The Reliance-Urban Ladder deal is good news for Pepperfry — Or is it?

The dynamics of the online furniture retail market have changed dramatically. What’s in store for the players? 

"It doesn’t get old.” You can hear the smile in Kashyap’s voice as he speaks of his response when people tell him they are Pepperfry customers. It is a world away from when he joined the digital-first furniture and home décor company in 2013. “Then, I had to explain to people just what Pepperfry was,” he recalls. These days, he meets customers almost everywhere he goes. The chief marketing officer and business head of the Bengaluru-based start-up sees these changing customer reactions as stages in the evolution of the market. Phase 1 started in 2012-13, when the first specialised retailers, including Pepperfry and Urban Ladder, began their operations online, and phase 2 about five years later, when large, multi-product players jumped onto the bandwagon. Now, as the online furniture retail market enters its next stage, Vadapalli is looking forward to hearing customer affirmations even more frequently.

But, there’s a lot going on right now. Swedish home furnishings major Ikea is pushing deeper into India; Reliance Ventures scooped up Urban Ladder in a fire sale that surprised almost nobody; and, of course, there’s the elephant in the living room, COVID-19. The competitive landscape is altering before Pepperfry’s eyes. How is the Reliance-Urban Ladder deal especially going to impact Pepperfry and other online furniture retailers? Here’s the shocker. It seems counterintuitive to think that a megacorporation’s entry into a minuscule but growing market will help start-ups, but it will (Terms and conditions apply).

Read on to find out how and why. 

The story so far

For those who came in late, let’s quickly recap the online furniture market story in India. Started in 2012 by two IIM Bangalore graduates, Ashish Goel and Rajiv Srivatsa, Urban Ladder is arguably the country’s first specialised e-commerce venture in the space. Pepperfry had launched operations the previous year, but in a different avatar. Founders Ambareesh Murty and Ashish Shah quit their senior executive roles at eBay to launch an online lifestyle marketplace. In 2013, they pivot to focus solely on home décor and furniture. The third significant player at this time is FabFurnish, started by Vikram Chopra, who is on a break from his MBA at Wharton for this venture, Mehul Agrawal and Vaibhav Aggarwal. 

All three start-ups are the darlings of venture capitalists who, it appears, can’t fund them enough. By 2015, roughly three years since they all started, Urban Ladder has raised about $77 million in four rounds of funding (including $1 million in seed capital by Kalaari Capital) from SAIF Partners, Steadview Capital Management and Kalaari. Pepperfry has a kitty of $128 million, amassed over four rounds, from investors such as Norwest Venture Partners, Bertelsmann and Goldman Sachs. And German start-up incubator Rocket Internet has pumped in over $30 million in FabFurnish during the same period, with the option to buy the remaining 4% for Rs.750 million. “We [venture capitalists] often tend to fall in love with a set of entrepreneurs because they have exceptional backgrounds. And we overfund them compared to the size of the market, leaving aside the underlying dynamics of the industry,” says Parag Dhol, managing director of early-stage venture fund Inventus Capital India.  

But even for those flush with funds, it’s not an easy space to operate in. The Indian furniture market is almost completely unorganised, mostly comprising standalone stores and carpenters who usually work on the customer’s premises. Then, online furniture retail is a tiny fraction of the organised market and comes with its own set of challenges. The customer acquisition cost (CAC) is very high and, given the infrequency of purchase and little likelihood of the customer returning to the site, the retailer needs to recover this CAC in the first purchase itself. Logistics is expensive and cumbersome since it involves providing and coordinating delivery as well as assembly, as is holding inventory. “E-commerce retail is a very fragmented market. Vertical domain sectors such as jewellery and furniture are especially tough categories,” confirms K Ganesh, serial entrepreneur and angel investor. 

The first to fall by the wayside, then, is FabFurnish. Co-founder Aggarwal leaves in 2014, and a year later, incubator Rocket Internet changes the top management, bringing in two new co-founders. In April 2016, Kishore Biyani’s Future Group acquires FabFurnish for a measly $2.25 million in an all-cash deal. Some months later, the brand is absorbed into Future Group’s HomeTown and FabFurnish ceases to exist. For Pepperfry and Urban Ladder, though, it is business as usual for the next couple of years. They continue expanding offline as well as growing their online presence. No, they don’t make money, but their willing investors continue to back them unconditionally. 

Meanwhile, regardless of the challenges, the opportunity in online furniture retail seems too big to ignore. Brand consultant Harish Bijoor puts it succinctly, “Earlier, furniture sales were restricted by geography. E-commerce has made geography history.” So, horizontal players such as Amazon and Flipkart steadily build up their presence in the sector as well. And then, in 2018, Ikea makes its long-awaited entry with the launch of its first store, in Hyderabad.

For their part, Pepperfry and Urban Ladder continue to focus on expansion, nearing but not quite reaching, profitability (See: Work in progress). In 2019, Urban Ladder declares a profit for the first time (although detractors say that has more to do with accounting tweaks than with leaner operations) but it’s too little, too late. Some of the start-up’s investors have already turned off the tap and it’s an open secret that the company is on the blocks. 

Up to speed? Good. Let’s move on to 2020, a watershed year by any measure. First, the pandemic and nationwide lockdown upends everybody’s calculations and predictions for growth and sales, for a while at least. Things start limping back after August, and many retailers now report spikes in sales thanks to the increased demand for furniture suited for work and study from home — especially study tables, office chairs and bean bags. The festive season continues to bring cheer to furniture stores, physical and digital. And then, in November, Reliance Ventures confirms it is buying 96% of Urban Ladder for Rs.1.82 billion in an all-cash deal, with the option to buy the remaining 4% and plans to invest Rs.750 million, by December 2023. In early December, Ikea announces the opening of its second store, spread across 500,000 sq ft in Navi Mumbai, later that month. For the online furniture market, life will never be the same. What happens now?


Opportunities galore

“Will this [Reliance-Urban Ladder] deal change the face of the industry? I don’t think so, since Reliance hasn’t announced any plans in this space,” says Kavitha Rao, country commercial manager, Ikea India. “What we see is that the furniture and home furnishings industry in India is poised for growth and everybody has space in this expanding market,” she says. Rao estimates that spend on home furnishings in India in 2020 was about €9 billion-10 billion, which will grow to €39 billion-40 billion over the next decade. 

Independent research reports are even more optimistic about the growing opportunity in the Indian furniture market. A report by Statista, adjusted for the expected impact of COVID-19, estimates the market size at $20.5 billion in 2020, up from $19.4 billion the previous year and projected to reach $26 billion by 2025. Online sales though, predicts the report, will continue to remain at a paltry 1% of the total. Another report, by Bengaluru-based consultancy RedSeer, estimates the market at $20 billion in CY20, of which 15% is organised. The online market for furniture is about $700 million (3.5% of the total), growing at 80-85% annually, “dominated by Metro and Tier-I, and driven by the ease of comparing products and low prices offered”, says the report. 

The RedSeer numbers are similar to Vadapalli’s estimate of the market opportunity. “There is large headroom for organised growth. And within that, online is a key player,” he adds. He declines to comment on either the likely fallout of the Reliance deal or on any competitor but agrees that the entry of more organised players can only be good for the market. There are four distinct types of players in the online furniture market currently, Vadapalli says — specialised players who have gained scale in the segment; small, niche retailers who have an online presence in addition to their retail outlets; horizontal, multi-category e-commerce platforms that have added furniture as one of their offerings; and, potentially, large multinationals who are experimenting with both online and offline models. Vadapalli is careful to not mention names, but you can easily make out which company falls in which category. “Each of these players has a different offering. The market is big enough to appeal to different segments, so we can all grow meaningful businesses based on our target groups and markets,” he adds.

Marketing push aside, a big-name, established player’s entry in the online furniture market can also help bring some order in different aspects of the industry, especially the backend. Ikea’s Rao points to several challenges on the supply side of the Indian furniture market, from sourcing of raw material, manufacturing-linked roadblocks to limitations in large warehousing capabilities as well as transportation. “Because of where the market is today, the more players, the merrier. Each one of us will work on tackling what we consider impediments to growth and, collectively, will end up expanding the market,” she says. Adds Ganesh, “Reliance can help organise the unorganised suppliers’ side, the carpenters and manufacturers, which is completely fragmented at present. They have the size and the scale to be able to do it, right from commissioning orders and managing handling materials to commissions and advances.”


Click and mortar

Reliance’s influence will be felt across the industry, not just the supply side. For one, its stake in Future Retail gives it access to HomeTown, the Future Group’s furniture and furnishings brand, and there will be natural synergies between Urban Ladder and HomeTown. And given Reliance’s familiarity with offline retail and its brand recall across the country, Ganesh expects the coming years to see the Urban Ladder brand being pushed in Tier-II and Tier-III towns through “lots more hybrid stores”. “The omnichannel route will grow. Pepperfry and others are already bracing themselves for that,” he adds. 

Indeed, the omnichannel approach has been the preferred route to growth for all major players in the furniture market, from the late, lamented FabFurnish to Ikea. For online players, the expansion to brick-and-mortar makes sense on multiple grounds. It gives the brand legitimacy, increases awareness and gives retailers the chance to engage meaningfully with customers, going beyond a mere transactional engagement. In furniture and home furnishings especially, touch-and-feel is critical, so an experiential space can prove invaluable in closing deals and even upselling, through thoughtfully styled displays and well-trained store staff. 

Ironically, given that it may now tilt more towards physical retail than online, Urban Ladder was the last to open offline stores. Within a year of its launch, FabFurnish had already opened four stores; Pepperfry opened its first studio in 2014, while Urban Ladder followed only two years later. Currently, Pepperfry has 60 studios across 20 cities, of which 20 are franchise-run. In the next four to six months, the company plans to expand that network by adding another 25, of which 20 will be franchise operated. “One of the fundamental challenges of online is the lack of touch and feel. We set up these centres to overcome that and provide consultation and guidance for customers seeking to make bigger, multiple-item purchases,” Vadapalli explains. About 35% of sales is driven through these experience centres, where customers can see the furniture and then place orders online.

Ikea India, too, has adopted an omnichannel strategy. The company went digital-first in Mumbai and Pune in 2019, launching online operations in these cities ahead of opening physical stores — the Mumbai store opened in December 2020, while Pune is still some time away. It also plans to open smaller, city centre stores in Mumbai in 2021. “We believe the omnichannel approach is the way — store or e-commerce is just a channel to meet the consumer. We need to have solutions so that consumers can seamlessly transition between channels, physical or digital,” explains Rao.


The Pepperfry advantage

Ikea’s India run is going to be a marathon. The signs seem clear enough: the Swedish giant will grow slowly here, pacing itself and not bother too much about what other players in the market are up to. For others in the online furniture retail space, though, the contest is a much shorter race. Not a sprint, certainly, but more like a 5-10k. They cannot be as measured in their approach, nor can they afford to ignore their competitors. 

Which brings us back to Reliance and its impact. What advantages does Pepperfry have that will protect it from the might of the Ambani juggernaut, whenever it rolls out? For starters, there’s Pepperfry’s marketplace model, which offers a layer of protection because of the variety it can offer customers. Pepperfry’s portfolio has about 700 suppliers, of which 20% are national and regional brands, including Godrej, Nilkamal, Durian and HomeTown. The rest are small and medium manufacturers, many of whom Pepperfry clubs together under “home brands”, based on the material used and the design ethos. “We make intellectual and data investments in these brands, giving manufacturers feedback and insights on customer demand. We also spend more time on quality control with them compared with bigger brands.” Revenue split between national brands and home brands is roughly the same. But, eliminating at least two levels of middlemen between the manufacturer and the retailer, especially for home brands, has helped Pepperfry compete on cost and get better margins, says Vadapalli. “This has enabled us to scale and grow in a healthy fashion,” he adds. 

Typically, online furniture customers interact with the retailer only about 1.5x in the 12 months after a purchase — in other categories, that number could vary 4-10x a year. For Pepperfry, the marketplace model helps in building frequency through non-furniture offerings. In any given month, 52-54% of customers are repeat purchasers. 

Vadapalli points to all the hurdles in selling furniture online. It’s a big-ticket purchase, highly researched, high involvement, need-based and space constrained. The replacement cycle is a long one and customers aren’t visiting your website as frequently as they do with other categories. “So, when you win the customer for the first time to buy, say, a sofa, you need to be positive on the first sale itself. She comes back and buys a lamp or coffee table, that’s great; you make some more money. But, it’s a key success factor that you have a CAC-to-AOV (average order value) that is much lower than the margin,” he explains. Currently, Pepperfry has an AOV of Rs.22,000 in furniture and Rs.4,300 in décor and mattresses, and gross and net margin of 55% and over 25%, respectively. For the past four years or more, the company has been recovering its CAC on the first purchase itself, Vadapalli adds. It helps that, as co-founder Ashish Shah said in a 2017 media interview, Pepperfry has “never lost money on the product because, in the past five years, we have not sold at less than cost price”.

There’s another arrow in Pepperfry’s quiver — its captive logistics. The company started off with third-party logistics but found it difficult to control costs and service deliverables (timely delivery, assembly, breakages, etc). Shipping a three-door wardrobe from the Jodhpur hub to Bengaluru, for instance, would cost more than the wardrobe itself. In 2013, it started managing the supply chain for itself, from pickup to delivery and assembly. Now, Pepperfry has a network of three hub warehouses, 21 distribution centres and over 400 trucks that cater to 500 cities across India. The advantage: to be able to control quality, delivery and assembly while keeping costs in check. 

It’s not a new idea, of course. FabFurnish had a hybrid model, FabOne, where it relied on third-party operators to reach beyond metros. Urban Ladder, too, has its own logistics arm with 22 delivery centres across the country; in September, it closed down three warehouses in Bengaluru as part of a cost-cutting exercise. Setting up a logistics network for furniture retail requires specialised vehicles, large warehouses, specially trained staff and technology; it’s a big investment but the benefits far outweigh the costs. “One of the biggest challenges of this category is logistics. Pepperfry has been able to handle it well and this will continue to be a moat for some time,” agrees Ganesh. 


The flip side

So, looks like all is right with the online furniture world. There is no risk of cannibalisation because the market is still nascent and there is room for all players to grow, albeit at different speeds. The entry of Reliance will hopefully help bring together the supply side of the market; the pandemic has inadvertently proved a shot in the arm for the online market; and everybody is diligently rolling out their omnichannel strategy, which, all agree, is the way to grow in the future. 

Happily ever after, then?  Not quite. Inventus Capital’s Dhol sounds the first note of warning. “Distress acquisition of a well-known company is never good for the rest of the players in the sector. It pulls down sentiment. External and existing investors will start questioning losses and the economics,” he says. 

That is particularly relevant for a player such as Pepperfry, which is not yet done with fund raising. “We are very close to break-even and well capitalised to reach our IPO target in early to mid-2022, based on our current performance trajectory and future plans. That said, if we find the right venture capital/private equity partners who share our vision, we will be open to raising additional funds,” says Vadapalli.

Questions are also being raised on Pepperfry’s marketplace business model. “This is a hard market. Targeting it the full stack way is the only way to go. The marketplace model is even tougher — you can never be sure of the quality,” says Dhol. Pepperfry certainly has no intention of starting its own manufacturing facilities or indeed swapping out the marketplace model for anything else. “Different teams handle these businesses and they have different goals. We have no reason to tilt one way or the other,” says Vadapalli. 

Brand consultant Bijoor proffers a reason. The current turn of events is an opportunity for Pepperfry to reinvent itself, he says. Rather than focus on the mass market, it should go the other way — create a high-value niche for itself. “Stick to the tenor, tone and decibel of being different. Become exclusive. The key task for the company right now is brand reinvigoration,” he says. And it won’t be a clever move to try and match the might of Ikea and Reliance, either. “Focus efforts on digital play,” Bijoor recommends. “Pepperfry is in a bit of spot because of recent developments. But there’s no reason it can’t be a sweet spot.”