Direct-to-consumer brands to draw in next wave of shoppers in India: Report

D2C brands could get fillip as covid-related restrictions on stores prompt more Indian shoppers to go online, discover brands and open up channels of reach and distribution, Avendus said. The company defines such brands as those that draw a majority of their revenue from or customer acquisition from direct to consumer online channels or those that started with an online-first distribution before going omni-channel.

Since 2016, over 600 such brands have entered the market, racking up over $1.6 billion in funding. Some of these brands include Lenskart, Licious, Zivame, Boat, Wow Skin Sciences, Healthkart, Mamaearth, MyGlamm, Sugar, Country Delight, Atomberg, among others. Avendus expects consolidation activity in the sector in the next three-to-four years, either as roll-ups or existing large consumer goods companies buying D2C brands.

“The new age consumers in India are brand-starved, they’re looking for variety," Pankaj Naik, co-head, digital and technology investment banking practice at Avendus Capital told reporters at a virtual press meet. Naik said consumer behaviour has undergone a shift, “we're seeing that in terms of online adoption, plus women have emerged as a significant new class of consumers". Moreover, a strong ecosystem has emerged with horizontal and vertical e-commerce players, social media marketing, plug-and-play supply chain and logistics options, aiding the growth of such direct-to-consumer brands.

Such brands, however, will need to have an equitable mix of online and offline sales to achieve scale and reach more households.

India’s overall retail market is still dominated by unorganized small stores, with overall contribution of e-commerce still in single digits (4%). However, online spending in India is expected to grow from $39 billion in 2019 to $200 billion over the next five years, Avendus said. The e-tail market in India will lead the shift to organized retail in the next five years. "While the macro tailwinds have set the stage well for D2C brands in India, COVID-19 has further accelerated online adoption amidst the temporary closure of physical retail stores and the growing wariness for public places," Avendus said as part of its report.

Direct-to-consumer brands in the beauty and personal care category have emerged as strong contenders in the space with several brands putting out new products in the market in the absence of homegrown premium brands. Moreover, unlike the West, India does to have a specialized beauty retail ecosystem, thereby limiting the physical reach of such brands. “D2C brands in this category have flourished on the back of product and price white space, business model innovation and growth capital," the report added.

Brands have also used the reach of influencers and social media engagement to draw in more shoppers.

The foods and beverages category is another—where the shift to organic foods and change in dietary preferences could emerge as an opportunity for direct to consumer brands. Leading D2C brands in personal care and food spaces have witnessed over 100% growth in scale with respect to pre-covid levels—including Licious and Country Delight, the report said.

Start-ups that started out as internet-first brands said the pandemic has helped accelerate their online sales. “What has happened with covid-19 is unprecedented—what this has done is that it's built really accelerated and strengthened an ecosystem, a real ecosystem—from logistics, to warehousing, the whole chain," said Shauravi Malik, co-founder at four-year-old Slurrp Farm that sells packaged millet-based pancake mixes, ragi cereals and snacks for kids and started out as an internet-first brand. This, she said, has subsequently brought down the cost of doing business. But for a brand to ensure long-term scale success “one has to be in the offline channel," she said. It has since launched its own website and sells through a few hundred stores.

India’s top FMCG companies have so far remained hesitant about investing in such brands. Earlier this year, Marico Ltd., completed its acquisition of male grooming brand Beardo. “I think they are monitoring the emergence of D2C players, but they haven't kind of played their hand yet, because maybe the scale of these brands is not big enough for these behemoths. So, some of them at least have tried started doing some minority investments or smaller acquisitions" said Naik. Naik said in the next two-to-four years FMCG companies will go aggressive in terms of acquisitions. "Our sense is in the next two-to-three years we'll see a lot of funding as well," he said.

But, despite the surge in their popularity, there remain several challenges.

“The scale of direct-to-consumer brands is limited. The aspirational purchase happens only offline for middle class India. So, once they achieve a certain turnover, they need to open offline stores. Even online brands need footfall-based traction else they will not achieve," said Sreedhar Prasad, Bengaluru-based independent internet business expert.

Moreover, they cannot depend on age-old targeting based on age or socio-economic category. "Some of the online brands are into nutrition, or healthy foods products. They cut across age, gender, SEC classification and target fitness conscious people. So, these brands have to do right, need-based targeting," he added.