Pepperfry to ramp up franchise-led expansion, says CEO Ashish Shah

How has demand for furniture as a category been this festive season?

Since last October-November overall discretionary spending has been impacted significantly. This wasn’t a good time for our category. I would attribute this to the fact that we saw a lot of layoffs across startups as well as no increments. Usually, our customers are those working in the startup and tech sectors and are very familiar with e-commerce. Mostly, our businesses driven people who move from smaller locations to large cities for jobs. Since the overall job market was not good, the last eight to nine months were quite subdued. Having said that, we have started seeing some good action starting 10 October; business has been good. The sentiment changed because I think people have been holding on to their purchases. This gives us some hope that things will perhaps look up from here. Customers are coming into stores, they’re coming online to buy our products.

With customer sentiment down, what are you doing to drive sales?

During this time of low discretionary spending, we spent a lot of time optimizing costs. So we went into each and every line item on the P&L and took significant actions. From the cost standpoint, I would say that our business is fairly sorted now. As a buildup to the festive season, we significantly enhanced our catalogue—over the last four months we have launched 20 new collections across our private labels. We have also on-boarded close to 150-170 new brands in the home and furniture space. The second area is our supply chain or the logistics around our business. It’s very complicated since we distribute in around 300 cities across the country—so we have been enhancing that, ensuring we are well positioned from a distribution standpoint etc. The third is the entire bit around customer segmentation using technology to understand what kind of customer should get what offers etc. Additionally, in the last one and a half years we have also launched 140 new shops.

But stores are capital-expenditure heavy, how are you managing that while also reining in costs?

Our store strategy has been very clear. In the top metros i.e. in Mumbai Delhi, Bangalore, Hyderabad Chennai, Kolkata, we have our own stores mostly. Metros require good investments, and you need to be at the right locations. Therefore, we use our stores not only as touch-points for customers, but also as brand locations. Typically, our company-operated stores break even operationally between 9 to 15 months depending on the locations. Our conversion rates in stores are very high, at over 70%. The small city strategy is all through franchising. These are typically small stores between 7,00 to 1,000 square feet, and are typically run by entrepreneurs. We believe that this business is very local, and therefore, a local entrepreneur would know their customers better. Today, we have 183 stores, out of which 45 are company-owned and operated and the balance 140 stores are franchisee owned.

Will you continue to add more company-owned stores?

We would not put in new cap-ex from our end. We had actually taken a short break from opening more stores because we want our existing stores to stabilize. But starting last month we are again ramping up our franchise operations. Over the next nine months, I’m looking to open at least 50 stores. These will be all be franchisee operated stores in non-metros.

What is more profitable as a channel right now for Pepperfry, online or offline?

From a margin standpoint, both channels are generating the same, just the mix of the product that is being sold offline tends to be more profitable. Our offline average order value (AOV) is two times the online average order value.

What is the split between online and offline sales?

It is around 50:50.

Do you plan to maintain this?

The fact that my offline AOVs are very high compared to online, and with the expansion of our store network, I see this ratio moving more towards offline in the near future.

Have you invested or thought about investing in any new-age, direct-to-consumer furniture brands?

Not yet. We think that furniture and home, both are fairly long-tail categories. They are best built through a marketplace model. We continue to believe that the marketplace is the way to win this space.

How do the next 12 months look like for the business in terms of further rationalizing costs etc?

With the last round that we raised, we are quite sorted. With all the initiatives that we have undertaken, we are also very close to profitability; it is eminent, it will happen really soon. My first focus will continue to be to ensure that we turn profitable really soon. After that, we need to start making more money and then look at IPO etc. The second thing we’re really focusing on right now is the entire bit around converting more customers on our website via assisted buying. We’re also going to use a lot of technology, a lot of call center lead management flows, and our stores to ensure that we become good at assisted buying. The third area of focus would be technology. We have been spending money in this area for some time now—it is an area that will continue to invest in.

Is there any timeline for Pepperfry’s public listing?

We were working with investment banks in November of 2021 but that is when the tide changed. However, you know that the markets have changed, if a company is profitable and makes money you can enjoy much better valuations. Therefore, our first milestone is to turn profitable.

Is the process underway?

So, the process has not started yet. It had started, we had appointed lawyers as well as bankers. Right now the process is on hold. We need to first achieve some milestones, see the business growing at a steady state etc. From our exit point of view—we would want to do an IPO. We believe it is the path for our company. We believe that in the space that we are in, we are a multi-year compounder.