, Rajkot, Bhavnagar, Junagadh, Panvel, Thane, Nashik and Solapur.
The site’s designs are suggested by an in-house team of designers, who zero in on a pattern, roll it out as a prototype and then pass it on for the site to get them commissioned on a made-to-order basis. “We are turning out to be an important delivery channel for both brands and our vendors. We have warehouses or distribution centers in 11 cities and are present in 200 cities and by the end of CY15, we aim to reach 580 cities across the country,” says Shah. Pepperfry currently has 11 distribution centres occupying a total of about 35,000 sq ft of warehousing space, the rent for which is about ₹10-15 per sq ft.
Most of the online furniture players operate on a hub-and-spoke model that covers 97% of the furniture orders in the marketplace and helps reduce delivery costs and returns. The cost of shipping for these companies is around 7-10% of the product value, similar to any other traditional furniture retailer. Online retailers can deliver within 24 hours if they have the product ready and most of them have tied up with a team of carpenters who are trained to deliver and assemble the products.
Most buyers who shop for big-ticket items conduct an incredible amount of research for the purchase and usually do not mind waiting for delivery for a few days, which helps online retailers compete with neighbourhood stores. At present, Pepperfry has 700 delivery personnel — of which 150 are on the company’s rolls — and 150 delivery vehicles, which the company plans to ramp up to 450 by next year. A major ramp-up is also on the cards, as Pepperfry is looking to set up robust delivery infrastructure. It is also looking to double its headcount to around 2,500 employees by 2016 from the existing 1,100 employees.
Room for growth
“By 2020, we want to be a $1-billion firm, up from our current run rate of ₹350 crore. There is space for at least two-three firms to build similar businesses. We need to raise a large amount of money — close to $80 million — and this should see us to profitability,” says Shah. “The category is still evolving and the focus is on bringing out newer products and acquiring customers. While the investment mode will continue for the next three years or so, with a large, pan-India presence, profitability is not too far,” says Deepak Gaur, MD, SAIF Partners. “We are excited about furniture, as it is a large market in terms of both value and volume. While the category is fragmented and the customer experience broken, it is an attractive segment where the average ticket size is high, while the cost of customer acquisition is 25-30% lower compared with other e-commerce categories.”
Shah and his partner Ambareesh Murty, ex-country manager, eBay India, are actively talking to investors, though they claim they are not in a hurry; the company has already raised $28 million through investors Norwest Venture Partners (NVP) and Bertelsmann. As the company is still in its infancy, Pepperfry and its founders don’t discuss actual sales numbers yet. Instead, the company says its gross merchandise value (GMV) at the end of CY14 was ₹350 crore, a growth of about 300% over the previous year. The company is aiming to cross a GMV of ₹1,000 crore by the end of CY15. However, in absolute terms, Pepperfry, registered as Trendsutra Platform Services with the Ministry of Corporate Affairs, as is required of private firms, reported a total income of ₹7.5 crore at the end of FY14, compared with ₹6.9 crore in FY13. It incurred losses of ₹30 crore in FY14, as compared with a loss of ₹41 crore loss a year ago, as per data published by the registrar of companies (RoC). (see: Spicing up competition)
While it has been mostly smooth sailing for Pepperfry, for Mehul Agrawal, founder and MD, FabFurnish, it was a challenge getting vendors. “It was difficult to get vendors on board. We started out with just 10 vendors and we would cold-call prospective customers to introduce them to our brand. We are now working with over 500 vendors,” says Agrawal. The firm has 300 employees and more than 100,000 SKUs. It is in good shape when it comes to the top-line. The firm’s total income at the end of FY14 was ₹47.7 crore, as compared with ₹11.7 crore a year ago. Its losses, however, widened during the period under review. FabFurnish, registered as BlueRock eServices with the RoC, incurred losses of ₹37.5 crore in FY14, as against ₹21.8 crore in FY13. “We are still in investment mode, and our focus is on acquiring customers. This leads to heavy discounting and marketing, which explains the losses,” says Shah. Urban Ladder, which industry experts suggest is the current market leader despite its limited reach and SKUs, has not submitted profit and loss numbers to the RoC yet.
Besides value and variety, each player is looking to build volume through either discounts or robust delivery. “In the online space, margins are far higher at 35-40%, as we deal directly with the merchant and there are no intermediaries,” says Agrawal. Online marketplaces such as Pepperfry provide a platform to untapped merchants or vendors, who can directly list their products on these websites. In the absence of any intermediaries, both vendors and the online marketplace provider are able to make more margins, compared with the 25-35% margin earned by offline players. And these companies are building an offline presence as well.
FabFurnish, for instance, has opened four brick-and-mortar stores, two in Delhi NCR and two in Bengaluru. The company says this will help establish its brand and increase trust among buyers. Pepperfry opened its first studio in Mumbai in December 2014, while the second one was recently inaugurated in Bengaluru. I
t plans to open 20 stores by the end of CY15. “The real estate rates in the country are prohibitive to furniture retail. We have opened up studios to give customers a fair idea about the quality and finish of the furniture. These are not sales points but represent the latest from the range available on our marketplace,” says Shah.
While Ashish Goel, co-founder and chief executive at Bengaluru-based Urban Ladder, is not sure whether Ratan Tata — who recently invested an undisclosed amount of money in the company — has bought anything from his site yet, the company is taking it easy as it paces out its growth in the burgeoning online furniture space. Urban Ladder opened its online store in July 2012 with 35 SKUS, and now sells 4,000 products across 35 categories in furniture and home décor. With an average ticket price of ₹20,000 — highest among its contemporaries — Urban Ladder is present in only 12 cities as of now, including the metros, and aims to cover 30 cities by the end of the year.
“We started out in an environment where competitive intensity was quite high but we stuck to the basics, choosing gradual growth over rapid expansion. With a smaller reach and catalogue, we are able to deliver better revenue,” says Goel, adding, “We are in talks with investors and are looking at raising $110 million-120 million.” Urban Ladder does not have offline stores yet, though it firmly believes it will have to work on technology and other innovative solutions to overcome the touch-and-feel gap. The company recently introduced home trials in an effort to help buyers choose the right furniture. The company has also introduced Urban Storage, an app to help visualise and customise complex and expensive categories like wardrobes before making a purchase.
More than their offline counterparts, for now, all the online players have fixed their sights on Ikea’s India foray. While the global DIY furniture retailer’s first store may not be out till 2016, the company already boasts of 300 successful stores across 26 countries. With the first of its 25 stores in India — at an investment of ₹10,500 crore — all set to come up in Hyderabad, the Swedish retailer might find the online space a challenge instead.
With the current infrastructure and logistics scenario in India, e-commerce is definitely not easy and online furniture even less so. For instance, in comparison with electronics, where 90% of sales come from 20% of SKUs, furniture is a long-tail business where, according to the players, 100% of sales come from 80% of the SKUs. While scale in this business will lengthen the business horizon, these firms can prove to be attractive takeover targets for traditional players wanting a larger online presence or horizontal e-commerce players who entered the furniture space. For now, it is great going for online furniture players.