Niche consumer firms grab investor eyeballs

Over the past seven years or so, dozens of consumer startups—niche brands in categories like food, tea, clothing, shoes, personal care, bags and others—have cropped up with the promise of creating better products than traditional consumer goods makers. Many claim to be ‘digital first,’ jargon used to describe their ease with online marketing and e-commerce.

As in public markets, consumer startup investments have been seen as defensive bets. They show slower, predictable expansion than the hockey-stick growth with pure internet startups and require far less capital.

This thesis, however, looked shaky in March, when brand startups saw their businesses come to a halt because of the nationwide lockdown. As it extended, millions lost their jobs or suffered income losses. Supply chains were in a mess and consumption took a hit. Investors and entrepreneurs at these startups feared the worst.

But after cities began to reopen in May, several brand startups, including personal care brand Mamaearth, electronics seller BoAT Lifestyle, fan maker Atomberg Technologies, health snack maker Yogabar and meat brand Licious, not only got back on their feet immediately but began to exceed their pre-covid-19 business.

Even many other startup brands that haven’t made full recoveries like Sugar Cosmetics, food ingredient maker Veeba Food, cloud kitchen Rebel Foods and mattress brand Wakefit are gaining market share in their respective categories.

Since June, Saama’s Lilani has begun to evaluate at least one new consumer brand investment every day. “Let me put it this way: in April, a down round was the best-case scenario for consumer brand startups; now, it’s the worst-case scenario for many," he said.

What’s helping startup brands versus many of their traditional rivals is a combination of factors. These firms are fleet-footed and have been able to launch relevant products like sanitisers, ready-to-eat and ready-to-cook food items, work-from-home clothing and home entertainment products faster than many larger companies in the same categories. Many startup brands tend to focus disproportionately more on the online channel—a feature that has become a competitive advantage in recent months as hundreds of millions of people are using e-commerce to buy an increasing amount of goods and services for fear of transmission.

“Consumer brand startups have certainly proved to be very resilient," said Kanwaljit Singh, managing partner, Fireside Ventures, a specialist consumer fund. “Earlier, some investors were worried about whether these digital-first brands can scale. But because of the efficiency of the digital channel in terms of customer acquisition and distribution costs, we are seeing consumer brand founders build high-growth companies with attractive unit economics."

The resilience of consumer brand startups comes as India is staring at a double-digit economic contraction in this financial year. Last week, India reported a 23.9% plunge in gross domestic product in the quarter to June, the steepest quarterly decline since the country started publishing quarterly figures in 1996. For the first time in decades, India is staring at a huge slowdown in demand even as the country is breaking daily records for transmissions on a regular basis and is expected to overtake the US as the country with the most covid-19 cases.

Amid this gloom, Indian tech startups have fared surprisingly better than many expected, partly because of an acceleration of digitisation across sectors. Early-stage deal volumes have bounced back and many investors now say that the funding downturn that was expected even before the pandemic may not be as severe as previously feared.

Sectors like education, content and software are witnessing a boom because of lockdowns. And now, consumer brand startups are emerging as the one of the seasonal favourites of investors. That these companies are not only growing rapidly but doing so with higher net margins is helping their cause at a time when investors are demanding better unit economics at startups.

Last year, consumer brand startups received $295 million in capital, up from $158 million in 2018, according to data with Venture Intelligence.

Covid boost

There are some common themes that are allowing startup brands to thrive. One, they were all relatively well-established in their categories even before the pandemic. Then, their products have now become especially attractive to shoppers (either demand in their categories on the whole has risen or because they are seen as value brands). Finally, most of these brands cater to the upper middle-class and rich segments, which have not suffered nearly as much economic pain as the lower middle-class and the poor.

At personal care brand Mamaearth, monthly revenues and orders are up three times from pre covid-19 levels. Because the firm has always relied heavily on e-commerce to drive sales, it has gained market share from traditional rivals that mostly sell offline. Since March, the company has added three new warehouses to meet the increased demand from existing customers in large cities and serve new customers in smaller cities and towns.

Keeping in mind popular trends, Mamaearth launched new products like a plant-based vegetable wash, hand cream with germ-killing power and moisturiser and products that have Vitamin C as a key ingredient. About 20% of the increase in monthly sales since March has come from these launches, Mamaearth co-founder Varun Alagh said.

“Because of covid, safety and hygiene are first and foremost in the minds of consumers. Our share in e-commerce is far, far higher than in offline, so when consumers choose online over offline, then obviously we gain major share. (While) many companies were going conservative on marketing, we went aggressive. Consumers were spending a lot more time online and searching for all kinds of categories, so we continued to keep the buzz going on our brand," Alagh said.

Like personal care, some segments in the electronics category are also seeing booming demand. As millions continue to work from home, they are spending big on quality headphones, laptops, sound systems and home entertainment products. This new demand has helped lift monthly revenues at BoAT Lifestyle, a digital-first brand that sells headphones, speakers, soundbars and power banks, by 20% from pre-covid levels.

“Products that enable work and study at home have become quasi-essentials," BoAT co-founder Aman Gupta said. “There are new markets of work from home, IPL at home, cinema and entertainment at home, education at home that have opened up. Online consumers weren’t spending on luxury brands and were primarily value-conscious anyway, which plays to our strengths."

The outliers

Some brands are thriving despite having poor digital operations.

After starting out in 2014, Yogabar established itself as one of the leading sellers of health bars and muesli in the country. The company put all its resources behind getting its product right and ensuring that its manufacturing processes and factory management were stringent. Before March, its digital marketing was amateurish. It lacked a fully-functioning website. Most of its sales came from offline stores.

Yet, its monthly sales have jumped 2.5 times to ₹6-7 crore since March, partly as overall spending on everything health has jumped. The company, which has raised $11 million from SAIF Partners, Fireside Ventures and others, now gets nearly half its revenues from e-commerce. It is opening a third factory, which is bigger than the first two factories together.

“For us, it has been primarily about the product – the brand has become so strong in the category that we have a big first-move advantage," Yogabar co-founder Suhasini Sampath said. “Our customers really appreciate that we’re transparent about our labels and ingredients. So we’re been rewarded for all this."

Because it has functioned more like a traditional brand than a new age startup, Yogabar, however, is relatively weak in digital marketing and online operations, leaving scope for rivals to restrict its growth. For instance, ‘Yoga Bar’ has become a key bidding phrase for health food in online advertising, which is used by the company’s rivals to capitalise on its brand.

“We’re putting a structure in place to improve our online operations and hiring people in direct marketing, engineering, marketplace management and customer service positions," Sampath said.

In fashion, too, where demand is at its weakest in decades, some startup brands are recovering fast. Fable Street, an office outfit brand for women, had to overhaul its product portfolio after it became clear that demand for its core products would disappear as work from home (WFH) became the norm.

The company launched a WFH product line including tees and t-shirts, shorts and eased-out bottoms to survive, co-founder and chief executive officer Ayushi Gudwani said.

Now, these new products contribute 60% of revenues, with the rest coming from accessories and formal wear. In August, Fable Street revenues had climbed back to more than 90% of its pre-covid levels.

Demand for cosmetics is picking up online as well. Kaushik Mukherjee, CEO, Sugar Cosmetics, said, “We typically sell more lipsticks as a percentage of our sales than other brands, and lipsticks still contribute more than 60% of our business. It’s probably a combination of offices opening up in cities like Gurgaon and Bangalore and women seeing lipsticks as a cheaper pick-me-up."

Mukherjee added that while Sugar Cosmetics monthly sales were at 80% of pre covid levels in August, the company expects net revenues in this financial year to increase to ₹140 crore from ₹105 crore in FY20.

Investment outlook

Because of surging demand and improving unit economics, consumer brand startups are attracting investors including private equity firms. Early-stage funds, too, are hunting for new deals and in talks to write follow-on cheques for their standout portfolio firms.

“If you have momentum and an established brand, you will be able to raise capital. Even if your revenues haven’t completely recovered to pre covid levels, but if the trend is upward, you can raise. A lot of big funds are showing a lot of interest. I’m, too, doubling down on my best companies," Saama Capital’s Lilani said.

Investor interest in consumer brands is the highest in the last five years, said Manu Chandra, managing partner, Sauce.vc, an early stage consumer fund.

“Unlike the tech companies that grow revenues fast but haven’t shown any signs of profits, the scaled-up consumer brands are growing fast and moving towards EBITDA profits as they don’t do heavy discounting. You will see several IPOs over the next two years in this space. Public market investors in India understand consumer businesses very well and many of these late-stage companies are great candidates to list," Chandra said.

One worry for investors in consumer startups is that the economic contraction will depress consumer spending for a sustained period. But entrepreneurs said that the money that people would have spent on eating and drinking out, travelling and other activities is likely to shift to other categories.

“Our consumers are in the (higher-income bracket) and most of them have actually seen a significant increase in savings—they are not stepping out, they are not going for annual vacations, not going to movies or clubbing. The economic situation will start affecting the personal care category, but the impact will be bottom-up than top-down, and our cohort will get affected last," Mamaearth’s Alagh said.

People will not drastically cut back on consumption but become more discreet about non-essential products and more “value-conscious," Fireside’s Singh said. “Overall, branded players, startups and others, will benefit in spite of the slowdown. And within this, digital-first brands will continue to see decent growth patterns," he added.