Pepperfry.

com – Turning the tables of Disruption

What were the challenges in creating a new online vertical in furniture?

Shipping cost, Quality, Return Policy Issues, Reverse supply chain logistics challenge and Last mile delivery problem. The
biggest challenge is poor infrastructure and supply chain. E-commerce as an industry can grow exponentially provided the
infrastructure and the ability to scale up and deliver products to every corner of the country develops at the same rate. For
a specialized vertical like furniture large item distribution poses as a huge challenge. There is no prototype in the online
industry for a vertical like furniture that can be imitated. It was a huge challenge that they overcame by pioneering their
own “Large Item Distribution model” which hasn’t been attempted by any other company in the past. By making significant
investments in that area they have built a hub and spoke model that covers a majority of their orders. This comes from
their business orientation that “when you take risks, you will make mistakes. But you should be the best at fixing them.”
Apart from the above mentioned challenges, they also face challenges pertaining to profitability, innovation and
competition.

Pepperfry was the first retailer to sell a large catalogue of furniture online. Given that the then market of buying and selling
furniture online was miniscule, the company had to face a plethora of challenges.

 Changing the habit of the consumer was a big problem. Most of them used to buy furniture from trusted, nearby physical
retailers. To get them to abandon their trusted furniture maker was a tough job to accomplish.  Besides usual concerns
regarding e-commerce, Pepperfry had to face their scepticism about quality, delivery and assembly  During their launch of
the platform, only 90-100 million people shopped online. Among them Pepperfry only targeted 25-30 million young
millennials, which was a narrow segment (5%) compared to the total user base of India in 2018.  Most of the suppliers
were small artisans and specialized furniture makers. To them, the concept of selling their products online was alien and
they showed no interest initially. The company had to convince them and give them incentives to sell on their platform. 
Another huge challenge was poor infrastructure and supply chain limiting the access to a large chunk of customers.
Shipping furniture long distance was expensive, the returns were more expensive and increasing speed of delivery was a
major hurdle

How did Pepperfry create a platform to connect supply and demand?

When the founders of Pepperfry were starting their venture, Indian retail furniture industry was 90% unorganized,
fragmented and largely non-branded. Of the rest 10% organized, only 1% had online platform. Consequently, there was no
business model they could replicate. They decided to create a marketplace for the unorganized suppliers, typically SMEs
and provided them with internet education to take their business online.
Building Product Portfolio:
They started with selling home, lifestyle, jewellery and fashion categories along with furniture. But later they dropped all
the products except furniture and home décor, to stick to their core offering. Furniture accounted for 80% of the revenue
and home décor and utilities accounted for only 20%. But the later were significant as they allowed the customers to test
the online concept and the products. Customers purchasing this category were 50% more likely to buy furniture from the
platform in next 12 months.
Curating the Platform:
Founders understood that they could offer greater value to customers around the concept of ‘variety’. They built a ‘curated’
marketplace by carefully selecting 80000 products from specialist merchants. In first level, customer behaviour drove
curation and Pepperfry used to discard products that failed to perform on their platform. In second level, interested
suppliers reached out to Pepperfry and a dedicated product team decided whether to list the products based on pre-set
factors.
Every month, more than 1000 active merchants sold on Pepperfry .
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Making Money:
Pepperfry used to charge commissions based on the order value instead of charging for listing fees. Usually a certain
percentage, 45-55% for furniture, was charged which included warehousing, fulfilment and assembly costs. Suppliers who
shipped directly to customers were charged lesser, around 15-20%.
Although home décor and furniture brought similar margins, utilities, being standard products, had much lower margins.
Nevertheless, it was made sure that all the transactions on the platform were profitable. Given the longtailed nature of the
business, they relied on conversion rate as their key metric.

In a market where customers were not comfortable with buying online, how did Pepperfry
drive the conversion?
Until the early 2010s buying furniture online was unthinkable. Yet, within 6 years Pepperfry although still a loss-making
company, successfully established itself as the largest furniture e-tailer in India.

Nature of furniture industry prior Pepperfry:

- Highly fragmented, 90% unorganized retail with non-standardized and non-branded

goods/services

- Industry dominated by local vendor and small carpentry shops.

- Space constraints due to which most of the purchases had to be done based on catalogs
- ‘Long Tail’ nature of business

Consumer behaviour insights:

- Furniture retailers within 10km radius would be the options

- Choice regarding retailers/ carpenters are made based on trust

Consumer pain points:

- Customers waited for a month for getting their furniture very often and yet, they didn’t want to abandon
their ‘trusted carpenter’.

Bottlenecks for online furniture industry in India:

Quality, delivery assembly and the general skepticism that was prevalent regarding e-commerce.

Pepperfry emerged as a disruptor addressing the gaps with both the stakeholders involved i.e. the supplier
and the consumer:

For suppliers and consumers:

Facilitated standardization by putting systems and processes in place.

For consumer:

- In an industry where demand was highly driven on trust and word of mouth, Pepperfry took a customer-centric
approach- Focusing more on items that were most popular among the customers have helped driving sales. Focus on
products that sell more also give a reflection of consumer behavior.
- They brought Transparency of information regarding product, quality and pricing.
- Offered variety at pocket friendly prices, due to the long-tail nature of the business.
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- Superior packaging through their in-house box manufacturing unit.
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For suppliers:

- They created a marketplace for SMEs and bridged the internet literacy gap by providing end- to-end
support to them.

To drive conversion, they followed 2 tactics mainly:

Leveraged consumer purchase behaviour insight:

Start by trying smaller lower-priced items like bedside/ coffee tables then moved to big items like sofas, dining
tables etc.

Pepperfry leveraged this insight to drive conversion:

- They paid keen focus on their Home décor and utility category.

- 1/3 cost allocation into building this category.

- This allowed the new customers to test the online concept and built repeat engagement.
- For larger items consumers usually took 40 days to make the purchase decision after checking the item.
During this period, it was essential for Pepperfry to stay relevant. So, whoever made purchase through
this category were 50% more likely to buy furniture in next 12 months.

1. Key metrics for conversion: Variety

- This was taken care by creating a curated marketplace.

Contrast to-

• Horizontal websites

• Marketplace operations that only matched supply and demand

Pepperfry reiterated listings KPIs:

Page views, conversions, transaction, quantity sold. They made unbiased distribution between small and large merchants.

2nd level of sorting was done by category team by answering key questions like:

1. Did the product category belong to the platform?

2. Did it plug gaps in the market?

3. Was the price right?

Apart from these,

 They have driven their customer conversion by the help. Strategic use of different communication channels such as
television, of digital marketing.
 Strategizing the product portfolio have helped them a lot. Initially customers were hesitant of buying high
engagement product or products having high cost so pepperfry focused on décor and home utilities which then
started to make name common in the market and made the brand name reliable. Ones consumers made some
purchase in low price items, there was 50% chance they would make furniture purchase within 12 months.
 As of revenue is concerned: Opening offline stores was one major decision which actually helped them drive their
sales
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 more impact on buyer’s mind and increases chances of conversion. It also helps them to customise according to
their requirement or order online thereafter.

Discuss the strategic bets made by Pepperfry in the following areas: a. Omnichannel b. House
brands c. Furniture rental
a) Omni channel

➢ The total size of the order was 80-100% higher than online orders.

➢ Pepperfry spent 0.8bn to 1bn annually in marketing in 50-50 spilt b/w digital and offline television
➢ Pepperfry, to expand its reach via the offline channel, opened 34 studios, with a franchisee model as well
which has 7 stores.
➢ Around 20% of the overall market was made available in the studios in 2018. As a result, Pepperfry expected
to raise the number of franchises to 70 by 2019, which would double. The aim was to raise sales in studios by
about 35-40 percent.
➢ Pepperfry was deciding to get his foot on non-metro tracks to tap into the next client surge.

b) House brands

➢ In the furniture, modular and mattress market, Pepperfry introduced 10 specialist housing brands.

➢ The overall home brand margin of roughly 50% of total GMV was 10% higher than consumer brands.

c) Furniture rental

➢ Rental furniture services in cities with immigrants were becoming common as the economic sharing expanded.

➢ In 2018 Pepperfry soft launched its furniture rental business. It collected data on demanded items, time
frame and payment methods. Based on the data it started developing special lines for rentals.
➢ Pepperfry attempted to hit the 22-29-year-old by rental. Although this segment was not their key customers,
they wanted to begin talking early with this segment through this rental service, that would eventually transfer
to the core segment in the future.

How can Pepperfry respond to competitive threats from international entrants like IKEA and
domestic platforms like Flip kart? Or will the disruptor be disrupted?
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Suggestions of Pepperfry’s countermoves to have a competitive advantage are as follows:

Increase market share Benefits:

- Economy of scale for other investment and fixed cost

- Better warehouse utilization
- Lower cost per unit

How:
- Increase offline stores around India Reasons:
- Footfall conversion rate >65%
- Average order value 80-100% higher than online only
- Comprises 20% of total revenue
- Direct competition to IKEA
- Introduce Augmented reality Goggles in studios

Marketing through social media

Reasons:
- Target Group- Techsavvy young audience
- This grabs the TG’s attention span from where they spend most of their time.
- Ensures top of the mind recall for Pepperfry over the e-commerce giants like Flipkart and -- - Amazon.
- Introduce Virtual Reality on the website

Increase Rental furniture

Reasons:
- IKEA/Amazon not involved
- Increasing market with estimated $3 billion
- Blue ocean
- Appropriate target group: Growing middle class, Young, Move often
- Niche market

Home solution Provider

- Become a holistic solution provider to meet customer’s home related needs

Reason:
- Create a unique value proposition to improve the competitive edge

How:
- Hire a moving team to launch a house-moving service while leveraging existing logistics
- Marketing campaign for moving house, targeting eg: students, young professionals and families
- Identify partners to offer large household products, eg TVs, washing machines on the platform

Very few start-ups grow to become market leaders in less than a decade. Yet, Pepperfry had done so. It is only due to their
core competencies that delivered delightful customer experience. This disruptor that ventured on to become a furniture e-
retailer when buying furniture online was unthinkable, growing to become the largest in the country in less than 6 years,
will not be disrupted in the face of competition and changing trends.
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What strategic drivers do you recommend for Pepperfry to achieve profitability ?
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Suggested Strategic drivers:

1. New revenue streams

Expand into office furniture market and logistics market (B2B)

Reason:
- Leverage the competitive advantage in logistics
- Startups as main target group in the B2B
- Fast changing demands
- Passion for innovation
- Value variety
- Online affine
- Trend conscious

How:

Start by conducting a market research to determine the demand for office furniture.
Focus on online packages for small start-ups and SMEs.

Expand Privilege Program:

- Include interior designers specialized in office spaces

- Ensure target group specific needs will be met

Build up office furniture home brand:

- Choose suppliers with manufacturing mindset

- Provide them with customer insights
- Innovate continuously

Add additional leasing option:

- Gives companies needed flexibility

- Accounts for specific needs

Promote new offering:

- Send sales representatives to startup hotspots

- Open experience centers solely dedicated to B2B customers

Online and offline promotion activities:

- Digital Marketing Campaign focused on Linkedin.

- Offline marketing on taxis, e.g. OLA and Uber and provide experiential airport business sections. Also, leverage
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Pepcart’s strong capabilities by expanding transportation services
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How:
- Focus on large items that require delicate handling.

- Provide differentiated service levels for delivery times upto 48hrs.

- Have a phased approach: 1) Metro cities 2) Second-tier cities

Benefits:
- Leverage full potential
- Higher utilization of trucks which leads to cost savings
- Additional Revenues
- Cross-selling opportunities between logistics and office furniture clients

Warehouse management

Reason: Increased revenue from warehouse usage fee

- How:
• Promote suppliers to stock more inventory in “Pepperfry” warehouse.

• Suppliers pay certain amount for the warehouse usage.

• Advertise their products in return as an incentive.

- Benefits:
✓ Better inventory forecast.
✓ Increased utilization of the warehouse.
✓ Lower fixed cost per unit.
✓ Increased earning.

Grow GMV through House Brands Sales

Reasons:

- Brand recognition of Pepperfry- 75% organic traffic

- Excellent distribution system- 2% breakage, 92% 1st time delivery, NPS 60+
- Supplier system is deep with strong relationships
- Marketplace is leading furniture portal in India
- House Brand gives greater profitability and is 50% of GMV
- Credible investors raised USD$195
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