First published on The Business Times on 01 April 2020.
While most other comparable digital retailers may focus 90 per cent of their budget on marketing and 10 per cent on product development, home-grown furniture retailer Castlery does the reverse.
Not that terms and concepts such as "targeted marketing" or "cost per acquisition" do not pepper the interview we had with co-founder Declan Ee, at Castlery's 11,000 sq-ft showroom in Jit Poh Building.
But at the heart of it, the team behind this online furniture store remains deeply committed to their product, and the challenges they face - which range from logistical matters to finding the right partners to work with - remain even as Castlery finds itself increasingly operating in the online space and moving away from brick and mortar retail.
"If you go to B2C (business-to-consumer) companies that sell furniture in the US, most of them are very focused on five to six products. We have a spread of products. So they probably spend 90 per cent of their money raised on marketing and viral campaigns and 10 per cent on product development," says Mr Ee.
"For us, it's the opposite. In the first five, six years, we spent 90 per cent on product development. We wanted to make sure we can engineer good products because ultimately, this is what we're selling."
In fact, the founders still sign off on every piece of furniture, although this is a practice that they really are trying to wean off, says Mr Ee with an almost sheepish laugh.
"I think that's the key difference. There is a real pride in product development ... It's like music, if you complete a song but you don't feel for it, there's a bit of an obsession to perfect it," says the student of law who went on to do a stint in investment banking while spinning electronic dance music.
Looking for scale
Even while the co-founders had no furniture retail experience between themselves or in their families, they knew they had to internationalise. And they also knew they had to structure themselves accordingly from day one.
"If your sofa is like S$20,000 apiece, maybe internationalisation is not so crucial. When you make such big margins, you don't need that volume; it's about closing those tickets," says Mr Ee. "We're not in that business so that's why we needed to scale."
"(With internationalisation) you see your economies (of scale) kick in on so many fronts," he adds.
"Instead of ordering 20 or 30 colours apiece, you can order 50, 60, 80, or 100. So it shifts your economics in terms of buying price. And also your logistics and marketing - as a percentage of revenue, it dramatically starts to get more and more efficient."
The company has certainly stuck close to that internationalisation mandate. Following its launch in Singapore in 2013, it has since expanded its footprint to include Australia (2017) and the United States (2019).
When Castlery first entered the Australia market, they brought with them their online-to-offline model. Otherwise known as O2O, this strategy finds consumers online and brings them into the real world to make purchases in physical stores. Castlery started in Singapore with this model, and maintains it to this day.
"When we started we were very nervous, so obviously having Enterprise Singapore to hold our hand (was helpful). And the account manager on the ground was very savvy and on the ball. He kept visiting us; having a home away from home was nice," says Mr Ee.
"The great thing about Enterprise Singapore is they have offices on the ground ... so if you ask where do people go for coffee, what are the consumption patterns, where do you watch movies, buy furniture, buy clothes, eat, they can give you that spread because they've lived there for two to three years. In our case, I think the account manager was there for six or eight years so he knew Sydney really well."
Not that Castlery's first foray overseas was entirely stress-free.
In the first year, their burn rate was in the six figures every month.
"For a startup, it's not so crazy, but you (feel the) stress," says Mr Ee with a laugh. "And you ask questions right? Is there a way to scale internationally without such a high burn rate."
One of the big challenges faced by the company was financing and the decision-making around stocking.
"Do you stock more or stock less? If you stock less and you can't meet demand, you actually drive up marketing costs because you have to spend more to convince someone to wait 12 weeks versus getting the sofa in one or two weeks. You stock more and you have the risk of overstocking."
The team at Castlery decided to err on the side of caution but being careful obviously came with its own set of challenges.
"We're so careful because we have no room for error. I think it is a good and bad thing, right? Good, because you don't have inventory issues, bad because you don't dare to swing.
"Let me give you a classic example - the mooncake festival. For those that make mooncakes, if you don't swing during the mooncake festival, you're done, you lose 70 per cent of your revenue. So the trick is to know which periods of the year to swing."
The fact that they were operating in a foreign context also hampered their decision making. Having operated in Singapore for many years, they understood how their target audience would react but in Australia, there were more unknowns.
In June last year, the team decided to take a leap of faith and transition to a pure online model in Australia. In late 2019, Castlery entered the US market, taking this model with them.
"We shut the store in Australia in June and in November we had a record month," says Mr Ee.
"There was a lot of internal debate between the partners. In the end, we were like 'you know what, our lease is ending, it's now or never. Either we sign the lease for three years or we just do it'. And we did it!"
It is a gamble that has paid off for Castlery.
"The amount you save on rent, you can focus on optimising your online marketing and campaigns," explains Mr Ee. " If the market is big enough, if you do your targeting well enough, someone will buy your product ... So this gave us the confidence to be like okay, let's try a pure online market in the US."
Breaking into the American market proved easier for Castlery. As Mr Ee puts it, "when we started in the US, we had no store, no staff. We just registered in Delaware, set up all the partnerships with the logistics companies, pressed a button from Singapore and started. The team was all here".
But he acknowledges that this was easier because the market had already been primed.
"Kickstarter changed consumer behaviour. In fact, it's almost an advantage to be a new brand because consumers feel like 'this is something unknown, I discovered it'. It's like coffee, right? Before the third-wave coffee movement, everyone wanted a Starbucks. But now if there is a new barista in the neighbourhood, you don't mind trying it," he says.
There is also the fact that other companies have proven the thesis. Mr Ee cites companies such as made.com in the United Kingdom and the United States' article.com as "reference models" that have guided them.
"If you deliver your product well and give a good customer experience, if you do your online targeting properly, I believe that our target customer - urban professionals and young families, aged between 25 and 35 - are willing to give you a chance."
Finding logistics and last mile partners was also easier given that the US market is more developed.
"In the US, they even have things like 'white glove' where they actually assemble (the furniture) and put it in the room of your choice. Or, there is a mid-tier choice where they can bring it into your house but they don't assemble it for you. Then there's a choice where you pay less and they drop it off at your front door."
Logistics players there are also more willing to work with startups as they have seen the market grow in the past five to seven years.
"They are like, 'okay, this sector is growing so I'm happy to give good rates at the start, to help you guys grow. In Singapore and Australia, the market is less developed, so they're like, 'will you be around in the near future? Better be safe'."
Mr Ee quips: "As an entrepreneur, you're always looking for the tipping point - when and how you can get somewhere the fastest. Now, looking back we should have gone to the US straight away. But it's easy to say that now because we have learnt all the lessons."
Built on fundamentals
Even as Castlery is scaling the digital side of its business, touching more markets through its portal and online marketing campaigns, a lot is being done to ensure it is operationally ready.
This is where their suite of suppliers plus their own factories comes in.
"Our supplier network is probably 30 to 40 strong across the region. Supplier network meaning factories that make products for us ... we try and find the best quality producer at the right costs, who can give us the right service in a particular kind of product. So solid wood could be someone from northern Vietnam, fabric could be someone in Hangzhou.
"Our factories serve us primarily. So for example, certain kinds of sofas are done purely in our factories. In fact a big bulk of our bestsellers are done in our factories."
As part of efforts to support their international growth, Castlery recently set up a regional distribution centre in Malaysia.
Enterprise Singapore worked with them to identify and implement various digital solutions to help them improve on their capabilities. This includes an automated warehouse management system which is able to, among other things, automatically optimise the furniture arrangement to minimise air pockets.
They also implemented an Enterprise Resource Planning (ERP) system that they developed in-house, and an automated warehouse management system.
The ERP system for instance helps Castlery manage information from different sources such as warehouses, back-end accounts and their consumer-facing website. It, for instance, allows them to track their inventory in realtime to know when stock is running low and to resupply.
As part of the ERP solution, a "lead-time indicator" was installed on their website. Castlery was the first in the market to implement such a feature, which enabled customers to know which items can be delivered in the timeframe that they wanted.
Enterprise Singapore is also working with Castlery to identify suitable manufacturing facilities in Johor Bahru, Malaysia.
With such fundamentals in place, the team is also looking at introducing functions to enhance the buying experience.
At the moment, Castlery has an iOS app which allows users to take a picture of any furniture and it will, using image recognition, map back to the closest match in Castlery's collection.
"It is part of our process to digitise the whole retail shopping experience for furniture, especially for the US and Australia where we don't have a store," says Mr Ee.
"The idea is, what can we do to take away the need to touch and feel?"
While Mr Ee is reluctant to share too many details, the app will leverage augmented reality (AR) technology and potentially involve working with the design community to help customers better visualise their space.
"I think it will take time for consumer behaviour to migrate (in that direction). Augmented reality shopping is not new, but people aren't really using it."
What Mr Ee is willing to say on the record is that these are features they are hoping to roll out in the next 12 to 18 months and that the app is a "key project that will get more and more critical in the shopping experience.
But even as Castlery moves deeper into digital territory, ask Mr Ee if the team will ever take Castlery purely online for Singapore and the question gives him pause.
"I do enjoy the physical presence of a store," he says finally. "There is a certain pride that comes with doing it, you know? And that satisfaction of creating it."