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Will IKEA Find a Home in India

Recently, five years after they cofounded Urban Ladder, an online furniture and home decor store, Ashish Goel and Rajiv Srivatsa launched their flagship experience center in Bangalore. Spread over 7,000 square feet in a popular retail hub, the outlet has been attracting steady business. For that reason, things are speeding up: Their second store is scheduled to be opened in a few weeks, again in Bangalore and, over the next 12 to 18 months, they plan to set up around 20 stores across the country. Describing Urban Ladder as a “design-led aspirational brand,” Goel says: “There is a general perception amongst consumers that online is all about discounting, and by extension, poor quality. Despite our best efforts, we also sometimes get colored by this perception. We see an offline presence as a great way to showcase our design aesthetics and quality, and build trust and reach out to a broader set of customers.”

Pepperfry, the biggest online furniture retailer in the country, already has 21 physical centers across nine cities. Cofounded by Ambareesh Murty and Ashish Shah in 2011, Pepperfry set up its first “studio” as they call it, in Mumbai in 2014. Murty and Shah are looking to increase this number to 45 by March next year – including through the franchisee route. “We think of our studios as a kind of Starbucks — with free coffee and free wifi — for the community of architects and designers. It’s a place where they can experience our products and interact with their clients and we can build credibility and get a mindshare of the influencers,” says Murty. He adds that being a marketplace, Pepperfry’s core proposition is the variety that it offers. “And so we don’t plan to stock huge numbers in our studios because that would mean a completely different business model.”

Flipkart, the largest online retailer in India, relaunched its furniture business just before its annual festive season sale Big Billion Days that kicked off on September 20. It also launched a private label for the category – Perfect Home. In a media interview, Nandita Sinha, head of furniture business at Flipkart, said: “Having done a soft launch of our in-house brands, we got on board external brands like La-Z-Boy, Home Town, Spacewood … with assured quality and service promise.”

 At the other end of spectrum, Godrej Interio, the leader in this space with over 250 exclusive stores, 800 dealers across 650 cities and present in major online marketplaces, will soon be launching its own ecommerce website. The market buzz is that the company is planning to introduce another furniture brand in consultation with a design company from Sweden.

Anil Mathur, COO of Interio Division, Godrej & Boyce, says: “We are trying to address our customer base by a multi-brand multi-segment approach. To be able to do this, soon there is going to be a completely new and experiential offering from the house of Godrej Interio. We are working with both domestic and international designers.” Mathur adds that Godrej Interio will be investing about Rs.400 crore ($61 million) in the next three years to “strengthen our capability and capacity.”

Clearly, the Indian furniture and home decor market is getting a makeover of its own. Meanwhile, Swedish giant IKEA, which got the Indian government’s approval to start operations under the single brand retail category in 2013, is gearing up for its India launch. Its first store is scheduled to open in Hyderabad early next year. Next on the list are Mumbai, Bangalore and Delhi NCR. By 2030, IKEA plans to open 25 stores across the country at an investment of Rs.500 crore to Rs.700 crore ($77 million to $100 million) per store.

“We have a range of around 9,500 products, and our India stores will feature the majority of the products that are available in our global IKEA stores,” says Patrik Antoni, deputy country manager, IKEA India. “In addition, these stores will also have 3% to 4% India-specific products including tawas, roti-makers, idli-makers, pressure cookers, etc. to cater to the specific needs of Indian consumers.”

Pointing out that IKEA offers a wide range of well-designed functional products at prices so low that many people will be able to afford them, Antoni adds: “The IKEA stores will have something for everyone. We work with democratic design, one that will combine form, functionality, quality, sustainability and low price. Every IKEA product will have these five components. This is a part of the company’s DNA as we remain obsessed with low price and this will stand true for India stores as well.”

India is not new to IKEA. Its purchasing organisation has been sourcing from the country for over 30 years. It currently works with close to 50 suppliers in India and does business worth 350 million euros ($411 million) largely sourcing textiles, along with some metal, plastic, lighting and decoration products. Antoni says that the company is now looking at sourcing new categories in furniture and locally available sustainable materials like bamboo, jute, acacia, sugarcane bagasse, water hyacinth, etc. He adds that while as per the single brand retail policy, IKEA is required to ensure 30% local sourcing, the company aims to “over achieve” that in order to supply low cost products to global IKEA stores including India. “We see great potential in India to become a main sourcing hub for IKEA. Presently, India contributes 3% to 4% of our global sourcing, and we plan to grow this substantially in the coming years.”

While sourcing from India is a familiar area of business for IKEA, retailing in the country is a completely different ballgame. IKEA could well have a challenge at hand on this front.

But first, what makes India an attractive market? Industry experts peg the size of the furniture and home decor industry anywhere from $20 billion to $30 billion and almost completely unorganized. The organized segment comprising brick and mortar players like Godrej Interio, Home Town and Home Center and etailers like Pepperfry and Urban Ladder account for less than 5%. “The growth potential lies in the unorganized space transitioning towards an organized play. This is an exciting opportunity,” says Ankur Bisen, senior vice president at management consulting firm Technopak Advisors.

Rishikesha T. Krishnan, director of the Indian Institute of Management Indore, notes that because of low labor costs, India has traditionally been a made-to-order market for furniture. The makers of such bespoke furniture have been highly fragmented but very adaptable to the needs of customers. Their main drawback has been lack of adherence to delivery commitments and heterogeneity of quality. Says Krishnan: “With increasing urbanization and the increase in disposable income of the middle class, spending on homes has increased. And even as the price sensitivity of buyers has gone down, the need for quality and convenience has gone up.” IKEA, being a well-known brand, is likely to attract Indian consumers, he adds.

Bisen believes that IKEA with its strengths in product design and range and the ability to mass produce at value pricing could “open up the mass market for a branded organized play.” Jagdeep Kapoor, brand consultant and CEO of Samsika Marketing Consultants, feels IKEA can be a game changer. “The Indian consumer buys furniture in bits and parts. IKEA can be a torchbearer and lead from the front in terms of coordinated furniture,” he says.

At the same time, though, experts caution that it won’t be a cake walk for IKEA. S. Ramesh Kumar, professor of marketing at Indian Institute of Management Bangalore, points out that though branded furniture is waiting to take off in the Indian context, “it requires consumer insights in a cultural context that is different from the western market.”

One very strong attribute of the Indian furniture market is the diverse needs and preferences across demographics and geographies. Mathur of Godrej Interio explains: “The space availability at homes in different parts of the country varies a lot. Also, people’s preferences of material differ. We see a strong influence of wood and more voluminous furniture in northern India and much more contemporary designs in the western part. The southern part of the country is even more fragmented in terms of requirements from minimalistic designs to modular and functional furniture.

Managing a portfolio for such a diverse audience is a huge challenge.” To deal with this complexity, Mathur’s team has adopted a multi-segment approach. “We have segmented them into psychographic segments rather than demographic segments and are evaluating ways in which we can address their wants and aspirations differently,” he says.

Moving from Unbranded to Branded

For IKEA, some of its strengths globally could well prove to be a challenge for its India foray. Take its format, for instance. IKEA stores are positioned as a fun day out for the family. They offer easy parking, an inspirational shopping experience, play facilities, a restaurant, café and so on. These stores are typically spread over a large area and therefore usually away from the city centers but with good access and public transport. In India, roads and public transport are abysmal, and given the traffic conditions, consumers don’t like to travel long distance for shopping. So, retail tends to get concentrated within the city.

Also, globally IKEA customers tend to transport their purchases to their homes and assemble them themselves. India, however, does not have a do-it-yourself culture. “It remains to be seen how many Indian customers take to IKEA’s do-it-yourself model,” observes Krishnan. “IKEA will need to factor this in its business model in India,” notes Kumar.

Niren Shah, managing director of Norwest Venture Partners India, an investor in Pepperfry, adds: “This is a very execution-heavy business, and unlike in other parts of the world, it’s not easy in India because the ecosystem is underdeveloped. It doesn’t help to [score] eight out of 10. It has to be 10 out of 10 every time.”

Indian players are already working hard on this front. Pepperfry, for instance, which is an online marketplace with over 10,000 merchants and over 100,000 product listings, has 18 fulfillment centers and 400 vehicles. It also has its own network of carpenters who assemble the products at the customers’ premises. Since its inception in 2011, Pepperfry has served 4 million customers across over 500 cities. “Anyone looking to build a large business in furniture in India has to be a supply chain specialist in road transport and have the skills and ability to deliver the end product to the customer’s home,” says Murty. He further points out that a large part of the India market is in tier 2 and tier 3 cities. Any company that doesn’t reach out to these areas will lose out on a big chunk of the customers.

According to Murty, Pepperfry had to set up its own supply chain and logistics system because it could not find any third-party service provider who could ship big boxes to the customer’s doorstep at scale and reasonable cost. “India is a large complex country, and while the national highways are reasonably good the last mile infrastructure challenges are huge. Add to this small lifts and narrow staircases in residential buildings and the problem is compounded. We have special equipment and tools and have trained our people for effective delivery.”

Pepperfry has raised $167 million to date from investors including Norwest Ventures and Goldman Sachs, and Murty expects the company to be profitable within the next 12 to 18 months. The company’s key areas of focus going ahead, Murthy says, are expanding its physical presence, moving beyond just selling products to creating content that engages with customers, and “driving a design revolution” and building new capabilities within the organization across diverse areas such as logistics, design, marketing, etc.

The India Challenge

While Murty is unwilling to reveal Pepperfry’s strategy to compete with IKEA, he says: “In order to compete successfully with a leader like IKEA, Indian companies must understand what’s core to them and what they are really good at. They must stick to their core strengths and ensure that they have enough of a differentiator from whatever IKEA brings to the table.”

At Urban Ladder, one of Goel’s key focus areas is to lead the sector on the design front. Describing Urban Ladder as a design-led firm that blends the ethnic and the modern, he says: “We believe that we stand for an evolved design sensibility and great designs that work for India.” This, says Goel, requires a deep understanding of the customer. He lists a few aspects. India is all about being modern and global but with an ethnic twist. Indian homes typically are not very large, so sizing the furniture appropriately is important. Often, the center table doubles up as a dining table, a dining table doubles up as work area and the sofa doubles up as a bed.

In many homes, furniture for the guest bedroom that parents use when they occasionally visit their children’s homes gets priority over the master bedroom. College students and young adults, a key consumer segment globally for IKEA’s no-frills furniture, are not large consumers of furniture in India. “While IKEA will obviously be doing its own study of the Indian consumer, globally there is very little precedent of it changing its designs,” says Goel.

Urban Ladder began in 2012 as an online marketplace but with a twist. All the products listed on its site were designed by its in-house design team and made to its specifications by third-party manufacturers. In August this year, it received the single brand retail license and has moved to an inventory-led model. The company offers over 2,000 products across 35 categories and delivers to 75 cities across the country. To date, the company has raised $90 million from investors such as Sequoia Capital and Kalaari Capital and industrialist Ratan Tata. Goel expects to turn profitable in the financial year 2018-2019. “We are not a discounting-led brand and don’t want to be bleeding for the next 10-20 years,” he says.

Samsika’s Kapoor believes that online players like Pepperfry and Urban Ladder have had a huge positive impact on the industry by creating awareness and increasing convenience. Interestingly, even as these firms are expanding their offline presence, IKEA seems to prefer to stick to its knitting. “We will use ecommerce to complement the shopping experience for our customers, but the focus will always be the large format IKEA store where families can come for a fun day out,” says Antoni.

Meanwhile, some foreign brands like Ashley of the U.S. and Natuzzi of Italy, which are already present in India, have not created any major waves. This is primarily because they address a very niche luxury segment. “We are happy with the sales of these brands. They don’t make much noise because they attract a small but specific kind of clientele,” says Amruth Sampige, the Bangalore licensee for Natuzzi and South India licensee for Ashley. One big challenge, Sampige says, is around fakes. “India is a huge market for reproduction. Anybody can replicate a design and pass it off as the original.”

So do domestic players have an advantage over foreign players in this segment? Or, will foreign brands like IKEA with their global status and deep pockets have an edge? Not really, says Kapoor. “It is a level-playing field. The consumer is going to look at the benefits the brand brings to them. If a brand is able to meet the aspirational needs of the Indian consumer, then it does not matter whether it is an Indian brand or a multinational brand for it to be successful.” Technopak’s Bisen feels that while at present it is “an open field,” there are “advantages for some domestic brands to play and position India designs.”

Shah of Norwest Venture Partners adds that the key to success is understanding the customer requirement and execution capability, irrespective of whether it’s a domestic or international player. More importantly, he says, “the game at present is not about taking market share from other players; it’s about expanding the market.” And this is where he expects IKEA will make the most impact. “It will get the word out to Indian consumers that branded furniture is the way to go,” says Shah.

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