The Indian e-tailing industry is booming and is pegged to become a USD 100 billion market from current USD 10 billion in the next 5 years. This will account for 7-8% of the retail market in India (currently this value stands at ~0.5-0.75% of the total retail market and 3-4% of organised retail in India). This is similar to what has been seen in  developed markets like USA and other markets closer home like China.

A key hypothesis which investors and upcoming startups are constantly debating is, how the market would be split between the large horizontals (Flipkart, Snapdeal , Amazon) and more specialised verticalplayers (Urbanladder, Lenskart, Jabong etc.); this debate is further strengthened when both sets of  players are  diving more deeply into highly specialised service and product deliveries.

We provide an analysis of one such case, the online furniture market, to explore how this space is expected to evolve, and the kind of market leadership and market share that would be commanded by various business models.

indian-etailing-market

Defining the Indian furniture market

The Indian furniture &furnishings market consists of furniture, home textiles and the other home décor products. It does not include home consumables, home improvement products (hardware, tools paint etc.) faucets and kitchenware categories.

The above defined furniture &furnishings market in India is pegged to be around USD 20 billion, with furniture and furnishingshaving almost an equal split in the market. Within the furniture market of USD 10 billion, the residential sector accounts for a 70% share (USD 7 billion), and ~ 6% of this is organized (USD ~400 million).

The organized residential furniture market is expected to triple in size to become USD 1.3 billion in the next 5 years, growing at a CAGR of 27%; this would be around ~9% of the USD 15 billion (expected) residential furniture market by 2020. This huge opportunity in the furniture market is what the
e-commerce players are likely to target.

2020: USD 1.3 billion Indian organised furniture market – target for online players
50% of the market is present in the top 6 cities and more than 80% in top 46 cities
Large items (beds, wardrobes and sofas) account for 80% of the market share
Woods and its derivation accounts for 60% of the market, rest being metal and plastics
9% of the market is made up of imported goods

The first battle: Indian organized furniture market – Leapfrogging brick and mortar stores to get online

The current USD 400 million organized residential furniture market is dominated by Godrej (USD 80 million sales in 2015), Style Spa (USD 30 million sales in 2015) and some other sub 30 million players. While having a few leading players dominate the market is consistent with the global furniture market structure, markets in the USA and UK also have a large number of smaller organized players.

What is distinctive in the Indian market is the small number of such players and their presence being restricted to bigger cities. They cover only 50 out of close to 500 Indian cities in India, serving just about 10% of the Indian population. The key challenge faced by these players has largely been around managing the high cost of real estate, poor logistics and the cost of inventory.

These are some of the key long term challenges restricting the rapid expansion of offline organized players in the Indian market. To put things in perspective, only 6% of the overall Indian residential furniture market is organized, while the same for USA is around 30-40%.

By the time the e-tailing market started to grow in the developed countries, the furniture market was already organized to the certain extent. Thus the e-tailing market made furniture players to resort to the omni-channel route.

It is expected that India is going to leapfrog the brick and mortar organized channel and move to the pure play online market. So while the organized market share in India and other developed markets would look similar in the long run, omni-channel would have a limited share in India. RedSeer expects online players to control 3.1% of the overall furniture retail market (of USD 22 billion) by 2020.

Customers are happy moving online for furniture buying: Key considerations
Key steps in buying Satisfaction with the offline buying process
Travelling to store Challenge in offline
Browsing through selection Worth doing offline as well
Checking availability of desired selection In Metro and Tier-I, it is still an issue
Comparing products at various stores Key challenge in offline
Furniture delivery and installations Delayed deliveries

The Second battle: 2015 market shares of online players and customer loyalties

In FY 2014 the Indian online furniture market was expected to be USD 40 million and the cumulative GMV run rate (net of cancellations) as of March 2015  was USD 130 million. It is expected that the online furniture market will grow with a CAGR of 75% and reach the USD 700 million mark by 2020.

The market share of online players in the organized residential furniture market will increase from current 10% to 51% by 2020.

Leading players in Indian Online Furniture market
Online Player March 2015 furniture GMV
(Estimated, post cancellations), in USD Million
Pepper-fry 24
Snapdeal 17
Urbanladder 21
Fabfurnish 19
Others
Total 81

furniture-perception

Pepperfry: Market leader in the Indian online furniture space. Sources70-80% of the products from Jodhpur. USP: Delivers wide variety of designs with customer reach spreading to 200+ cities.

Fabfurnish: Second largest player in the Indian online furniture space. Has the widest variety of SKUs among the horizontals. Largely operating in the market place model. USP: Focus is on providing affordable product categories, appealing to wider audiences.

Urbanladder: Smallest of the three major vertical players. 100% private label with a strong focus on quality and customer experience. USP: High end designs delivered through the best customer experience.

Snapdeal: The largest marketplace for furniture in India, with 15,000 – 20,000 SKUs and 400 suppliers. They are still working towardsgetting the customer experience and delivery right. USP: Largest and fastest growing selection delivered to a large range of locations.

Third battle: Change in customer mix will alter the online product mix and hence shift the competitive advantage

The current online furniture market is ruled by the early adopters. And hence the product/material split of of the online and offline market look very different. Whilehardwood constitutes 15% of the overall offline market, in online space this value is around 47%. As the adoption increases, the split of the online and offline markets will begin to look similar.

Online players who are targeting to play a pan-India role with a significant market share would need to realign the product portfolio, sourcing and the pricing strategies. Players like Urbanladder and Pepperfry  who are focused on  hardwood furniture sourced from Jodhpur, would need to source products from other locations as well; this would not only gives them access to a  wider variety of materials but also a distributed sourcing channel to address  larger volumes.

It is also expected that the online furniture market will be governed by the market place model, due to the very high number of SKUs and the different kinds of product positioning involved. A key competitive advantage would be the access and exclusivity to suppliers. Our initial assessment suggests that suppliers have very low affinity towards online portals and are ready to supply to multiple players. So the current hold/exclusivity of the supplier might not stay true for the future, as they can always cross the lines to supply to a wider range of online players.

Snapdeal andFabfurnish, are not currently considered to be quality focused, which is perhaps a closer reflection of the current market demand; conversely brands likeUrbanladder and Pepperfryare providing high quality material are aiming to create a brand image which will make them more acceptable to a wider variety of the consumers in the long run.

The war of market dominance: How is 2020 split expected to look-like

The war in the furniture space for  market share could  be fought, won and lost on  a few key strength areas (refer to the table below). While verticals, fast looking for investor money, are making claims on how they are better , horizontals looking for the next big  growth category  are not leaving a single stone unturned  to grab a  large pie of the market. Here is a step by step assessment of their strengths and weakness in the short-term.

Online Furniture Market: Assessment of key competitive areas
Assessment Areas Horizontal vs Vertical (1-5) And why
Sourcing 3:3 Growing share of MDF, plastic, metal and non-hardwood products in online market by 2020 is likely to reduce importance of Jodhpur as a sourcing hub. Horizontals with the their wide reach of seller onboarding teams can catch up with verticals
Quality Control and Warehouse 3:3 Horizontals are investing aggressively in warehousing and QC capabilities. Also, as online market become 20X by 2020, the sheer high volumes to be managed will allow horizontals to leverage their skills including technical capabilities with handling high volumes and compete effectively with verticals
Line Haul 2:3 Going forward, horizontals can work equally well with 3P logistics players to establish robust furniture line haul operations. Verticals are unlikely to gain a significant competitive advantage from their current line-haul tie-ups1
Delivery Hub management 3:2 Expertise in managing high delivery hub volumes efficiently is likely to become the key differentiator going forward. Additionally, horizontals like Flipkart and Amazon already have a network of 220+ delivery hubs across India each, which offers them readymade infrastructure to build upon for shipping furniture
Last mile delivery 3:3 Horizontals like Amazon and Flipkart would be able to leverage their large appliance delivery expertise for furniture delivery as well when the category is launched. Additionally, horizontal’s expertise in managing last mile shipment at scale is likely to help them stay competitive with verticals, when furniture volumes shipped grow to ~10,000 units per day from 350-400 currently1
Customer – Brand recall 5:2 Unaided brand recall of horizontals is 3-4x that of horizontals

 

Expected Online furniture market split 2020
Parameters Market Size
Overall Furniture market 22
Residential Furniture market 15
Online Furniture market 0.7
Vertical market 0.4
Horizontal market 0.3

Globally the online market leader for furniture doesn’t have a market share of more than 7-8%. India is also set to follow in the same path, thus attracting huge investments by 2020.

[About the author : Anil is the CEO of Redseer Consulting. His work focuses on advising clients on growth initiatives in emerging markets around new age companies and healthcare. ]