Mumbai: Ambareesh Murty and Ashish Shah, co-founders and respectively chief executive officer and chief operating officer of Pepperfry (Trendsutra Platform Services Pvt. Ltd), created an online market in India for furniture and home products, a category that requires high consumer engagement. The former eBay India employees are banking on the potential of e-commerce, along with their growing number of physical ‘experience centres’, to provide a comprehensive consumer experience. Edited excerpts from an interview:

How did your experiences at eBay India help you with Pepperfry?

Murty: eBay taught us about marketplaces. It helped us build the business to scale and ensure the right checks and balances to minimize the cost of our mistakes, especially in this category. Since nobody in India sold furniture online before, there were no business models out there we could replicate.

One of the largest challenges you faced in this business was logistics. How did you set up your own distribution network?

Shah: We chose a hub-and-spoke model (a network in which smaller centres are connected to large distribution hubs) to reach smaller cities more easily. Costs were initially at 20-25% of the cost of goods sold (COGS). They were brought down to 8-10% through optimization of the delivery timeline and cost. Daily route planning is also done on algorithms. As demand intensity increased, we used larger trucks and bypassed intermediate locations; this brought down costs.

The key is to keep managing capacity per day between two end points. As long as the capacity utilization per day keeps moving towards 100%, we will achieve economies of scale.

How has growth been so far?

Murty: Our three-year compound annual growth rate (CAGR) is at about 85%. We haven’t yet arrived at the hyper-growth stage for this category. It will happen when customers become more comfortable with buying non-standard and high-ticket products online. That’s typically how markets have moved in other countries such as China and the US.

What was your experience in standardizing the category?

Shah: Consumer searches for furniture are complicated, especially compared to buying a mobile phone, for instance, in which the customer will simply type the model name in the search bar. We had to emphasize a common language so people understand what exactly is on offer.

Murty: Customers need to notice the differences, so it becomes important for us to highlight those differences. For example, let’s take a bed. How are the legs? Does the customer want a headboard? If yes, is it going to be leather, fabric or wood? Do they want a flat base or a slatted one? Does the bed have to come with or without storage? If yes, front storage or side storage? Just the number of permutations and combinations that are possible are humongous in this category. So, we do everything possible for the customer to get to mera wala bed, by offering the option of filtering beds by storage, size, type and nature of the headboard, design, etc.

How much time does a customer spend on your website to get to that mera wala bed?

Murty: Eight page views on average per session on the website and 32 page views per session on the mobile app, because the app is more exploratory in nature. Customers roughly spend a minute per page on the website and slightly longer on the app. Each page typically has 50 to 80 items. The purchase cycle is typically 27 days long. Over this period, we roughly have a 45% conversion rate.

What is the contribution of the furniture category to your business?

Murty: About 80%, though the other categories (decor and utility) have a very important role to play in increasing trials for new customers and building repeat engagement. After trying these categories, which are at lower price points than furniture, most people move to the higher ones. Even in furniture, customers start with buying bedside and coffee tables; these are typically low-priced. From there, they move to sofas, beds, dining tables, etc.

Pepperfry’s offline experience centre in Mumbai.
Pepperfry’s offline experience centre in Mumbai.

What has been the change in average ticket price?

Murty: The average order value is now at Rs18,000, up 80% over the past three years. This is because most of our customers have upgraded from the trial phase to purchasing higher average order values, as 58% of our business every month comes from repeat buyers.

How important are your own (house) brands to the business?

Murty: Today, about 50% of our business comes from our house brands. We make about 10% more margin on our house brands, which is essentially the value we add in terms of standardized packaging, quality control and easier logistics. It made great business sense for us and our marketplace merchants. Every month, we have more than 3,000 active merchants that sell on Pepperfry. More than 10,000 merchants have sold on Pepperfry since inception.

Will Pepperfry ever sell from the experience centres?

Murty: The easiest thing would have been to sell the, say, 100 pieces of furniture that we had in our studios. But we built our business on two pegs—variety and value. If I were to sell only the 100 products that we have offline, I’m going against the first peg itself. Therefore, we encourage the customer to check out the website.

How financially viable have the studios been?

Shah: All our studios are breaking even at the operating cost level. Roughly 20-odd% of people who buy on Pepperfry.com have been to one of our studios over the last 30 days, and the footfall conversion rate is upwards of 40%. The initial investment is Rs50 lakh to Rs60 lakh of capital expenditure. The operating costs typically range from Rs2 lakh to Rs5 lakh a month, depending on the size of the store, etc. In the fourth month, we are operationally breaking even from the studio.

How do you plan to take on daunting competition like Ikea?

Murty: We know they are a large conglomerate with tremendous financial power and that they have a good product which they sell to a particular target segment, which is younger people.

I think Ikea and others, along with Pepperfry, will help to grow the market. In a market which is 91% unorganized, the growth is going to come from customers who interact with the organized players. As long as they are aligned with our goals, it’s fantastic. Anything which increases the degree of excitement in the furniture category will benefit everybody in the category, and definitely the largest players.

How will Pepperfry’s pricing change once Ikea starts operating in India?

Murty: Not much, because if I were to compare a Pepperfry product today with even a composite Ikea product, we would be more competitive, even though they are not in the wood segment. What we know very well is that India is our only market. The size of the opportunity is humongous and we will do everything possible to ensure that we build a fantastic business here. We also have a strong sense of the local market, which we have developed over the last five years after working with local entrepreneurs.

You are welcoming competition with open arms but experience the world over has shown that there can only be place for one player at the top.

Murty: I think this might apply only to a horizontal.

They can acquire also. Will you be open to acquisition?

Murty: No. Sometimes horizontals see growth driven by acquisition, but if we speak typically of verticals, multiple brands can lead the charge in their own verticals. We think we are the dominant winner in our marketplace and vertical. Pepperfry sees 60% of the traffic in the furniture space. Our nearest competitor would be in the low 20s, percentage-wise. There are about 12 other companies in the furniture space who, put together, would be about 10% of the traffic.

CEO Murty says that the firm is looking to get to a stage where it is able to deliver furniture to customers in only the time it takes for furniture to be transported.
CEO Murty says that the firm is looking to get to a stage where it is able to deliver furniture to customers in only the time it takes for furniture to be transported.

Are you 100% inventory-led at this point in time?

Murty: No, because we have a marketplace model; about 7% of products sold on Pepperfry see their inventory already stored at our location.

What is the cost of acquisition of the customer?

Murty: As a percentage of average order value, the acquisition cost is under 15%. In a 45% plus gross margins business, our overall direct costs are about 8-10%. The rest caters to general and administrative costs.

I ask because you’re not losing money at any part of the supply chain.

Shah: We’ve always focused on growing as well as making money and have never sold at less than the cost price. We understand that we are building a business and it needs to make money. If people are paying us 50% margins, then we have obviously built something good.

What would be the ideal furniture-selling experience for you in 2020?

Murty: As technology develops, it shouldn’t matter that we are online sellers when it comes to a purchase decision. The brand Pepperfry should become synonymous with any kind of home purchase for an Indian. Also, we are looking to get to a stage where we are able to deliver furniture to customers in only the time it takes for furniture to be transported.

Shah: That entails cutting down on delivery time by three-four days, by stocking enough inventory to reduce truck time. Then, when a product reaches a local warehouse, the time taken to complete the last-mile delivery should also fall. Thus, fulfilment would happen via large warehouses, distribution centres and also from the studios.

Murty: Three years from now, our house brands may be available even offline, through other retailers such as HomeTown and local furniture markets. The share in revenues will stay stable at 50%, because even the proposition of the marketplace sellers is quite strong.

Why did you decide on the name Pepperfry?

Murty: We wanted to build a business on the premise of ‘Indian, honest and fun’, so the name had to be fitting. Peppers are something quintessentially Indian because they are used to add spice. Pepper is also honest because everybody knows what it would taste like. But because its effect is known, it becomes a bit boring; so what makes pepper fun is the tadka one does while cooking it, that’s why we added fry to the name.

Another reason behind the name was the fact that we are both vegetarians and pepper is usually associated with every meat dish one can think of. And we thought that would be a good inside joke.

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