1. Pepperfry – Becoming profitable within the next 18 months
University of Muenster Consulting
U M C
Anna Theile, Max Noever, Erich Daniel, Simon Jeurissen
Pepperfry – Becoming profitable within the next 18 months
Presenting to Murty and Shah

2. University of Muenster Consulting
Your Agenda
Management Summary
Analysis
Alternatives/Recommendation
Implementation
Financials/Conclusion
1/10/2019
University of Muenster Consulting

3. University of Muenster Consulting
Problem Statement
Solid revenue growth over the past six years, but inability to generate profits due to high costs and low margins in the volume business
Growing online furniture market attracting large new competitors
Goal: Become EBITDA-profitable in the next months
Situation
Focus on furniture category to decrease complexity
Extend franchise business to more than 70 concept stores
Actions
Increase gross margin by 2.5 percentage points
Become profitable by 2020
Outcome
1/10/2019
University of Muenster Consulting

4. University of Muenster Consulting
Key issues
Historically limited sales channels and target group
But: High awareness among target groups due to effective digital and offline marketing
High cost of category management
Dependency on high utilization levels in logistics to benefit from economies of scale
Internal issues
Different attitudes and states of mind among different parts of the population
Transport distribution in India is highly difficult due to insufficient infrastructure, especially in rural areas
Uncertainty about the impact of new competitors such as IKEA
External issues
Unprofitable growth!
1/10/2019
University of Muenster Consulting

5. Pepperfry’s market environment
Mixed: Large competitors (IKEA) entering the market, but high hurdles to enter Pepperfry’s niche
Threat of New Entrants
Industry Rivalry
Many competitors in furniture and furnishing market, but overall good position of Pepperfry
Supplier Power
Buyer Power
Furniture: Many possible suppliers, therefore low power of the individual
Utilities and decor: Rather high in light of growing competition and absence of home brands
Long-haul logistics: Low after contract has been auctioned, but high dependency
Rather low due to growing target group and already competitive prices
Threat of Substitutes
Rather low, as Pepperfry’s business model cannot easily be replaced (niche strategy)
But: Potential threat in future
1/10/2019
University of Muenster Consulting

6. Assumptions for the Development of Alternatives
Due to rather fix margins, costs are treated as a percentage of revenue. 1
Overall internet literacy and e-commerce affinity in India will continue to increase over the next five years. 2
India’s macroeconomic development continues to advance, resulting in a growing middle class. 3
There are enough potential franchisees to meet Pepperfry’s goals regarding the opening of offline stores. 4
Supplier power is assumed to remain at the current level for the next five years. 5
1/10/2019
University of Muenster Consulting

7. Strategic Alternatives for Pepperfry
1. “Go rural!”
Build an online furniture & furnishing market in non-metropolitain areas
Focus on a broader target group
Continue to build franchise business and open offline studios in rural areas
Gradually expand across regions in India
Focus on high-margin furniture business and home brands in the long run
2. “Go specialized!”
Focus on decor and utilities segments
Leverage changing state of mind regarding home decoration
Leverage changing state of mind regarding the acceptance of e- commerce
Build home brands in decor and utilities to become more independent from large brands
3. “Go future!”
Leverage the trend towards furniture rental in the short-to medium term
Become a pioneer in the sharing economy
Start in large metropolitain areas
Focus on a younger target group ( years)
1/10/2019
University of Muenster Consulting

8. Evaluation of Alternatives#
“Go rural!”
Criteria
Profit potential
Market positioning
Supplier dependency
Uncertainties 1 2
“Go specialized!” 3
“Go future!”
Highly important criteria
Less important criteria
Positive implication(s)
Mixed or uncertain implication (s)
Negative implications
1/10/2019
University of Muenster Consulting

9. Decision on a Strategic Alternative#
“Go rural!”
Criteria
Profit potential
Market positioning
Supplier dependency
Uncertainties 1 2
“Go specialized!” 3
“Go future!”
Base Pepperfry’s five-year business plan on the “Go rural!” strategy.
1/10/2019
University of Muenster Consulting

10. Timeline Go live Go live 2 2023 Find new Zones
Find and school franchise partners
Find new Zones (Wave 2)
Find and school franchise partners
Development of product portfolio and store concept for rural areas
Run first rural stores and gain experience
2019
2020
2021
2022
2023
Build Storage Room
Slightly change store product portfolios towards furniture
Start preparations for possible IPO
Negotiate with logistic partners
Find adequate area for stores and rent
1/10/2019
University of Muenster Consulting

11. Risks and Contingencies
A) Building storage room may need a lot of capital and running cost
 Instead of building rent storage rooms
B) High dependency on logistic carrier may cause problems
 Negotiations of long term contracts
C) Last Mile Delivery may fail in rural areas
 Set collective points in center of rural areas
D) Inhabitants of Rural Areas may not have access to Internet
 Grant mobile devices and access to internet at stores B
Impact C A
Probability
1/10/2019
University of Muenster Consulting

12. Keep Focus on Furniture Category
Décor (40%)
Furniture (60%)
Category Gross Margin
Pepperfry’s goal
30% - 50%
45% - 55%
Overall Gross Margin 2021
46%
1/10/2019
University of Muenster Consulting

13. Keep Focus on Furniture Category
Décor (40%)
Furniture (60%)
Category Gross Margin
Pepperfry’s goal
30% - 50%
45% - 55%
Overall Gross Margin 2021
46%
Décor (30%)
Furniture (70%)
Our suggestion
Category Gross Margin
30% - 50%
50% - 60%
Overall Gross Margin 2021
50.8%
Assumption:
House brand margin 10% higher, increase to 50% of GMV
1/10/2019
University of Muenster Consulting

14. University of Muenster Consulting
Financial Forecast
all figures in million USD
2016
2017
2018
2019
2020
2021
2022
2023
Revenue without
28.6
38.7
63.9
105.4
173.8
286.8
473.3
780.9
Revenue with
67.7
118.5
207.4
363.0
635.2
1111.6
Gross Profit without
12.9
17.4
28.7
47.4
78.2
129.1
213.0
351.4
Gross Profit with
14.5
19.7
34.4
60.2
184.4
322.7
564.7
Difference
1.7
2.2
5.7
12.8
27.1
55.3
109.7
213.3
1/10/2019
University of Muenster Consulting

15. Problem Statement Situation Actions Monday Morning Actions
Solid revenue growth over the past six years, but inability to generate profits due to high costs and low margins in the volume business
Growing online furniture market attracting large new competitors
Goal: Become EBITDA-profitable in the next months
Situation
Focus on furniture category to decrease complexity
Extend franchise business to more than 70 concept stores
Actions
Set up a project team to start looking for potential franchise areas
Plan an executive meeting to communicate strategic plans for Pepperfry.com’s way into profitability
Monday Morning Actions
1/10/2019
University of Muenster Consulting

16. Thank you Pepperfry – Becoming profitable within the next 18 months
University of Muenster Consulting
U M C
Anna Theile, Max Noever, Erich Daniel, Simon Jeurissen
Pepperfry – Becoming profitable within the next 18 months
Thank you