01 Jun 2016
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Case Study: On the Table

Should Gaia Design be a furniture company or a logistics one?
Re: Ted Hibben (MBA 1986); Jerome Hamilton (AMP 179); Sanjay Bhatnagar (MBA 1993); Ben Beckhart (MBA 1987); Ali Shihabi (MBA 1985); Kiran Brahmandam (GMP 15); Cindy Park (PLDA 12); Chris Johnson (MBA 1993)

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Philippe Cahuzac (far right) and his Gaia Design cofounders (Photos courtesy of Gaia Design)

Philippe Cahuzac (far right) and his Gaia Design cofounders (Photos courtesy of Gaia Design)

Gaia Design is a Mexico-based online furniture company, selling the type of modern, design-driven pieces popular with the country’s young and growing middle class. With funding from angel investors, the company launched in Mexico City in October 2014 with 3 employees; now it has more than 50 employees, 35 percent growth month over month, and an additional $2.5 million in venture capital from American and Mexican firms.

But Gaia Design has not grown the way that Philippe Cahuzac (MBA 2014) and his two cofounders—former coworkers at an online furniture company in Brazil—had anticipated.

Compared with the United States or even Brazil, Mexico has an unsophisticated e-commerce market. Gaia Design was prepared for the challenge of educating and acquiring customers new to making large online purchases. But what the company didn’t expect was the absence of the infrastructure necessary to support e-commerce. Very quickly, Cahuzac realized that the company’s attention and resources had to be invested not in furniture design but in a warehouse, a fleet of trucks, and a staff of drivers—the type of capital-intensive vertical integration he planned for later on, after Gaia Design had established its reputation as a source for well-designed, good-quality furniture. The company has also encountered limited choices among payment vendors and difficulties finding employees with e-commerce experience, necessitating extensive training.

The Question:

Cahuzac and his cofounders had planned to run a furniture company, not a logistics one. How can they focus on and scale their furniture business when the necessary e-commerce infrastructure does not exist in Mexico?

The Answers:

Bingo—you’re in (or should be in) the logistics business! You’ve stumbled on an unmet need in the marketplace that eclipses just the furniture niche. Yeah, it’s capital- and management-intensive, and not as flashy as a style-driven business, but go with it.
—Ted Hibben (MBA 1986)

Start the delivery operation but structure it for spin-off, because there’s clearly an opportunity for e-commerce logistics in Mexico. As part of the startup, look for other e-commerce companies that could partner in the investment.
—Dave Roberts (PMD 58, 1989)

Gaia Design should use an already established logistics company such as UPS, FedEx, or DHL. Although the e-commerce infrastructure as a whole is not good in Mexico, these organizations are large enough to drive world-class supply chain methods and have demonstrated technical success. When I worked for Ford Motor Company years ago, we partnered with UPS quite successfully for supply chain and logistics improvements. They should focus on their core business and let the experts help with logistics and supply chain.
—Jerome Hamilton (AMP 179, 2010)

Investing in logistics is what Amazon.com had to do, and this was in the United States!

Partnership with established logistics companies is a choice, and renting warehouse space may be possible, but building a completely captive system and investing in it would destroy the premise behind an asset-light company.

If none of the above is possible, then a change in your business model may be necessary. Go local: pre-sent choices to customers only from local suppliers so that the delivery and logistics is managed by the seller, but monitored and guaranteed by the e-commerce company.
—Sanjay Bhatnagar (MBA 1993)

Setting up logistics infrastructure may be an unexpected burden, but it represents a strong opportunity to build entry barriers for future competitors. This is the story of Sabritas (Frito-Lay Mexico), Bimbo, and other power brands and billion-dollar firms in Mexico. These companies had to set up direct store delivery vans because back in the 1960s and ’70s—and still now—there was no way to reach the consumer who shopped at mom-and-pop stores. Today their distribution networks are formidable barriers to entry for most competitors in their segments.
—Benjamin Beckhart (MBA 1987)

Focus on US/foreign sales so logistics can be outsourced to a global company like DHL. Mexico has a cost advantage, so it can naturally be a production center.
—Ali al Shihabi (MBA 1985)

Consider researching how Indian furniture startups and food companies are solving the delivery infrastructure problems. In some cases, they are trying to be the logistics/delivery company delivering furniture/food instead of the other way around.

Have you considered the option to have brick-and-mortar stores with online being an add-on? You will need a warehouse, but you won’t have to worry about the last-mile delivery problem.

As for payment, consider a partnership with a bank, building your own payment gateway, or taking cash on delivery. A lot of e-commerce companies in India take cash on delivery for online orders.
—Kiran Brahmandam (GMP 15, 2013)

Partner with home goods retail companies with logistics infrastructure. You can leverage their experience, real estate, and logistics. In exchange, you can expand their product offerings and grow their customer segment.
—Cindy Park (PLDA 12, 2013)

Here are my quick thoughts based on years of emerging and developed market experience: (1) You need to figure the 80/20 for the business. What is the profile of 80 percent of your customers? Focus on better serving these customers. (2) Manage the online part of the business outside Mexico—there are many Spanish speakers who are e-efficient. (3) Focus on scalable furniture sales and distribution. This may mean B2B rather than B2C.
—Christian C. Johnson (MBA 1993)

Got a case? To take part in a future “Case Study,” send an outline of your company’s challenge to bulletin@hbs.edu

From Baker Library:

Rethinking the direction of your firm? Discover research by HBS faculty on lean startups and pivoting. Explore potential partnerships with furniture retailers and logistics companies using data OneSource Global Express. Or, learn more about the evolving customer base in Mexico. Delve into ABI/Proquest to read articles about firms like Amazon, Urban Ladder, and Pepperfry that are tackling logistics challenges in both mature and emerging markets. Learn more about how Baker Library can help you with your research needs.

 
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Featured Alumni

Featured Alumni

Class of MBA 2014, Section A
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