Indian online retailer Pepperfry mulls IPO option, says co-founder

Photo: Unsplash

In an exclusive conversation, Ambareesh Murty, Co-founder and CEO of India’s leading online home furnishing retailer Pepperfry, discusses his journey in creating a profitable brand in the highly competitive e-commerce space.

Ambareesh believes that the road to profitability for an e-commerce niche brand such as Pepperfry is through creating ‘differentiation,’ ‘scalability,’ and ‘brand recall.’ And these three factors allow Pepperfry to consistently make 20%+ contribution. Ambareesh shares his intension to take Pepperfry ‘public’ and believes that ‘IPO’ is the true measure of success, at a time when many tech-entrepreneurs prefer to stay private for long.

Ambareesh, further opens on a host of topics: his initial mistakes and course corrections in creating Pepperyfry, frugal capital raising at a time when capital is abundant, advent of Ikea and its impact on his business, and some of the key challenges and learnings in the course of creating a successful brand.

Edited excerpts :

When you started, you went through a capital constrained environment, and it was one of the reasons you had to narrow down your categories. And now entrepreneurs are building out under a notion that capital is super abundant to say the least. And your VCs define you as a ‘pragmatic’ entrepreneur. What does it really mean to be building out a company in 2019?

I will start by actually explaining the choices that we made when we started off in 2011 and got access to funds in 2012-13. We figured out a few things out. We figured that what we wanted to build was a lifestyle business. However, there were certain categories, such as fashion and jewellery, which frankly we as a marketplace didn’t have a right to win. And therefore, I think one of the best decisions we made was that we pivoted out of all those categories, really early in 2013. About a year into our existence, we became a pure play home interior site.

And when it comes to pragmatism, I guess the way I think about ourselves or I think about myself at least is that I’m like the elephant in the room, and I’d rather not be noticed. Because I feel a lot of good work that a person actually does or companies the way they get made, are a function of being strong, silent and doing all the right things rather than being flamboyant about it. And I think that’s what I guess defines me as pragmatist or defines the way Pepperfry is built. I think that’s now inherently part of our DNA. And I’m really proud of it.

But frugality is not necessarily a virtue appreciated by VCs anymore. When we speak to VCs , they also say that the quality of the founder is also being judged at how much capital he or she can attract?

I actually think I have a slightly different viewpoint on this. My point is that any business should raise the capital that it requires not the capital that somebody is willing to give it. And there is a big difference between the two.

As we built Pepperfry, both my co-founder – Ashish (Shah) – and I always wanted to raise the amount of capital that we required, as a business. Now fundamentally when you’re a business which has great economics and you keep your cost structures low, the capital that you required tends to be lesser. I would be very wary of going in raising a bunch of capital just to make a vanity point, because I really don’t think vanity point holds for long.

Eventually the value of a company is in the eyes of public markets, where a million people buy your stock and price your stock in a particular manner. And I think therefore it’s the duty of a company that it delivers great valuations by the virtue of actually delivering great value. And that great value gets delivered to the million people who buy your stock when you take your company into the public market. That’s the time that I think an entrepreneur should really smile and feel to have done some good.

So, IPO is the preferred exit option for your investors?

Yes, it is.

Talking about being frugal and not necessarily going over the top, even if capital is too freely available. And the fact you would rather go for a public listing and have the perception built the mind of the public.. there seems to be quite a few challenges, in terms of macros; (a) we’re going through not necessarily a great economic environment, (b) Secondly you also have the advent of IKEA. How do these things really impact your business?

So, I actually think that the advent of Ikea is a pleasant thing to happen in the market. I think is the fundamental role Ikea would play is to build the market. The key thing about the furniture or home interiors market today is that 90% of the market is unorganized. And when you have 90% unorganized segment, nobody (Ikea) is going to build a big business by taking 1% away from each other (in this case Pepperfry) from the organized segment. The bigger size of the pie is the 90% unorganized segment. And I think folks like Ikea will help in organizing that part of the market more. So, for me here’s the thing – Ikea has committed billions of dollars into India. Obviously, they must have done that because they have thought through what the potential in India for furniture and home interiors is. And because the potential is high, they’re willing to commit billions of dollars. For me it’s market validation!

And the good news is that despite the economic slowdown, Pepperfry has grown fairly rapidly and I can’t ask for anything more. And of-course in doing all of this, we’ve tried to keep our costs sensible. As an entrepreneur I think we built a good business, which is able to grow really rapidly without really sucking up costs.

So, how have you been able to do this ? How have you been able to do this because e-commerce companies are notorious for having high burn rates?

It starts obviously with unit economics. If you make a really sizeable contribution margin – the margin you make after you deliver the goods to the consumer’s doorstep – it’s only a question of time before which, that contribution margin starts to set off against all of your overheads.

How much is (contribution margin) that for your business?

Our contribution margin is 20% plus which is basically our net margin. So, we are in a category where differentiation really counts. We don’t sell mobile phones. We sell furniture. And the task of standardizing furniture and selling it to millions of people across India is not an easy task. However, in any business, if you’re not doing an easy task, you’re differentiating your business. And if you’re differentiating your business, you can actually make great margins.

So, what’s the kind of GMV (Gross Merchandizing Volume) that you have right now?

I don’t normally say it out in public. But let me just say this broadly, that I think we would reach roughly about a billion dollars in GMV in about two years from now.

At a time when there is so much capital available for startups, winning company is also decided by the amount of capital raised……

Let me give an example. There have been many markets in the world where multinational companies with billions and billions of dollars to invest have actually not managed to build great businesses; while it’s the local business that have thrived. Think of Alibaba – when Alibaba started off Alibaba didn’t have access to resources that an eBay or an Amazon did. But who turned to be eventual winner in China – (it was Alibaba) – somebody who actually built their business on strong fundamentals and those strong fundamentals involved the right use of capital, and not just the use of capital. And that’s the distinction that I’m trying to make. I would say that the way I built my business is how much revenue do I make, which is how much commission we make on the sales.

So, how much are your margins ?

20% is my net profits; my gross margins are 55% plus. There aren’t many businesses in India which can claim that.

Interesting, you also mentioned that capital is never a constraint for good companies, and you are raising funds. So why is the need for fund raising?

It’s a validation from the market on our valuations. I hope in the next 12-18 months, I am able to take Pepperfry public. I am conscious that I am here to create value, not only for my shareholders but also to create value for my employees, my partners and all the merchants who work with Pepperfry. They are the reason why Pepperfry exist today, and before an event such as a public market offering, I would want to keep validating that the value of Pepperfry is to increase.

You said you want to increase the value for your shareholders. so is there a unicorn obsession?

No, I think unicorn is irrelevant; it’s the brand. It’s the value of the brand I was talking about. For me, for example, a billion-dollar brand is something which in perpetuity can make 55% gross margins. The value of a brand is never just a balance sheet activity, at a point in time. The value of a brand is courtesy the sustenance that the brand creates. And everything we’ve done at Pepperfry is actually toward creating that sustenance of brand.

We don’t things like dropping our gross margins to 10% for one day just because we want a fantasy; it never works like that with us. We will consistently provide great value and that’s what we stand for. So, building a billion-dollar brand is not a point in time. It’s an orientation of state of mind.

It really looks like you are geared towards public market listing. So how are the conversations with investors going in that direction?

A large part of our last board meeting was actually about, how we need to plan this. Our CFO has set up an IPO day, next month, a single day where the board is only going to talk about strategy as we go forward for an IPO. There are a lot of work that needs to be done, but hopefully we’ll get there.

The entire idea of adopting the omni channel strategy for Pepperfry. What was the rationale behind that?

I believe fundamentally we are serving the same customer. She could be on a mobile phone at some point, then on a laptop at another point in time, walking down the high street or going to a mall but actually she is the same customer. And therefore, it’s my duty as a brand to interact with her on a mobile, on the laptop or through a physical presence in a mall or on high street because that’s how we create customer engagement.

Incidentally, 2014 December is when we set up our first omni-channel store. And at that point in time omni channel in itself wasn’t a word which was considered to be nice. And especially for an e-commerce company to even think of a physical presence, wasn’t something that was supposed to be in vogue. But we did it because our principle on the customer’s always been the same. “That it is the same customer, she is the same!” And so therefore, I will interact with her in whichever way she wants to interact with me because that’s how I will be able to build a strong billion-dollar brand.

If you were to start a business in 2019, how would that be different?

One key learning was that even if you wish to sell products that you think are high on design, customers sometimes won ‘t get it. So, let me give an example. We started off selling rugged wood furniture, i.e. furniture that used to be made from wood that was recycled from old homes or ships. We had a whole range of those in 2012-13. Customers used to buy it, and tell us that the furniture we got is old. So, learning was that you need to simplify life. It’s like you know you need to keep yourself in step with the evolution of the customer. This category has evolved a lot in the last seven years. Today, for example, if I were to talk about old wood furniture, most of my customers would actually know about it. Seven years back, if you looked at 10 houses – potentially 50 pieces of furniture, 20 of them would be the same. And that’s changed and that’s something Pepperfry has really brought to the table. I think we democratized choice when it comes to furniture in India.

Second learning is that in a fairly complex category such as ours, we should have started managing our supply chain earlier. We started doing it only in 2013.

The third learning is that sometime you are lucky that you have some of the smartest people, with a lot of passion, decide to work with you. One of the learnings I always had, is to never forget that fact. At the end of the day, it’s those people that made the business. And we’ve been very fortunate that we have some really great people working with us.

Interesting. You have a different path towards e-commerce success. Can one really burn his/ her way to success?

So, I think there are two types of businesses. The first business is one where you sell the same product, you sell it many million times. And the second type of business, in which you’re selling highly differentiated products, you’re selling a million products and you’re selling each one time. That’s the business we are in right.

So, yeah, it’s a very different solution to an e-commerce business. It’s a very different e-commerce business in itself and in the longer term I think this kind of business creates a lot of value.

What is the biggest challenge playing in the mind of Ambareesh Murty?

As I grow this business 10x, how do I ensure that execution, which has been something that we have been awesome at till now, continues to remain the same even when we are 10x the size.

If this world were a billboard, what would you write on that?

Happy Furniture to You.

What is your advice to VCs. How should they remain sane and focus, at a time when there’s just so much capital and competition even for them?

Well I think they should stick to the basics. They should look at businesses, for what businesses actually stand for, which is the metrics, P&L and bottom line. Decisions should be based on those.

This interview was first published on livemint.com