Earlier this month, Pepperfry, the Mumbai-based ecommerce company founded by former eBay India country manager Ambareesh Murty, raised its Series B round of funding — $8 million from existing investor Norwest Venture Partners. Several things have changed inside the company since it went live with its online store a little over a year ago. The company’s headquarters in Mumbai’s central suburbs have more than doubled in size, it has exited categories such as apparel and footwear to focus exclusively on the home segment and, it now has a new logo to reflect that shift.
Within the country’s competitive ecommerce sector, Pepperfry stands out as something of a contrarian. It is one of the few companies in the space that was born as a marketplace (several competitors are now trying to transition into marketplaces). Its headcount, compared to peers, is startlingly small at just 152. And, only two per cent of its sales are via cash-on-delivery. The site now lists 35,000-plus products and claims 700,000 registered users.
A couple of weeks ago we met up with Murty, one of the more astute ecommerce entrepreneurs in the market right now, to find out what has been going on inside Pepperfry in the past year. Between Wii tournaments and literally breaking down walls, Murty is already plotting the path to breakeven in 12-15 months.
You’ve raised a relatively small Series B round. Why?
See our model is very different. We don’t think that you need that much money in India to build a really good ecommerce company. We raised $5 million in our Series A round, which is nothing in this market. I would love to get more money at any given point in time. The question is how much do you need? I am of the opinion that over a 12-15 month timeframe, Pepperfry will break even. I am seeing a path to break-even that’s not five years years away. If that is the case then I basically need money just to get till there. Therefore, we didn’t want to raise too much or too little. I think there may be one more round (of fundraising) out there but that, my guess is, would be the final round.
What will you do with the money? Hire more people? Add more warehouses?
We’ll probably add another 20-30 people. We don’t need more than that. There are plans to add three more warehouses, one each in Bangalore, Kolkata and Madurai. We already operate three, one each in Jodhpur, which is our biggest, Mumbai and Delhi.
Since the launch, you’ve repositioned to focus only on home. How did that happen?
When we started we were very clear which parts of the ecommerce industry we wanted to serve. So we said that we wouldn’t want to do electronics, we wouldn’t want to do only clothing and shoes and, we wouldn’t want to build a broad ecommerce business. I think we stuck to our guns fairly well and it’s played out well for us.
In terms of focusing only on home, here’s what has happened. There are obviously lots of great players who sell clothing and fashion products online. While we did dabble in that space, we also hugely expanded the home segment. A year ago when we put furniture online, we didn’t know if we would ever sell furniture. Over the last one year we realized that it was a fantastic call to make. Indians are truly interested in buying furniture online so much so that we sell a couple of crores of furniture now every month. Which means thousands of transactions. We soon realized that our home offering was constituted 80 per cent of our business. As an organization, you keep prioritizing what you are doing well at and so we focused on building out our home segment. Now 100 per cent of our business is home, within which furniture is the mainstay in terms of value of transactions.
How soon into the launch did you decide to focus only on home?
About three months into the launch, when we realized that 80 per cent of our business was coming in from home, we started thinking whether fashion was a distraction for us. There are three things you need to evaluate when you decide which business you want to be in. The first is where are your strengths. Our obvious answer was home. The second question was whether the category in which you had your strength was a large consumer category. For context, the shoes and clothes segment is about $21 billion and all of home is about $24 billion. So it is a larger category. The only thing is that in ecommerce terms, or online shopping terms, it is not as large as shoes and clothing. The third factor to consider is how the consumer demographic shapes up. Pepperfry has always been about the ‘millennials’, folks born after the 1980s. What’s happening to them now? Most of them are between 25 years and 35 years old and that is prime home maker life stage. We got resounding ‘yes’ answers to all three questions and decided to make the shift.
You operate with less than 200 people. Isn’t that odd for an ecommerce company in India?
Sometimes we think we’ve figured out a magic formula on the the people front but obviously there’s more to it. It goes back to the model and the investments that we’ve made in processes. The 152 people we have now includes everything. The way it breaks up is about 10 people in marketing and creative, 30-35 people in logictics, about 40 people in customer support, a few in administration and finance, and then everybody else is in what we call category management. Also, people work longer hours at Pepperfry. If you have a happening personal life, Pepperfry is not the place for you (chuckles). On a more serious note, we go with the philosophy that everybody can do more. People are encouraged to move across functions. There are people who have moved in batches from customer support to category management, for example. Also, when positions open up or are created, we first look inside. When we look outside, we first go through friends and family, not headhunters. This year, going forward, we will probably hire another 20-30 people. We pretty much have more or less what we need in terms of people.
How does the model work, as different from a traditional ecommerce company here?
So we’re not a retailer. We’re a marketplace. We don’t stock goods. We don’t have anything sold out of inventory. We have back-to-back merchant deliveries. We however are a managed marketplace which means that we try to ensure that every item that is sold on Pepperfry is checked by us before it goes to the customer.
If you look at a regular ecommerce company, it will go to manufacturers and buy say 5,000 items and store them in its warehouse. They have to put cash down and buy the items from the manufacturers. Millions of dollars in funds raised from investors are currently locked in inventory across the ecommerce sector. Conservative estimates put that at anywhere between $50 million and $100 million, and I am not even including the single largest player in the market, which alone would account for more than everybody else put together. That makes the ecommerce company a retailer. We, on the other hand, don’t buy anything. When an order is placed, we have something called an order fulfillment team. This team reaches out to a merchant to ship the item to our order fulfillment center, which is what we call our warehouses. So, inherently we have no money locked in inventory. That makes us highly capital efficient. The merchant sells us the item based on the pre-sold order. As a result, 98 per cent of our orders are paid for online by customers. So the business model is very different. The nature of the business metrics is very different. Therefore the team composition is very different.
Share some examples of these processes you’ve built into the company to manage efficiencies.
Well for example, we don’t have inventory and so orders may get cancelled. This means that the merchant at the back end may not have the item either. That’s bad because we incur a cost in acquiring the customer. Earlier we used to do a weekly reconciliation of stock with our merchants. Items that are live for sale from a specific merchant would be checked on a weekly basis for availability. We changed that to a daily reconciliation cycle for the top selling items. What that ensured is that our cancellations came down from five per cent to two per cent. Then, we’ve built out our entire supply chain process on Salesforce. This allows us to know almost daily how much we are spending on shipment costs, how much on receiving goods and so on. And, it’s an open source platform which involves only a licensing fee.
We also use technology very well in other ways. Our technology approach is very nice. I believe it is called the SCRUM approach. We conceive an idea, test and implement and keep testing. So we will not first develop a business requirements document, then a products requirement document and then having a long engineering phase and then launch the product. This means that you will see us experimenting a lot. Take for instance, the user interface. We are an ecommerce company. At the end of the day, the site is my business. We have external analytics agencies who monitor the site and rip it apart regularly. As a result, what you are seeing now is version 3 of the site. We also use a lot of this analytics to aid us on the pricing front. On April 1 we launched a feature called ‘goes well with’. This is essentially a recommendation feature based on items that have previously been bought in that category by other users. That’s fairly significant analytics happening on the back end.
How do you manage the vendor side of the operations?
They are not vendors. I don’t like that term. It’s a very retail term. They are merchants. A merchant is somebody that you have an ongoing relationship with and in our business this is very important because it’s not a one-off transaction. We are actually only about the small guy. We are not about the large manufacturers though we have some on board. But we are about the small and medium businesses, craftsmen, etc. The only thing that the merchant needs to take care of is that product is unique and it’s great quality. Outside of that we take care of everything. We make selling online really easy even for a person who may not be technology savvy. This is the part where the category managers and category associates come into the picture. When merchants are first empaneled they need a high degree of handholding. This is done by the category managers. As merchants become more mature on the marketplace, which usually takes about two months, the team’s attention shifts to new merchants. At that point, the existing merchant transitions to the order fulfillment team. Again, if the merchant comes up with a new product line, the category team gets involved.
How small is the ‘small guy’ for you?
Small could be three people making furniture in Jodhpur or Rs 1 lakh in sales per month. That’s sales, so the actual profit would be a few thousands. But they are growing with us.
What percentage of the business is currently repeat buyers?
About half our business every month comes from repeat buyers. We now have close to 700,000 registered users. Home is a very wide product category and that gives is several cross-selling opportunities. Also, we rarely have people buying just one item. Out of the 700,000 users, 250,000-300,000 would have actually shopped on the site. That’s a pretty good metric to have.
Read our earlier posts on Pepperfry