Online furniture and home marketplace
Pepperfry has recently launched its fifth birthday sale campaign costing R5 crore to further build on its promise of hassle-free furniture buying. In conversation with BrandWagon’s Ankita Rai, Ashish Shah of Pepperfry talks about why technology, studio and marketing are the company’s key focus areas on its path to profitability.
Pepperfry’s funding of R210 crore in September last year came at a time when growth in the overall online retail market was sluggish. What is working in your favour?
From day one, we were always focussed on the path to profitability. One can’t say that they want to grow first and make money later. Growth and profitability should go hand in hand. So while profits happen in e-commerce after reaching a certain scale, our focus has been on operational excellence, reducing cost and increasing margins from the very start.
Even when the market was driven by cash on delivery (CoD), we decided against it. So we first addressed the concerns of why consumers prefer CoD. Our TG is in the age group of 30-45 and a majority of consumers use debit/credit cards. For people who pay only in cash, we launched cash pay — where we first collected cash and then processed orders. Another important issue was consumer trust. So we introduced part pay, in which 30% of the money could be paid in advance.
Also, being a marketplace, it was important to address key concerns of sellers. Sellers want three things — quick processing of orders, confirmed orders and getting money fast so that they can process multiple orders. Today on Pepperfry, sellers receive money within four days of doing the transaction. Contrarily, in a COD-based transaction, the cycle is at least 15 days. This really helps small sellers.
The return rate is less than 3%. It includes cancellations, transit damages, returns and refunds. Around 99.5% orders are prepaid, which also means we have had minimal demonetisation impact.
According to RoC data for FY16, Pepperfry posted nearly four times increase in revenues of R98 crore for the year ended March 31, 2016 against R25 crore in FY15 while losses nearly doubled to R154 crore in FY16 as against R80 crore in FY15. Is there a tradeoff between growth and profitability?
We started in 2012. In the past five years, we have built a R1,000 crore furniture and home business while offline businesses take around 20 years to reach this scale. Currently, we process 2,500 orders a day. E-commerce businesses will show you profitability over a period of time as revenues increase, costs get amortised and one gets the benefit of scales. For example, every month, the cost per order is going down. When we started, the cost to service a furniture order was R3,000. It is only R400 now. So, not only the shipping cost has gone down drastically by more than 70%, but damages and return rates have also improved.
We want to serve 20 million homes by 2020. We should be profitable by 2018. We cover 500 cities and 30% business comes from tier-II and tier-III cities.
E-commerce players last year saw subdued sentiments especially when it comes to discounts and are re-looking at their discount strategy. How do you look at discount-focussed sales?
Discounts should be looked at in two ways. First, are you discounting the product? Discounting and subsidising the products may not be right as you may lose money on the product. We have always made money on the product. Our margins are in the range of 40-50%. Second, discounts act as triggers especially in a non-standard category. We use discounts to create urgency and trigger the transactions. Discounting doesn’t hurt my suppliers.
Are you also planning to partner with big horizontal players like Flipkart and Amazon? Do you plan to remain a niche player? Does the entry of IKEA or new players, or the growth of key horizontal players, worry you?
Our customers look at us as specialists. We don’t plan to tie-up with horizontal players for marketing. At Pepperfry, we control the entire experience — from sourcing, display, delivery, customer services and studios to consultancy. Second, we are in control of the experience. Every piece of furniture is delivered by us.
We have around 383 branded vehicles, 17 distribution centres and three sourcing hubs — Mumbai, Gurgaon and Jodhpur. A lot of focus goes into training and grooming our delivery staff.
It is difficult for new players now to build such experiences in short period of time.
We are looking forward to big players like IKEA coming to the country. They will further grow the category. Only 10% of the market is branded. We have to focus on the rest 90%. Also, almost all big brands are available on Pepperfry. In fact, 50% of the business is marketplace and the rest is in-house brands. There are seven in-house brands as of now. Both have to exist and grow.
Do you plan to stay in a managed marketplace model or are you looking to convert to being a single brand retailer so that you can stock inventory?
We plan to stay in the managed marketplace and have no plans of going into single brand retail. From the get go, we are very clear on this proposition of great variety and great price. This is possible only on a marketplace. Take this: in electronics, 80% of the business comes from 20% of the SKU. In fashion, it is 60-40%. But in home, it is a long tail business. I don’t want to sell to a certain segment. I want a piece of furniture in every home in the country.
Pepperfry saw a significant increase in ad spends from R68 crore in FY15 to R155 crore in FY16. How much you plan to spend this fiscal?
We believe that we are the largest in the category and we need to further grow the market. Therefore, we need to keep on investing in marketing and advertising that breaks barriers. We started advertising in October 2014. In the last two years, our brand awareness has increased tremendously. Our NPS is upward of 60%.
Each TV campaign costs around R5-10 crore and you will see most of our campaigns timed between July to January which is when sales go up significantly. We have seen month-on-month growth of 100% during this time.
Our marketing and ad spends for FY17 and FY18, will be similar to FY16 — as we are already investing for growth at an aggressive number of almost R160 crore. We are hopeful of reaching the R3,500 crore GMV milestone over the next three years.