Pepperfry: Carving out a niche
Seven years ago, Jugal Kishore went to his handicrafts shop in Jodhpur thinking it would be just another day at work. Customers walked in as usual, some browsed around for a bit and left while others stopped to buy a souvenir to take home. But one 30-something man who walked in was different: He checked out the products in the shop and then approached Kishore with a business proposal which took the Rajasthani businessman by surprise.
The Mumbai-based entrepreneur suggested Kishore’s homegrown small enterprise, Appu Arts and Handicrafts, become an exclusive seller on his online platform. Kishore wasn’t exactly tripping with excitement: For one, he didn’t understand how online businesses worked; for another, he wondered about the long-term viability of the platform. Perhaps the biggest stumbling block was that Kishore didn’t even know how to access e-mails.
But the entrepreneur, who had zeroed in on Appu Arts after much research, wasn’t ready to ditch the idea. So, he sat down with Kishore, who specialises in hand-crafted carved wooden sheesham (Indian rosewood) furniture, and worked on him. By the end of it, Kishore was sold on the idea. Appu Arts was clocking revenues of Rs 4 lakh a month at the time, but more business never hurt anybody. The first order worth Rs 31,000 was placed and an alliance was formed.
Kishore didn’t regret taking the plunge. Today, Appu Arts clocks revenues of Rs 60 lakh a month. Its work force has increased from six craftsmen to 75 and its workshop has grown from around 500 sq. ft. in 2011 to 8,000 sq. ft. “Runk se raja banadiye hain Ashishbhai ne [we have been turned from paupers to kings by Ashish],” 61-year-old Kishore tells Fortune India over a call.
The ‘Ashishbhai’ Kishore is referring to is Ashish Shah, co-founder and chief operating officer of Pepperfry. Ashish Shah had quit his job as head of sales with eBay Motors India and was looking to step on the entrepreneurial road. He came across Appu Arts when he was scouting for furniture-makers for his yetto-be-launched online furniture platform, but even though he was new to the business, he had an uncanny ability to spot the right seller. And that’s what has helped him launch Pepperfry and make it the largest online furniture player in the country in just a few years. He and his business partner, Ambareesh Murty, launched Pepperfry in January 2012 at the height of the startup boom. They chose the quirky name because they wanted something distinctly Indian and also something with an element of fun. “There were fundamentally three things that we said we will do—we will build a truly Indian company; we will build an honest company, and we will have fun along the journey,” says Murty. “Today, we have reached there. We have market validation and we have created a strong brand.”
The numbers are telling. Pepperfry has 63% market share in the organised furniture space, makes more than 45% gross margins on average, and offers more than a million products from 10,000 sellers ranging from furniture and home furnishings to appliances. Such high margins are rare in the e-commerce world, barring the likes of fashion. Even phones, one of the most sold categories for e-tailers such as Flipkart and Amazon, offer gross margins of only 5-7%.
Of course, none of this would have been possible without funding. Niren Shah, managing director, Norwest Venture Partners India (NVP), was the first investor in the furniture platform when the company’s business plan was only on paper. Both Ashish Shah and Murty had left their jobs at eBay (India) and connected with Niren Shah to discuss their business plan. In their second meeting at Dublin, a pub in Mumbai’s ITC Grand Central hotel, they shared their business plans with Niren Shah on paper napkins. It worked like a charm and NVP made a commitment for $5 million in funding there and then.
Two things gave Niren Shah the assurance he needed for making an investment—solid entrepreneurs and a business model that would scale. Before joining NVP, Niren Shah was a senior director with eBay in the U.S. and knew both Ashish Shah and Murty. He calls them “A-plus, rock stars”. In a major vote of confidence, he invested another $8 million in the company again in 2013. In 2014, NVP and Bertelsmann India Investments invested $15 million in Pepperfry. Over the years, Pepperfry has raised Rs 1,300 crore ($189 million) from investors, including Goldman Sachs, Zodius Technology Fund, SSGA, besides Bertelsmann and NVP.
Funding was, obviously, crucial. But just as important was Ashish Shah and Murty's determination. The two trekkers, who’ve been on some of the toughest trails, knew all about fighting the odds. And that’s what they drew upon to make the online furniture retailer a success. After all, Pepperfry isn’t alone in the market. Industry estimates peg India’s furniture market at around $32 billion, of which 90% is offline and unorganised, and the rest consists of organised offline brands such as Godrej, Nilkamal, Durian, and @Home as well as online players such as Urban Ladder, Gozefo, Homefuly, and Helpmebuild. “There has to be more awareness about buying branded furniture. Today a majority of people don’t even think about it but it's changing fast,” says Ashish Shah. “The biggest issue that we have today is that there is not enough competition [in the ready-made furniture space]. We believe that if there is enough competition, the market will expand. If you look at the structure of the market, 90% of the market is unorganised.”
Pepperfry is unique as it doesn’t restrict itself to being an online player, but straddles both the online and offline businesses. It has 36 studios across 20 cities, of which 26 are company owned and 10 are franchise studios. Its main competitor, Urban Ladder, on the other hand, only tweaked its business model and shifted from online retail to an online-offline presence last year when it launched its first experience centre in Bengaluru. Urban Ladder has raised nearly $103 million so far.
“The number two is far behind; it [Pepperfry] is a dominant vertical player; it is not just online… It has all the entailments of a large business,” says Pankaj Makkar, managing director, Bertelsmann India Investments. “When we came, we saw there were not many big brands in the segment, which is not the case globally. So there was place to create such a brand in India. There was an omni-channel strategy and it can be a number one player [overall].”
How did Pepperfry manage to carve out a niche for itself in a crowded furniture market? One big factor that has helped is that it has a carefully crafted business strategy and has stuck with it. In 2014, when Pepperfry opened its first studio, many were sceptical about having an online and offline model. They said it killed the whole point of having an online business: getting away from the hassles of real estate rentals, managing inventory, and manpower to run such outlets.
But Pepperfry had its own rationale. “We cannot play God. I cannot choose to let a customer interact with my brand only online. It’s every business’ duty to ensure that it is present wherever the customer wants it to be present and my customer is online sometimes, she is offline sometimes and she is on mobile sometimes. I will engage with her on any platform she is present on,” says Murty, co-founder and chief executive, Pepperfry, sitting in his aesthetically designed Mumbai headquarters. Every nook and corner of the office is done up with Pepperfry products in subtle colours. There is also an illustration on a wall chalking out Pepperfry’s journey so far.
The offline-online channel has been an integral part of the company’s journey. It started expansion through franchisees about six months ago and gets three franchisee requests a day. It will have 17 more franchisees in the next four months, and wants this number to touch 70 by the end of March next year. “As we started rolling out our franchisee network, we realised there was a huge demand for Pepperfry products in tier II and III cities,” says Ashish Shah. It is not just about geographical expansion; Pepperfry also intends to get into more high-margin product categories such as flooring. “Flooring is a natural extension of our supply chain. It is also an extension of our home proposition and it’s an area where we think we have the same ability that we had in the furniture market of organising unorganised supply,” says Murty.
Within the home furnishing category, it has identified mattresses as a $1 billion category in itself. It entered the lucrative Rs 6,000 crore mattress industry with the launch of its private label Clouddio this year. It has nine private labels across furniture and modular kitchen categories, and will introduce more such brands in bed-sheets and lighting. It is also working on private labels in the carpets and rugs segment. “Our private label focus will define the future for us. Today, half the business comes from private labels. Going forward, too, the focus on private labels will continue. Our private labels, however, will always be 50-60% of the business, while the rest will be brands which are not owned by us,” says Murty.
In its bid to expand its business, Pepperfry has entered two new streams—renting out furniture and exchange of furniture, mostly targeting consumers in the 22-35 age group. Pepperfry has a furniture rental service in cities including Mumbai, Bengaluru, Delhi, and Gurugram.
But business plans are never foolproof as Pepperfry has learnt in its journey. In 2012, after it launched the online platform, it noticed that one of the latest trends in furniture globally was distressed furniture. It launched a line of distressed furniture the same year, but several buyers complained the wood was cracked and they did not like the products. It took a while for the market to mature and demand for distressed furniture to grow; today, Pepperfry has an entire range called ‘Bohemi ana’. “We realised that there are perhaps stages to design evolution for customers. For us to start introducing something that customers have not evolved to appreciate might not be a right thing for us to do,” says Murty.
Also, in 2012, it used to rely on third-party logistics providers to ship orders. While Pepperfry’s promise was to deliver furniture to the customer’s doorstep, several logistics providers would leave furniture outside and tell customers it was their responsibility to take it in. Such complaints came mostly from buyers in high-rises where logistics partners found elevators too small to carry heavy items such as sofas. To ensure that it offers a seamless delivery experience, Pepperfry started building its own supply chain in 2013. Today, it has India’s largest business-to-customer big box supply chain with 18 distribution centres and more than 300 vehicles of its own. “They [the founders] don’t throw away money or burn cash unnecessarily. They take calculated risks and if, for any reason, it doesn’t work, they pull back,” says Niren Shah.
The calculated risks have paid off. The company is growing at a CAGR of 83%. In FY17, it clocked revenues of Rs 127.5 crore, a 30% jump from the previous year. Its losses narrowed to Rs 128.8 crore from Rs 154.9 crore a year earlier. For 2017-18, it expects a 30% increase in sales and a 40-50% drop in losses. Pepperfry, which has a user base of five million, is already profitable at the pre-marketing level. The focus now is on turning profitable in the next 12-18 months. “Pepperfry is at a huge inflection point. A few years ago we saw people moving from what were essentially stitched clothes to ready-made apparel. We are seeing the same shift next in furniture—people will move from making furniture to buying readymade furniture,” says Niren Shah.
So, what’s next? A public offering is definitely not off the table. With audits from KPMG and internal audits from EY, the company says it is ready for a listing. But it doesn’t have a date yet. With the world’s biggest furniture retailer, Ikea, gearing up to launch in India, thinking out of the box is the only option.
(This article was originally published in the August 2018 issue)