Here's what went wrong with India's online furniture market

Early this year, Urban Ladder laid off around 100 employees in order to cut costs following a failed attempt to raise fund.

So what went wrong in this once promising sector?

In 2011-12, when the e-commerce segment was picking up, besides horizontals, furniture was one of the early categories to have been born.

While Pepperfry was founded in 2011, Urban Ladder and Fab Furnish debuted in 2012.

Founders had realised that furniture was a highly unorganised category. It largely consisted of mom-and-pop stores. There was a lack of assortment and hence online furniture retailer sounded like an interesting concept since they could offer a very wide range of furniture after displaying it on their platform.

However the biggest challenge was fulfilment because most of the furniture is bulky and some of them also require installation.

Setting up of specialised fulfilment led to significant direct operational cost overheads for these companies. They had to build the whole supply chain to ensure right quality and availability.

The second issue was that it was largely like a customised category and the fulfilment couldn’t be made upfront. Unlike segments such as fashion or electronics where goods can easily be delivered in 2-3 days, the time taken here used to get extended to 2-4 weeks on many occasions. This took away the entire value preposition that is in the e-commerce space for these companies.

It was then, that many of them decided to go offline.

While Pepperfry still remained an early mover with the launch of its experience stores in 2014, Urban Ladder moved into this domain only by 2016.

Even as the industry was trying to discover the right model, Rocket Internet-backed Fabfurnish died an unfortunate death followed by a failed strategy of its promoter in India and stiff competition from rivals.

Rocket Internet was soon looking for buyers for its portfolio companies which included Foodpanda and Jabong besides Fabfurnish.

Fabfurnish got acquired by Kishore Biyani-led Future Group in April 2016 and eventually got shut.

By this time, Pepperfry had already raised $100 million from investors such as Goldman Sachs Zodius Technology Fund while Urban Ladder had raised $50 million from Sequoia Capital and TR Capital.

Meanwhile another startup Livspace which is relatively in a vertical - home interior and renovation - started to gather pace. Founded in 2014, the company started attracting investors, early on.

In 2014, it raised a Series A funding from Helion Venture Partners and Bessemer Venture Partners last December which was soon followed by $8 million Series B round, the next year.

Given the niche segment, it further went on attracting investors such as TPG Growth, Goldman Sachs. Early this year, it also raised money from Ingka Group, the franchise partner of US-based furniture giant IKEA.

Before this investment, the Swedish furniture giant IKEA also opened its first store in India in 2018. It’s entry into the India market ensured that the investors had to go into the shell.

Interestingly, just before IKEA’s store launch in August, Pepperfry managed to raise $37 million from State Street Global Advisors talking its total fund raise to around $200 million which kept it in a healthy shape.

Urban Ladder too had raised $12 million. But the plan was to raise more money in future. The company was targeting $40 million fund raise.

However, the market changed in the next few months. The investors became jittery and an immediate fund raise seemed impossible.

The lay-off of around 100 employees, early this year was a strong move by Urban Ladder to sustain the market. It has also postponed its fund raising plans and is targeting profitability.

The company now plans to become EBIDTA positive in the next couple of months.

“The whole point was that we understood that it is going to be tougher to raise (fund). So we got to a point where we don’t need to raise, atleast for the next year or so,” Rajiv Srivastava,  co-founder of Urban Ladder told Moneycontrol in an interaction.

“If we are able to show the profitability story which we should in the next 2-3 months then may be closer to Diwali, we will again go back to the market but as of now we don't need funds,” he added.

While Pepperfry declined to comment for this story, in a previous interaction with Moneycontrol, Ambareesh Murthy, founder and chief executive officer of the company had said that Pepperfry was targeting to achieve profitability in the next 12-15 months.

According to data from startup tracker Tracxn, the online furniture segment has so far raised around $450 million so far, of which $120 million was raised by Urban Ladder and $200 million by Pepperfry.

Srivastava told Moneycontrol that of the total money raised atleast 30-35% was spent on marketing.

So was it a bad move to spend such a huge amount in a category which had low frequency customers?

“You have to understand where the macro environment is, in a particular way. Now if you just go back, during 2014-2016, there was just a lot of companies vying for investors dollars. There was a lot of money in the market at that time. If you said you are not going to grow then also you will be left behind because your competitor will come,” Srivastava said.

“Now again in the hindsight it is easier to say that maybe we shouldn't have gone so gung-ho, spending that amount of money on marketing and stuff,” he added.

Given so many challenges associated with the loose furniture category, companies such as Livspace with an alternative business model are seen inching towards a growth trajectory. The company offers entire interior designing driven by technology.

“Pure loose furniture, may be the marketplace model, will be there for some of the categories but it is not very scalable. It is not going to become a massive segment and organised retailers like IKEA are going to be competitive over there,” said Karan Sharma, co-head of the digital and technology vertical for Avendus.

Avendus advised Livspace for the Ingka-IKEA deal.

Will this make it further difficult for companies such as Urban Ladder and Pepperfry to raise next round of funding?

“Difficult to comment on a company's fund raising options. However, investor sentiment has been a bit subdued in pure play furniture retail. Higher marketing costs and lower repeats is a challenge. It's important to have high post marketing contribution in the first transaction itself. Also, there could be some open questions around potential exit options. We find the tech led home interiors space to address the above aspects with defensible moats,” said Sharma.

However investors seem to be having a different view.

Many feel that the market is still highly unorganised. The marketplaces do not have much competition with IKEA currently as much they do have with the Kirti Nagar and Ali Road markets.

“While we are getting used to these newer brands but if you look at the overall market, a significant market is still going to the local furniture markets in every city. A lot of this is still unorganised. The real competition is how this unorganised market starts getting organised and more branded stuff,” said an investor requesting anonymity since he has a stake in a furniture startup.

Urban Ladder has also claimed that their Hyderabad business saw no impact even after the launch of IKEA’s first store in the city.

“The challenge is to see how these companies are able to offer consumers products that are better in terms of design as well as price points,” the investor said adding that it is too early to say that we have written off the sector.