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Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:21} Christoph can you share some context to the strategy behind launching made.com in Germany?

{audio:0:00:28} When I joined made.com, in order to launch in Germany, the company had earned its right to go into the biggest market in continental Europe. They started in the UK and were already selling in France, Benelux and Italy. Germany was always considered a scary, competitive hairy monster, but there was a clear hypothesis on the ground to be successful in the market. I was not only the guinea pig for the German market but also the first presence in continental Europe with an office and things went well. We were able to replicate the trajectory that Made had seen in other markets and executed on the three-year business plan to the dot.

{audio:0:01:36} How would you compare Germany's furniture market to that of the UK?

{audio:0:01:42} The UK has one third of the purchasing power in and around London whereas in Germany, Berlin is the biggest city with three million people, with most other cities closer to 500,000. The top five cities together are roughly equal to the volumes in London. In the early stages of the launch, we saw that our customers were coming from urban centers, which makes it easier when you're scaling up down the line with an offline presence and also with logistics.

{audio:0:02:53} How do German customers purchasing patterns differ from those in the UK?

{audio:0:03:02} All the markets follow a similar growth trajectory due to similar demographics across regions, which leads to similar basket sizes and purchase patterns, and our collection is global. Sales seasons were particularly successful in Germany where they are sensitive to discounts. That was part of our early growth, but I have not seen any of the current numbers.

{audio:0:03:46} Did you focus mainly on urban millennial or older women, similar to the UK?

{audio:0:03:57} I wouldn't necessarily restrict it to women, but affluent urban customers between 30 and 50 years old were initially the most responsive target group.

{audio:0:04:09} According to the financials, Westwing has a higher portion of orders from women; is the customer base or the focus slightly different between Westwing and Made?

{audio:0:04:22} I cannot speak for Westwing but, at that time, they had a very different model which was exclusively based on an online magazine subscription and regular deals. They addressed female customers with their daily or weekly deals, but I would question whether the purchaser is always female. In the showroom setting, we always had couples, especially those who had possibly bought their first house. Women had a more keen interest in the details and had done some research up front, but the purchasing decisions were not solely taken by females.

{audio:0:05:24} How would you describe the made target customer?

{audio:0:05:41} Our particular target group was the graduate from IKEA, anyone who was willing and able or tired of buying packs and probably in their third rental apartment, even if they didn't own it yet. Prices were sufficiently affordable, especially on the accessories side, to give people the opportunity to find a different assortment than that of IKEA or other big box offline retailers, which characterized the German market.

{audio:0:06:27} How did you plan to position Made versus competitors in Germany?

{audio:0:06:31} The key difference was always on the design spectrum. You have to deliver quality within a price level, although average price points even among more premium offline competitors seem to be quite similar, which has to do with global sourcing. Everyone has access to the same producers so it comes down to brand differentiation. Made were focused on being a design-led organization, which remains a key indicator in all marketing materials.

{audio:0:07:44} Sourcing and design are intimately tied together, with deep relationships between external designers. That was the biggest advantage compared to big box offline retailers who tend to have a huge inventory risk. A typical IKEA store makes 100 million revenue per year, so there is not much flexibility in terms of taking risks on the assortment. The agility of Made and the strength of their design team allowed them to take more risks in the assortment and, therefore, stand out on the design spectrum.

{audio:0:08:49} How does the design approach differ between Made and Westwing?

{audio:0:08:56} Are you talking about the permanent collection of Westwing?

{audio:0:08:59} Specifically, their permanent collection but also their design approach, because Westwing claim to hire 200 design and inspiration-focused creatives. How would you compare the way Made claim to be design-led versus Westwing?

{audio:0:09:24} The DNA or heritage of Westwing stems from a deal-first environment, where they offer their customers special deals 365 days of the year – newness in their assortment – and their heritage is not in producing. Conversely, made.com comes from a production standpoint with a permanent collection which gets iterated behind the scenes. When I was there, a quarter of their 3,000 to 5,000 SKU collection was exchanged every quarter, giving them a gradual transition in newness, which they never advertised because the bulk of their revenue comes from established proven bestsellers.

{audio:0:10:35} That changed while I was there, and with the proliferation of Westwing and other traditional retailers focusing more on this design-led assortment, I definitely saw a reduction in having the lead with a specific unique item. Obviously, patents, if they are there, are very hard to enforce, and it is very easy to get access to producers who can simply copy designs.

{audio:0:11:17} So Made are design-led and come from an upholstery background, but everyone uses the same contract manufacturers and can see the best selling high-end designs from their competitors so it’s relatively easy to replicate. So how did Westwing become design-led in their own collection relative to Made?

{audio:0:11:40} I come from an e-commerce background rather than a design background, so to me, the differentiating factor was very fluffy. Made offer a safe environment with a curated selection. Online sales of furniture historically focused on the breadth of assortment. They had 60,000 to 100,000 SKUs, and offered every version of every brand. Even today, many brands allow you to customize the color and legs. There is too much choice with online furniture, but there is probably a sweet spot because you want to drive the customer purchase. Made offers a safe environment, with a wide selection of colors and styles without getting lost in hundreds of filters and customization options which offer no additional real value to the customer. When you look at the conversion rates of the permanent look and feel of the brand, that is substantially different to Westwing, which has evolved based on their DNA. Westwing have to create newness daily and are focused on price reductions, whereas Made are more subtle.

{audio:0:13:39} Seasonal sales were in line with the industry but were not massive reductions because of their daily good price policy, whereas the lever Made were able to pull was more on the free shipping side. They never removed shipping costs because that was a good way to incentivize new customers. You come to a website and know, at some point, there will be a sale or some kind of trigger. Whether it's newsletter discounts or special sales, that was always a good trigger to convert and nudge people to purchase a sofa, which has a long sales cycle.

{audio:0:14:34} What do made.com do from a design perspective that is hard to replicate?

{audio:0:14:42} It comes down to their DNA. Design and purchasing departments are traditionally separate in this sector. You have revered designers, similar to fashion, who make a design, then the purchasing department find the right producers to make it and look at the sell-throughs, and the following season design come up with new ideas. At made.com everyone intimately sat together. The head of purchasing was a brilliant lady, with decades of experience, and would be thinking about margins during the design process. She would get feedback from the manufacturing process to realize additional gross margin gains, without compromising on the design integrity. That agile design process is quite unique and difficult to replicate.

{audio:0:16:03} Made.com is successful due to their just-in-time delivery supply chain. Having minimal inventory risks allows them to weed out product designs which do not work. They are able to be bolder and at made.com everything is attributed to the brand. Designers are not put in the spotlight which allows the brand to create a uniform message which can be fluidly transitioned into the marketing materials. Marketing, design and purchasing sit together and think about how to adapt the latest season styles. This has now become the best practice and people are adopting these methods similar to how corporates adopted lean working methods. The business model and structure of made.com allows them to better implement that.

{audio:0:17:55} Made have some salaried designers but most of them are freelance and get paid by royalty. Products may be exclusive but what stops them working for Westwing?

{audio:0:18:14} There are many business-minded designers who sell their name to various brands. Ultimately, if you look behind the hood, the designers who are brand names and licensed to Made, make up an insignificant part of the sales; the bulk comes from the in-house team who collaborate with an extended working bench and are able to imprint the Made design language on top of those external designers.

{audio:0:19:15} They reported in their prospectus that 33% of SKUs are made by in-house designers, but they seem to be reliant on external designers for collaboration ideas and input to new products.

{audio:0:19:34} It would be interesting to see how much is made in-house, because I would posit that the in-house products are the ones which drive and have the highest margins. If we look at absolute contribution margin, the permanent collection has changed with scale, periodically weeding out things which do not sell, and bringing things into the permanent collection which drive margin. Obviously, the licensing costs are optimized when done by the in-house team.

{audio:0:20:17} You can use third-party designers to get new ideas and do a small batch production to test the adoption, then iterate further in-house with similar products and own the full IP in the long run.

{audio:0:20:38} The model is inspired by fashion trends and an extended workbench of designers. At made.com, the brand product is more prominent than the designer names. IKEA have tried to distinguish design-led parts of their assortment from their permanent collection to bring in more foot traffic, whereas made.com is driven by their in-house agile design process.

{audio:0:21:25} How does design and sourcing team work together to develop products at made.com?

{audio:0:21:45} We typically think in quarters and again, it is led by business. The secret sauce comes from balancing the manufacturing of the inventory and forecasting, based on quarter objectives and marketing spend; you need to plan the higher-level budgets of the inventory, then split it out into categories across countries. You look at the sell-through rates of products which were unsuccessful then launch new collections based on design trends and fashions. One initiative was called the talent lab, where amateur designers contributed ideas which ultimately became top-selling items. The designer and purchaser will sit together with the CAD drawings and iterate, discussing materials, availability and pricing with the manufacturing partner. The design inspiration comes from fashion competition designers, but the process of bringing these collections to life involves speaking with manufacturers and finding road blocks. You also need to work out the best sustainable packaging that ships well across oceans.

{audio:0:23:45} Is there a risk of designers not being willing to work for Made in future?

{audio:0:23:51} I do not think so. It remains a big problem in the industry that these creators and designers have a tough career path. After studying at a renowned design college in London, they have to make a name for themselves, and it is difficult make money with your own name. The few designers who stand out are also business minded and are able to license well. On the supply side, there is an oversupply of talent and inspiration, so that is not a constraining factor.

{audio:0:24:40} Do designers have bargaining power to demand higher royalties or larger fees?

{audio:0:24:46} It was different in the beginning when Made grew with a handful of designers and perhaps they had preferred terms, but today, all the terms are probably industry standard.

{audio:0:25:12} Being design-led is clearly a differentiating factor in the industry; is there a risk that Made could lose their design edge over Westwing or other competitors?

{audio:0:25:31} That is always a possibility. Hundreds of brands have died on Oxford Street.

{audio:0:25:52} If Made no longer has a design edge in five to 10 years, or many competitors have a similar design-led strategy, what is the long-term differentiator?

{audio:0:26:10} Looking at ruling out factors, there are not many new entrants in the category, but there are competitors and traditional brands who are looking to poach some of the talent. The agile design process and being free to take risks is something not even John Lewis could do due to their completely different organizational structure and requirements. Size matters and once Made makes a billion pounds a year, many things will have to be rethought – everything from the supply chain to the design process – because it will no longer be simple to weed out new designs which do not work.

{audio:0:27:35} I am not privy to anything which is not public but that is possibly a reason made.com launched the marketplace. Westwing and made.com are coming from two different business models, and are both leaning more towards each other's models. Made is looking to launch a marketplace whereas Westwing have already transitioned into a permanent collection. The question becomes, which is harder to replicate? Is it harder for Westwing to replicate the design process of made.com, or for made.com to work on a marketplace model who work with many more third-party brands?

{audio:0:28:20} Westwing get 85% of their sales from customers who visit them 100 times a year. If they replicate the made.com design process and product quality and own the customer relationship, why wouldn’t that pose a threat to Made in Germany and Europe?

{audio:0:28:44} The total market is €40 billion and the share of these two players is insignificant, so I would not talk about direct competition as it is quite a different business model. There are so many different possibilities for both of them to grow in various directions. There is a bigger threat from traditional retailers waking up and picking up on some of the bestselling designs. When we brought new products to market, we would not see a copy for at least two years, whereas now you see easily see the bestsellers. People screen each other's websites and use tools to work it out because, naturally, bestsellers are placed on top of the site. A problem with retail in general is that everything starts to look similar for bigger brands.

{audio:0:30:03} Could Wayfair or IKEA come to market faster than Made who take months to get products to customers?

{audio:0:30:19} A bigger threat is that platforms could offer a better overall service quality. Wayfair or Amazon could, at some point, offer shorter lead times by storing more inventory, which is a big threat to the conversion rate of leaner models, but very few could pull that off. Wayfair and Amazon could provide a platform for independent brands with very good design capabilities to offer competitive products, but you have to comparison shop in those environments, selecting from thousands of SKUs. In a captive space like Westwing or made.com, you are in a safe place where it is also easier to choose your product.

{audio:0:31:36} Back to your point on Made launching third party brands in a marketplace, what are their main challenges integrating third party products into their offering?

{audio:0:31:48} How new cost structures and incentivization will have an impact on retail prices.

{audio:0:31:59} What do you mean the new cost structures?

{audio:0:32:03} When I was there, we were able to aggressively increase gross margins quarter on quarter and year over year, which the big players cannot do. By moving production from China to Vietnam to Indonesia and back and forth, once you work with external parties it becomes harder to negotiate year over year gross margins. You also need a uniform design language which made.com has created for its brand and I am excited to see how they will integrate external providers, whether that is done prominently or more subtly.

{audio:0:32:53} Similar to Wayfair's house brand being produced by third party producers?

{audio:0:33:00} The most prominent example is Amazon, who make their own furniture but position it with different names. It remains to be seen how that model translates into the brand promise, and whether that's done similar to how Westwing separate the two.

{audio:0:33:41} That is something which has definitely evolved at made.com with their new feeder operations in Europe. There is definitely some expertise that Made can share with its market providers and adapt based on requirements from these brands, whether they have their own warehouses and infuse them in, because Made has the flexibility of working with multiple third-party providers in each country. They can choose to inject before the last mile or into feeder operations for all of Europe or only the UK, which is now separate and a big advantage from Brexit. For European Italian designers who want to sell to the UK, made.com could be well-placed to offer operational support when it comes to import. They have more flexibility but I have no privileged information on how that marketplace operation will function.

{audio:0:34:48} It will be interesting to see how Made launch the marketplace and keep the brand promise they have spent so long building up, which is design-led and one house brand as you browse and view their products.

{audio:0:35:03} Design, price and quality are the three brand measurements.

{audio:0:35:10} As this evolves, it's interesting to see how the assortments are converging. Made are coming down from the design-led end to a third-party marketplace to expand their range. Westwing are coming from a daily inspirational sales method to a third party led collection. Wayfair chose to be service-led and integrate with suppliers. Obviously, Wayfair could own the service-led mass market approach, but when you have two smaller players like Westwing and Made competing for similar customers, how do you see their assortments evolving?

{audio:0:35:57} It is not even between Westwing and Made. There is a lot of talk about new technology such as augmented reality, which will be a big step change for online furniture. Wayfair can solve the last mile delivery and service promise, and could offer their services to smaller independent brands to become the Shopify for furniture designers. That could flip the whole thing on its head because, all of a sudden, you could create your own lamps in Italy, store them in a third-party fulfillment center and get them delivered with Wayfair, by a marketplace operation, and I've seen a few small operations grow through marketplaces. Traditionally, they start on Amazon or Home24 but could open up at some point.

{audio:0:37:04} Are Wayfair effectively becoming the Amazon of furniture?

{audio:0:37:09} Exactly, and they could do that in the background while offering logistics services and owning the whole operation and being the service delivery person. There is a player in the UK who have done that well for brown goods. Whoever does that will allow smaller independent producers to thrive, which could be a massive threat or an opportunity to collaborate with Westwing. I am not sure if Westwing are big enough to do this on their own.

{audio:0:37:49} They are experimenting with last mile but Wayfair are completely different. If Wayfair becomes the Amazon of furniture across Europe and the US, offering third party logistics and owning the last mile, where does this leave a company like Made?

{audio:0:38:12} One piece which has been useful for driving conversion is the offline presence, which brings a closer relationship with the customers. With the emptying out of big high streets, there is an opportunity to go back offline and create an environment for customers. Although you can buy furniture online, similar to shoes, it's always quite good to try it out and feel the environment. made.com have done that well but the showrooms are not click and collect. They could offer click and collect but, more importantly, it's an environment where you could inspire people to spend their weekends or a few hours after work, which again comes back to the brand experience. However they do it, the brand has to tell a convincing and compelling story to engage customers, which Wayfair will never do. People hate Amazon for what it is and who is behind it, but convenience and price always win.

{audio:0:39:52} How could that change for furniture? Could Wayfair aggregate demand so that every consumer checks their site because of the convenience and it takes eyeballs and share away from Made?

{audio:0:40:11} Over 50% of US e-commerce searches begin on Amazon as opposed to Google.

{audio:0:40:18} If I go on Wayfair and see a similar design to Made because everyone uses the same producers and designs, is there a risk of me moving from Made to Wayfair?

{audio:0:40:37} That comes back to the safe environment and being brand loyal, but if there is a 10 weeks difference in lead time and it is 20% cheaper, you would think about switching.

{audio:0:40:55} Does the daily interaction that Westwing have with their customers build up their brand and more of a relationship?

{audio:0:41:04} It is always more cost effective to have your own media channel where you don't have to spend money to attract eyeballs. That doesn't necessarily create loyalty but is remains a small part of the pie. It will be more interesting to see who will be a real contender for IKEA.

{audio:0:41:31} Who do you think that could be?

{audio:0:41:32} At the moment, it is hard to say. All the new venture capital moved out of that field because it was too capital intensive. It took a lot of time for people to exit and valuations were unattractive. Now that the eyes are off the prize, it is a great opportunity for the right people with deep pockets to collaborate. We have seen a trend in the aggregation of Amazon marketplace seller brands being bought up. Almost $10 billion has been raised in the last year for the new P&G or Unilever, so someone might very well buy or offer.

{audio:0:42:33} Isn't that what Wayfair are trying to do, where they have no inventory risk and practically become a freight forwarder and offer a wider selection?

{audio:0:42:43} Yes, but it's very different being an operator of a design brand and being a service. Wayfair is a service provider who could create an interesting portfolio of design-led brands under one roof and distribute them through the available platforms.

{audio:0:43:06} After Wayfair entered Germany, how did you see them impact the industry?

{audio:0:43:13} When I was still operating, Wayfair had dipped their toes and spent a lot of money, then retracted again, but they are here to stay. It's hard to say from an outsider perspective.

{audio:0:43:30} If you look at market share, it is too early to tell.

{audio:0:43:35} Do Made have any volume commitments with contract manufacturers?

{audio:0:43:51} The associations are quite loose. They now have several offices in Southeast Asia and will have on the ground contact with designers, but the product development process is less sexy than it seems on the outside.

{audio:0:44:26} Why is the lead time so long?

{audio:0:44:29} It is about inventory risk and lead times could be reduced with more inventory. With scaling, significant investments have been made in warehousing in both the UK and continental Europe, and warehousing capacity is vital if you want good throughput.

{audio:0:45:00} With Covid, all of a sudden, you have old inventory piling up in the warehouse and cannot bring in new inventory. Westwing and Made are past the inflection point where it could go wrong but are not yet at the point where everything works seamlessly.

{audio:0:45:37} Do you believe Made has to take more inventory risk to reduce those lead times?

{audio:0:45:43} Yes, but once the investment into infrastructure and warehousing amortizes, you become less flexible and take bigger risks on inventory but keep your promises to customers.

{audio:0:46:05} 60% of their product is sold in transit, so is the idea to get the designs and small batches made in production facilities in Vietnam and Southeast Asia to get inventory sold up front?

{audio:0:46:26} Having the design marketing on the ground is a competitive advantage and being able to sell the product before it arrives in a port, results in strong net negative working capital.

{audio:0:46:43} Don't big suppliers want Made to commit to a certain volume?

{audio:0:46:56} Their secret sauce is the strategic allocations between different suppliers, allowing their risk to be significantly reduced across several countries.

{audio:0:47:09} Is it about managing supply and demand, putting up the inventory as quick as possible and getting the orders in and managing the schedule to the suppliers?

{audio:0:47:17} Yes, and it comes down to balancing the risk of quality control and safety with onboarding new suppliers, but that is too far off my expertise to speak about authoritatively.

{audio:0:47:33} Small design-led stores could run that model for a while but as you get to a billion dollars in revenue, you need to take more inventory risk and give better service to your customers. You cannot make a billion dollars of revenue and wait five months for product, so it changes the business in terms of how it's run and the risks involved?

{audio:0:47:58} The supply chain glut raises questions about production opportunities in Europe, as you get into expansion of the assortment. Higher margin accessories could be sourced in Europe, leaving the staple sofas in the Far East.

{audio:0:48:27} What is the typical customer buying behaviour in the first and second year?

{audio:0:48:39} Customers return every five years on average, but you have to look at different cohorts. There are cohorts who buy lamps and accessories and those who buy bigger baskets, but the average basket is similar across all these, between 300 EUR and 500 EUR.

{audio:0:49:07} Made's gross ARPU was 287 EUR for Europe last year and 310 GBP for the UK, which is over double that of Westwing.

{audio:0:49:19} Yes, because you have a higher portion of bigger items. Several years ago, Made expanded their assortment to stimulate repeat purchase behavior, but there is probably a lot more room there, even to onboard with a marketplace.

{audio:0:49:39} Accessories and homewares?

{audio:0:49:42} Yes, because if you look at the DNA, Made comes from staple goods; they are well-placed to do home electronics.