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The IKEA way

Here is what Indian e-retailers can learn from IKEA's democratic designs and frugal business model

Ankita Rai 

IKEA

Gurgaon-based online home furnishing and furniture retailer FabFurnish, which operates both online and offline stores, has found its niche in smart expandable and collapsible furniture. Translated, this means it creates flat-pack products that are assembled at the customer's home. Why is this insistence on flat-pack and in-home assembly? Simple: Cost reduction. DIY (do it yourself) products reduce logistics cost, damages and storage costs, ensuring phenomenal efficiencies at the backend.

But hold the applause. The whole idea is borrowed: the e-retailer has been inspired by global furniture behemoth IKEA. "Flat-pack furniture can help reduce the total cost by 20 per cent for smaller products like wall shelves and in the case of heavy furniture like of sofas or wardrobes, the total cost can go down by 50 per cent. DIY is also more scalable," says Vikram Chopra, co-founder and CEO, FabFurnish.com. "Our focus is affordable yet inspirational products. This is precisely what IKEA does."

FabFurnish isn't alone. Many organised furniture e-retailers in India have followed the success story of IKEA keenly, borrowing and tweaking some of its strategies and applying them in their own ventures to drive scale. Says Devangshu Dutta, chief executive, Third Eyesight, "The IKEA model presents significant learnings for India's online home and furnishing e-tailers in terms of product standardisation. Standardisation can bring credibility into the online business given the lack of the touch-and-feel factor."


Globally, IKEA derives its competitive advantage from low cost and smart 'concept-led' design, in turn leading to low prices - a lethal combination that makes IKEA a formidable brand. So what are those inspirational moves of the Swedish furniture maker, and is it possible to replicate them in India? More importantly, will the Indian players following in IKEA's footsteps be able to deliver equally enviable results?

Before we proceed, let us look at the home decor and furnishing market in India. The market is pegged at $20 billion (Rs 1.2 lakh crore), half of which is furniture. About 90 per cent of the market is unorganised. Modern home furnishing and furniture retailers working offline have not been able to scale up fast because the footprint and inventory requirement is quite large. Such stores typically need at least 15,000-plus square feet of space. And if you are hoping to set up shop on the high street then the costs can really go through the roof.

This makes online an interesting medium to go to. "Compared to a physical retailer who has to spend about a third of his revenues only on premises and manpower, prices for online furniture can be 15 to 20 per cent less," says Paritosh Bindra, chief operating officer, Home Needs Online. "The segment is still untapped unlike categories such as fashion, consumer electronics, books etc. There is scope for niche and label businesses to organise this market using web/mobile technology."

That said the biggest challenge in the online furniture market is the high logistics cost. Says Bindra, "While margins in the business are in the range of 40 to 50 per cent, logistics cost make up 10 per cent of the overall cost." What can also make or break is raw material, which is the single biggest investment for a furniture manufacturer. Major e-retailers are working on making their supply chain cost-efficient with one common focus: make it lean like IKEA.

Building a frugal supply chain
Broadly, two kinds of raw materials go into two different kinds of furniture in India. While the hardwood required for furniture is sourced locally, particleboards or medium-density fibreboard (MDF) are sourced from China, Malaysia, Taiwan etc. The price difference between an MDF-made product and a hardwood product can be as much as 25-40 per cent after covering the cost of imports. Unlike hardwood furniture, MDF furniture is assembled from knocked down parts. This makes handling, logistics and transportation easier. "However, this involves working closely with vendors to enable them to change their traditional manufacturing processes," says Chopra of FabFurnish, which sources its products from Malaysia, Brazil and Indonesia, apart from certain pockets within the country.

Another major organised player, Style Spa Furniture, part of Saroj Poddar's Adventz Group, also makes knock-down furniture. The company, which recently introduced an e-commerce platform to complement its brick and mortar retail stores, offers consumers the services of dedicated Style Spa furniture assemblers free of cost. It uses MDF boards, mostly imported from Europe. "It is not so much about MDFs being cheaper than solid woods. It is about design and manufacturing quality. Raw materials would be 60 per cent of the total cost of a product. So design is the key consideration," says DK Jairath, deputy managing director, Style Spa Furniture.

Mumbai-based online marketplace, Pepperfry is also looking at flat-pack design for the fast selling SKUs of its private label brand Mudra, which is 60 per cent of its total merchandise; the rest is branded, knock-down furniture. Says Ashish Shah, co-founder & COO, Pepperfry.com, "There is a lot to be learnt from IKEA: How to design a product that can be shipped at minimum cost."

Bangalore-based curated marketplace Urban Ladder is also inspired by IKEA's frugal approach to business. "Product design at IKEA is such that the consumer wants to buy every single piece. The second is the scale at which it operates. The idea is to squeeze out inefficiencies and ensure that the product reaches the consumer at the right price," says Rajiv Srivatsa, co-founder and COO of Urban Ladder.

Delhi-based Snapdeal's line-up comprises 60 per cent home decor and 40 per cent furniture. It sells both solid wood and MDF furniture. "Because of the ease of movement and scalability, many in the industry are moving towards easy-to-modify, acrylic-based furniture. This is a trend big retailers abroad have capitalised on already," says Amit Maheshwari, vice-president, fashion merchandising, Snapdeal.com.

Serving the last mile
More than one-fourth of furniture sold in India constitutes bulky products, such as bed, wardrobes, tables etc, which makes the task of delivery and installation cumbersome. Says Jairath of Style Spa, "I do not see DIY picking up in India. India will always have the services component attached to the offering," he adds, saying, "How efficiently one can manage the last mile can prove to be a game-changer."

FabFurnish is closest to IKEA when it comes to managing distribution. While the company manages the last mile itself, it charges a nominal fee of Rs 300 for assembling services. Even product shipping is not free.

Style Spa undertakes last mile delivery by itself. For its e-commerce platform, Style Spa plans to use its existing brick and mortar stores in 65 cities as fulfilment centres. Its physical infrastructure includes 28 warehouse and 115 physical stores. All online orders are transferred to the store closest to the customer location for execution.

In the same way, FabFurnish's hybrid model allows consumers to touch and feel its products first-hand. It has four brick and mortar franchised stores - one each in Faridabad and Gurgaon (near Delhi) and two in Bangalore. Says Chopra, "FabFurnish is built on three pillars: Price and design differentiation, access and trust. To build trust and credibility, having partner stores is a must." The average delivery time is five days.

Chopra thinks that India is not ready for a marketplace in furniture. Vendors are small and fragmented. So managing inventory in a cost-effective manner is crucial. "Our inventory levels are never more than eight weeks," he adds.

By September this year, the portal expects to notch up annual sales of Rs 200 crore and hopes to close 2014 with a revenue of Rs 180-220 crore.

If Chopra is sceptical about the potential of the marketplace model, Snapdeal is a believer. It markets semi-knocked-down products. While the transportation is handled by a third party, the firm keeps a hawk eye on packaging, lead time, quality and installation. Currently, it is the only player in the category that dropships even bulky furniture.

Taking inspiration from IKEA's way of conceptualising design, most of the products at Urban Ladder are designed in-house and outsourced to manufacturers handpicked from places such as Rajasthan, Bangalore, Mumbai and Delhi. It doesn't customise but allows free shipping, free installation and cash on delivery (COD). "We have to make it easy for a customer to purchase high-ticket items. We have made discovery simple with our clutter-free website and the purchase process easy by offering COD on even expensive items," says Srivatsa of Urban Ladder.

Urban Ladder is present in six cities - Pune, Chennai, Hyderabad, Bangalore, Delhi and Mumbai - and has warehouses in each of these cities, besides one in Jodhpur. It only sells products made of solid wood. It uses external logistics partners for inter-city shipment. Last mile and assembling services are provided by the company.

On its part, marketplace Pepperfry has brought down shipping costs to nearly a third. It has reduced the shipping timeline to three-eight days (from a fortnight earlier) by building its own last mile delivery programme. It has hubs in cities like Delhi, Jodhpur, Bangalore, Mumbai, Kolkata, Pune and Chennai, which also serve as sourcing and distribution centres.

Another key learning from IKEA has been that in a category like furniture it is not such a great idea to just sell a product. The accent should be on selling a concept. So that the customer can visualise how the furniture will look in a particular corner in her house. Lately, IKEA's online catalogue has attempted to simplify the shopping experience with its augmented reality app. Customers can virtually place items from its 2014 catalogue anywhere in their homes and see if they are of the right size, fit, colour and style, before committing to purchase.

So whether one talks of inexpensive design, the use of technology, a frugal supply chain or rich customer experience, IKEA seems to be the first port of call for Indian e-retailers in the space. The Swedish retailer's value proposition is based on simplicity which in turn makes it clear to consumers how IKEA is like no other furniture retailer. Sounds easy but replicating its model of simplicity is more difficult than it seems. E-retailers in India have the inspiration. Now they have to get the execution right.

IKEA makes low prices the high point of its strategy: Denise Lee Yohn
Denise Lee Yohn
Enlightened businesses usually avoid low price strategies because they tend to commoditise their offerings and squeeze margins. But home furnishings retailer IKEA uses low prices to fulfil its brand mission, cultivate loyal customers, and sustain profitable growth. The company is designed and operated "to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them."

Following are the key pillars of IKEA's business model:
  • While most retailers use design to justify higher prices, IKEA designers work in exactly the opposite way. They conceive each IKEA product by starting with a functional need and a target price and use innovative manufacturing processes to create functional products.

  • IKEA controls its product assortment and leverages its international footprint to purchase large volumes of raw materials, which pushes prices down even further. It follows a design philosophy based on offering products so they can be transported in flat packs and assembled at customers' homes. This lowers prices by minimising manufacturing, transportation, and storage costs.

  • IKEA also keeps prices low by empowering customers to make most purchase decisions themselves. It makes it easy for customers to choose the right products by displaying them in situ, with all specifications. It packages them for immediate self-service pickup and offers a simple return policy.

  • IKEA stresses the importance of product quality and minimises the company's impact on the environment. Reducing the amount of packaging for its products reduces carbon emissions, energy usage, and waste. Even its store design reflects this. For example, newer stores make more use of skylights, which reduce energy costs, improve worker morale, and give a better impression of the products.

  • IKEA has done an exceptional job of extending its brand mission to its thousands of global suppliers through "The IKEA Way"(IWAY). IWAY sets out a clear list of standards for everything from environmental practices to employee working conditions.

IKEA uses its brand as a tool that fuels, aligns, and guides everything the company does. This is why IKEA has thrived, while so many other big box retailers have failed.

This is what great brands do.

Denise Lee Yohn
Brand-building expert & author of What Great Brands Do

First Published: Mon, June 02 2014. 00:15 IST
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