Mumbai: In June 2011, Ambareesh Murty, Ashish Shah and Niren Shah—all former eBay India personnel—met over lunch at Niren Shah’s Nariman Point office in Mumbai. Murty was the country manager for eBay India and Ashish Shah headed the motors and social shopping divisions there; Niren Shah had quit in 2007 to join Norwest Venture Partners, an investment firm, as managing director.

As they lunched, Murty and Ashish Shah outlined their plans to launch a lifestyle e-commerce venture on a paper napkin to Niren Shah, who immediately liked the idea. That lunch meeting was the genesis of Trendsutra Platform Services Pvt. Ltd, which runs Pepperfry, the online furniture marketplace and home decor platform.

Pepperfry is today by far India’s largest online furniture retailer, with 50% of the market share. Its revenues of Rs98 crore for the financial year 2016 tripled over the year-ago period while net losses also grew to Rs154 crore from Rs88 crore, according to company filings with the Registrar of Companies (RoC). On average, the company has grown at a compounded annual growth rate (CAGR) of 85% for the past three years.

At first there were the inevitable cash-flow worries. The initial 15 or 20 employees were happy to wait a little for their first month’s salaries. “They knew us and wanted to be part of an entrepreneurial venture," said Ashish Shah, who appeared relaxed in a bright-green polo T-shirt and jeans on 25 September when Mint interviewed him and Murty.

“It was the beginning of the e-commerce J curve," said Murty, dressed in a black t-shirt with the Pepperfry logo and jeans. “We were fortunate enough to be there at the right time."

Murty is referring to India’s start-up boom, which coincided with Pepperfry’s entry into the market. In that heyday, funds were easy to come by for companies that ticked all the boxes. Between them, the founders met most of the criteria. Indian Institute of Management? Check. Multinational company experience? Check. E-commerce experience? Check. The company had first-mover advantage. Murty and Ashish Shah had the right experience and qualifications. The two were credited with turning around eBay’s dismal performance in India in its first years: in 2010, eBay’s operations were in the black for the first time, after five years in the country.

The start-up sector was starting to boom. In 2008, 595 start-ups launched in India, and every two years this number would double. The boom peaked in 2015, with 11,591 start-ups launching. The year 2015 saw 1,142 transactions worth $8025.5 million, according to data by Tracxn, a start-up tracker.

“Investing in Ambareesh and Ashish was a no-brainer; I agreed to fund them before there was even a business idea," says Niren Shah, who knew Murty only as a professional acquaintance, but had previously hired and worked with Ashish Shah at online marketplace Baazee.com, now a wholly-owned subsidiary of eBay India.

According to an October 2017 report by Morgan Stanley Asia Ltd, India’s e-commerce market will grow at a 30% compound annual growth rate for gross merchandise value, to be worth $200 billion by 2026.

Yet, over a cup of tea at their simple office in a Mumbai suburb, Murty and Shah insist theirs was not a fairytale beginning.

Early days

“There was a considerable time lag between the signing of the term sheet with Norwest in July and the transfer of the money in late September into our bank accounts," says Murty.

Those were anxious months, as their funds ran thin. Murty and Shah spent all their savings, about Rs2 crore, on website development, office infrastructure and building a team of 30 people, but they had nothing to show for it. The website hadn’t been launched and the money promised by the investors was yet to come in. They were so straitened that they almost pulled the plug on the venture in September 2011, when the partners were down to their last Rs10 lakh.

But the duo kept their nerve. Both are serious trekkers, who have conquered some of the world’s most daunting trails: Chadar, Wari La pass and Zanskar in Leh and Ladakh. This indomitable spirit proved useful: Murty and Ashish Shah spent the last of their funds on a company offsite in Goa. “We decided that if we were going to fail, we must fail gloriously," recounts Murty.

In Goa, the nascent Pepperfry team spent two days preparing a meticulous six-month plan on what to do once Pepperfry launched. The exercise could well have proved futile. As luck would have it, the Norwest money, all $5 million of it, arrived just as they returned from Goa.

In the same vein, Pepperfry made an audacious bid to sponsor the Rajasthan Royals franchise during the Indian Premier League in 2015. The company was running low on funds again, but it took a leap of faith and committed Rs30 lakh to the cricket team franchise. This was about 1.2% of its revenue in that year.

“We source a lot from Jodhpur and there was no way we were missing a chance to be on the Rajasthan Royals cap," says Murty. About three weeks later, the e-tailer raised $100 million from Norwest, Goldman Sachs Group, Inc., Zodius Capital and Bertelsmann India Investments in a series D funding round, its largest and most recent. The funding valued the company at $280 million.

There were operational issues as well. Since Pepperfry was the first e-tailer in India offering non-standardized products such as furniture and home decor, there was no existing business model it could follow.

In the first year, the company had to set up its own manufacturing units simply for packaging boxes, as there was no widely available solution to package and transport furniture. As the company gained scale, it shut down the manufacturing facility when third-party vendors arrived on the scene.

Building a market

The company still had the onerous task of creating a market by building awareness of the category—for example, consumers were not very sure of the difference between a coffee table and a side table. As an online retailer, it had to make doubly sure that consumers were ordering furniture that matched their specifications. This could mean asking the customer to take on tasks they weren’t accustomed to: measuring the doorway prior to ordering a sofa, being clear about sizing charts. This risked losing consumers who found the process complicated, or too different from the neighbourhood furniturewalla.

India’s furniture e-commerce industry has not yet reached inflection point. Murty says that will come when a lot of people have moved past using the internet for the latest fashions, and become more comfortable buying non-standardized products at higher price points. That market is still small in India.

According to an October 2017 report by Morgan Stanley Asia Ltd, India’s e-commerce market will grow at a 30% compound annual growth rate for gross merchandise value, to be worth $200 billion by 2026. While smartphones, electronics and apparel are the prominent categories today, the report expects grocery, personal and beauty products, furniture and food delivery to increase market share significantly in the coming years.

This growth will benefit Pepperfry, which has made inroads into the urban Indian market. “The company will do well in India because it is attempting to standardize and formalize the category, while making things convenient for the urban professional," says Rajat Wahi, partner, management consulting, Deloitte India.

Furniture displayed at a Pepperfry offline experience centre in Mumbai.
Furniture displayed at a Pepperfry offline experience centre in Mumbai.

Secret sauce

Unlike many peers in the start-up sector, which focused on topline growth and expansion on the back of investor money, Pepperfry has a well-earned reputation of frugality. There is a sharp focus on the bottomline.

Start-ups raise millions of dollars, and consequently spend the bounty lavishly, on state-of-the-art offices in upmarket locations and acquisition of consumers. Pepperfry is focused on growth, but has been careful to keep an eye on profitability. “We have never lost money on the product because, in the last five years, we have not sold at less than cost price," says Ashish Shah, who handles the operations and is in charge of execution, while Murty is the strategist.

According to Ashish Shah, the company makes 45% gross margin and is profitable at the pre-marketing level. “The only thing we lose money on today is marketing," says Murty. He asserts that the company makes enough money to cover its other expenses, including overheads, direct costs, payment gateway, logistics and shipment costs. Pepperfry is hopeful of turning profitable in the next 12-18 months, following which it will consider an initial public offering.

Keeping costs low is an essential part of the plan. “When we raised $100 million in 2015, the temptation would’ve been to move the office (from Kanjur Marg in central Mumbai) to Bandra Kurla Complex, if not south Bombay," he says. “But we wanted to make productive expenditures, so we just got ourselves a fantastic warehouse." Shah attributes their management style to their humble backgrounds; both Shah and Murty’s parents were government officials.

The company is now benefitting from economies of scale. In its first years of operation, the e-tailer invested heavily in the supply chain and logistics to control the consumer experience, but third-party vendors were not fulfilling the promise of doorstep delivery, and even abandoning ordered items in the lobbies of buildings if they did not fit in the elevator. Initially, the operating expenditure was 20-25% of the cost of goods sold (COGS). Today, Pepperfry operates at 8-10%, said Ashish Shah.

The company now offers more than one million home products, ranging from coffee tables and beds to bedsheets and lamps, and delivers to more than 500 cities in India. It has a fleet of 400 self-owned trucks, with 18 warehouses across the country. The company says that its Padgha warehouse, located north of Mumbai, is India’s largest.

Valuing the employee

The Pepperfry office has an open layout, an arrangement popular with start-ups, which is supposed to allow for greater collaboration and the pursuit of shared goals. Senior management executives have their cabins along the perimeter, with quotes in Latin on the glass doors. Murty’s translates to ‘Make my day, punk’ while Ashish Shah’s reads ‘I will find a way, or make one’. The co-founders’ shared personal philosophy seem to have inspired Pepperfry’s intense work culture.

“A few values are very dear to us; two of these are courage and intensity," says Shah. His biggest fear is that Pepperfry will become complacent, and fail to execute in the manner it has so far.

Employees are encouraged to speak their mind even when differing with the chief executive of the company. When Murty refers to the company’s intensity, he is describing the long work hours of most employees, and the frugal approach management has adopted. The company is proud of the fact that it manages to accomplish double the work with half the resources in half the time.

The online market for the furniture category remains nascent. Furniture comprised about 1-1.5% of online sales in 2016, according to a study by RedSeer Management Consulting.

“We are super proud of the fact that even at 9pm, 50% of the office is still full. E-mails are typically responded to within 10 minutes, even on weekends. Our culture is that intense," says Murty. He now wakes up at 5am to spend time with his six-year-old son—who has also changed his bedtime to 8pm so that he can rise early.

The duo believe deeply in inculcating their values and interests in their employees. In the last year, the company’s human resource training programme has started to include treks. Twenty employees, from every level of the company, have already participated in a trek near Mumbai. “Ashish and I are serious trekkers," says Murty. “It’s about imbibing our values to our people through activities such as trekking, rappelling, night walking, etc."

Yet, the founders claim their personalities are poles apart. When they took the Myers-Briggs Type Indicator (MBTI) test, a psychographic test that is highly valued in the business community but considered outmoded by personality psychologists, Murty and Shah differed on three of the four parameters used to determine a personality type. Despite this, they find common ground on most matters. For instance, hiring. “I always think (Ashish Shah) hires more than he needs to, but he ends up convincing me," says Murty. The company now has 1,480 people on its payroll, of which 1,000 work on the logistics side of the business.

Budding market

The online market for the furniture category remains nascent. Furniture comprised about 1-1.5% of online sales in 2016, according to a study by RedSeer Management Consulting.

Mobile phones accounted for about 48% of overall gross sales by e-commerce firms in India in 2016, and fashion products 20-22%.

China had similar numbers about seven years ago—online furniture was 1% of overall online sales. Now that number is 12%. Ashish Shah expects India to follow this trajectory.

But Pepperfry’s prospects could be disrupted by newer business models, for instance, furniture rental. Another looming concern is the entry of the world’s largest furniture retailer, Ikea. The Swedish retailer will begin operating in India early next year.

Since 2012, close to 350 online rental service providers have started up, offering products ranging from furniture to bikes, cars, books, clothes, toys, pets and even diamond jewellery, according to data from Tracxn. Of these, 30 have got at least one round of funding; they include furniture rental companies Furlenco and RentoMojo.

“The sharing economy has gained immense traction since 2016," says Sreedhar Prasad, partner, e-commerce and start-ups, at KPMG India. “However, rentals are complimentary because the customers that Pepperfry essentially caters to are different from the rentals market; it adds to the overall furniture industry instead of increasing competitive intensity." KPMG is a consultant to Pepperfry.

Analysts say Pepperfry is a good candidate for a buyout, yet the omni-channel furniture vertical will survive because of the high level of expertise required in terms of logistics, managing inventory, and assembly.

The company is particularly proud of its omni-channel capabilities, allowing the consumer to order anytime, anywhere, from any channel or device. This is possible through mobile and website presence, which allows consumers to switch easily between these media for any part of their purchase journey.

Growing competition

Since 2014, Pepperfry has opened offline experience centres, which allow consumers to physically interact with its products. The company owns 23 of these centres and plans to have 48 operational by April 2018.

Unlike it closest rival Urban Ladder, company will not sell from these centres since the website “would help showcase, say, 1,000 beds instead of just the 15 that a physical store could", according to Ashish Shah.

Another challenge is the competition from mega e-commerce players Amazon India and Flipkart, who have ramped up their home and furniture offerings since 2015. These heavily funded online retailers could potentially acquire verticals such as Pepperfry to increase market share and offer products in even more consumer categories.

Analysts say Pepperfry is a good candidate for a buyout. Yet the omni-channel furniture vertical will survive because of the high level of expertise required in terms of logistics, managing inventory, and assembly. “This may be difficult for horizontal players to emulate," says Wahi of Deloitte. Likewise, Ikea’s entry will further increase the share of the organized furniture market, which means incumbents will also gain. The organized portion of the overall furniture market in India is 15%, according to a KPMG report, while e-commerce accounts for less than 2% of organized furniture retail.

Pepperfry’s founders are unfazed by the changing competitive landscape. “The Ikea customer is a first-time householder between 23 and 27 years old," says Murty. “They don’t typically spend a lot on furniture. That’s the segment where rentals operate. The typical Pepperfry customer would be a ‘settled’ urban professional between 30 and 40 years."

Over time, though, the market will see consolidation. There are currently more than a dozen online furniture retailers, excluding the horizontal players. “I envision this category as a few-player market," says Ashish Goel, co-founder and chief executive, Urban Ladder Home Decor Solutions Pvt. Ltd, which runs Urban Ladder. “Over 10 years, maybe three or four companies will exist, but with a billion dollars in revenue." Urban Ladder is Pepperfry’s closest competitor, with revenues of Rs56 crore in financial year 2016 and an even wider loss than PepperFry’s at Rs175 crore for the year, show company filings with the RoC.

The company will also face difficulties when catering to semi-urban markets, after the demand in tier-1 cities tapers off. “Those markets are price-sensitive and do not value design as much," says Prasad of KPMG. “There will have to be a change in offerings. And finding labour suited to delivery and assembly will also be difficult in smaller cities."

Nonetheless, the company is bullish about its future and plans to go public in the next three years, according to Murty—once it achieves profitability. He expects sales to be more than $1 billion by then.

Investors are optimistic, especially the very first investor, who has no exit plans yet. “They are very strong entrepreneurs as they take calculated risks and face heavy competition head-on," says Niren Shah. He believes Pepperfry will be first among the scaled-up e-commerce companies to be Ebitda-positive. Ebitda is earnings before interest, tax, depreciation and amortization, an indicator of operating profitability.

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