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Inside the direct-to-consumer wave sweeping India

Co-founders of Sleepy Owl Ajai Thandi (left) and Arman Sood. The coffee brand relies on its formula of travel friendly and easy-to-use DIY brew packs.  (Photo: Pradeep Gaur)Premium
Co-founders of Sleepy Owl Ajai Thandi (left) and Arman Sood. The coffee brand relies on its formula of travel friendly and easy-to-use DIY brew packs. (Photo: Pradeep Gaur)

  • Drawn to quality and customization, affluent Indian consumers are falling in love with direct-to-consumer brands
  • India has a growing young and upwardly mobile population which seeks niche, high-quality and customized products that are underserved by the traditional players

NEW DELHI : Delhi-based art designer Nisha Agarwal calls herself an “Instagram shopper". The 25-year-old picks her coffee, protein supplements and skincare products from brands she comes across on the popular social media platform.

“Between the second and the impending third wave, I don’t think I’m stepping into a mall or a store anytime soon," she said, explaining her buying behaviour. “Moreover, these brands have the products tailored to my requirements."

Agarwal is among millions of online shoppers that are fuelling a frenzy of new-age brands that are trying to sell directly to the consumer (D2C), bypassing traditional marketing and sales channels. You mostly won’t find these brands in stores and you will rarely find a celebrity endorsing them, which means you are not footing the bill for sales commissions or marketing spends. The margins saved on these expenses allow such brands to deliver high-quality products. They then add in a layer of sharp and digitally promoted narrative—around the quality of ingredients, or the community that the produce comes from or the family that owns the business in a way that appeals to the sensibilities of an aware, quality-conscious customer. Throw in sustainable packaging, customized products and prompt delivery and you have the recipe for the consumer trend sweeping India. In categories ranging from electronics, furniture to personal care and lingerie and coffee to cosmetics, D2C brands are shaking things up.

The pandemic has obviously helped. Locked down, India’s young turned to their smartphones to shop. The growing penetration of smartphones and other macro tailwinds are now inviting big investment dollars. Since 2016, about 600 such brands had raised only about $1.6 billion in funding, Avendus Capital has estimated. However, 2021 could be the turning point. Earlier this year, headphones maker boAt raised $100 million from private equity firm Warburg Pincus at a valuation of $300 million. In March, skin and hair care brand Juicy Chemistry raised $6.3 million in Series A funding round led by Belgium-based investment firm Verlinvest. Plum, Sugar Cosmetics, MyGlamm, Oziva, Sleepy Owl, and Wakefit also raised venture money recently. Together, the brands are eyeing a $100 billion addressable market by 2025, Avendus estimates.

What is making investors so optimistic about the D2C market?

One, the ecosystem needed to support such brands is fast maturing. The first wave of D2C ventures came between 2012 and 2014. Back in those days, brands would sell primarily through a third-party platform such as Flipkart, FirstCry and Amazon. However, over the course of the last five years, platforms such as Shopify and Delhivery—which help brands enable digital storefronts and solve for logistics—created an infrastructure backbone. Besides, the payments ecosystem (UPI and digital wallets) evolved, and so did social media marketing.

All this has helped players across categories to operate large D2C businesses and scale up. But investors and entrepreneurs are also stoked about a new generation of digital-first consumers. Like Nisha Agarwal.

Niche buyers

D2C brands discovered a vacuum. For years, fast-moving consumer goods (FMCG) firms have focused on making mass-market products pushed through massive marketing spends, sales incentives and distribution muscle that reached every nook and cranny of the nation. The bulk of the country’s consumption base rests here with price points that are more affordable.

Nevertheless, India has a growing young and upwardly mobile population as well. The younger consumers are savvier, are in sync with the latest global trends and demand differentiated brands. They seek niche, high-quality and customized products that are underserved by the traditional players. Using certain brands in their daily lives becomes a part of their identity.

Kanwaljit Singh, founder and managing partner of Fireside Ventures, said that India has a low penetration of branded businesses, primarily because of the complexity of distribution and the mass market nature of the market. “In any category, no matter how mainstream, you will end up with four to seven brands rather than 50 or 100 in any of the other global markets," he said. “The white spaces exist," he added.

The digital-first approach adopted by new firms, he held, make a lot of sense because one can disrupt the market, understand consumer response far more quickly, experiment, and get a lot of consumer data. That’s a view widely held by other investors as well. The consumer shift towards digital consumption, especially in a post-covid world, is a positive change that is likely to help D2C brands, said Arun Iyer, founding partner of Spring Marketing Capital. Spring, set up in 2019, is co-founded by former Sequoia India CMO Raja Ganapathy, former DDB Mudra Group chief executive officer Vineet Gupta, and Iyer, the former chairman of Lowe Lintas.

Spring provides marketing and branding services to more than 20 D2C brands. Through its investment arm, it has also invested in two D2C startups—Juicy Chemistry and Purplle. “Given the low barriers to entry, thanks to digital distribution, D2C brands are more experimental and more focused on their core purpose and vision. This gives consumers a whole new basket of offerings to choose from. Larger companies and multinationals these days end up following the D2C brands which tend to be more innovative and risk-taking," Iyer said.

A case in point is Marico Ltd. Earlier this year, Marico completed the acquisition of male grooming brand Beardo, a move that will allow the firm to capitalize on the niche D2C wave. Former Hindustan Unilever Ltd (HUL) executive Shankar Prasad stumbled into the D2C category while trying to build a beauty brand in India. As founder and CEO at Pureplay Skin Sciences that retails brands such as Plum, Phy and BodyLovin, Prasad said he liked the “measurability" and “modular" nature of D2C. In other words, the model allows businesses, often bootstrapped, to start small, measure and scale up over time. It also means that promoters can focus on the core product, while outsourcing so much of the operations involving marketing, payments, digital storefronts, logistics and others. For nearly every function, there is a plug-and-play third-party offering available in the market.

The measuring piece, which Kanwaljit Singh also alludes to, is particularly appealing. Unlike in offline retail, where customer feedback comes once a week, D2C model has a real time feedback mechanism through reviews, offtake, page views, social media activity and conversion rates—all driven by this new generation of consumers. “Recently, we have launched Aloe vera gel in a tube format which looked like an emulsion. However, consumers gave us a feedback—they wanted a product which looked like gel but packaged in a jar," Prasad said. The company therefore changed the formulation and packaging to relaunch the product. “Some of our best-selling products like night gel for oily skin and acne treatment are created on the basis of customer feedback," he added.

Plugging the gaps

Ajai Thandi moved back to India from the United States in 2015. He noticed that western markets had several D2C niche brands across categories. India had few. That’s how coffee brand Sleepy Owl was conceived. Thandi, a former investment banker at JP Morgan, along with friends Arman Sood and Ashwajeet Singh, started selling cold brew coffee on tap in June 2016. Most companies in India sell instant coffee powder—that’s convenient to make and is more accessible. “There was no brand educating consumers on what their coffee is, how to make it and consume it. We said if we can simplify this process and introduce new consumers to coffee, we will have a solid business at our disposal," Thandi told Mint.

Sleepy Owl, backed by Rukam Capital and DSG Consumer Partners, has found a winning product formula in the form of travel friendly and easy-to-use DIY (do it yourself) brew packs. They are available for both hot and cold coffee and in various flavours. In retail, the hot brew packs are priced at 300 for 10 bags. The format gained traction during the lockdown as cafés and restaurants remained shut. The beauty category also saw a high growth trajectory. Around 2014, people started watching more videos. This change played natively in the beauty category where products can be shown in real time through video searching, unboxing and tutorials. Beauty e-tailers such as Nykaa and Purplle started legitimizing the model of selling beauty products online. Nykaa also actively invested in influencer marketing to build awareness. Kaushik Mukherjee, co-founder and COO at Sugar Cosmetics, was running a beauty subscription service called Fab Bag in 2012, inspired by the success of the model in the West. Earlier this year, the cosmetics firm raised $21 million in series C funding led by Elevation Capital, formerly SAIF Partners. “After three years of running Fab Bag, we realized that the frequency of consumption was far less in India than the West," Mukherjee said.

He saw a big need gap in the colour cosmetics market in India as make-up was largely occasion based wear till 2015 but this trend was changing with digital platforms exposing Indian customers to international trends and beauty gurus. “As make up became more mainstream and a daily wear ritual, people started looking for more matte products and nude shades which existing brands didn’t offer. We launched matte and long-lasting products under the Sugar brand," Mukherjee said. Five years later, in FY21, the brand managed to clock over 130 crore in annual revenue.

The omnichannel way

While digital is driving majority of the sales for many D2C brands, a multi-channel distribution—a mix of one’s own platform, marketplace and offline—will be essential to achieve scale, going ahead.

That’s because offline distribution increases customer reach and expands the addressable market. For instance, India has over 10 million to 12 million mom-pop stores that sell goods of daily use. These shops are the backbone of how some of the largest consumer goods firms reach shoppers. It also increases brand discovery and credibility, enables the touch-and-feel factor for customers.

Beauty brand Mamaearth started in December 2015 and is looking to turn profitable by 2021-end. Varun Alagh, co-founder, said that although e-commerce now reaches 30,000 pin codes in India, it would still take time for the majority of Indian consumers to adopt online shopping. “D2C businesses which have the patience to wait for another four to five years will not require offline distribution to achieve scale. However, if a brand is fast growing and wishes to capture the market, offline is the route to take," he said. “In 2021-22, offline distribution will be our strong focus area. We want to take our current distribution from 50 cities to over 100 cities through modern trade, general trade and chemists," he added.

Sugar Cosmetics’ Mukherjee admits that D2C is tough to scale today through the online-only approach. He explained that in China, Perfect Diary has become number two beauty brand in just two years because they have a payment system through WeChat which India doesn’t. “In five years, if WhatsApp payments become that big, there’s chance of D2C players becoming 200- 300 crore brands. Currently, 90% of retail shopping is offline. So, if a D2C player has an aspiration to become to become a top beauty brand, they will have to explore offline retail," he added. Sugar’s current retail presence is across 10,000 stores, including 18 exclusive brand outlets (EBO’s) and 32 kiosks, in over 130 cities.

Flatheads, a men’s casual footwear company, was set up by Utkarsh Biradar and Ganesh Balakrishnan in November 2019. Both of them are former internet entrepreneurs. The brand primarily sells through its own website, and also via Amazon and AJIO. Balakrishnana said he is cognizant that India’s e-commerce market is still small, and brands need to be present offline. He does small pop-ups in Bengaluru to help gain visibility. “We are already doing road shows and experience centres. We don’t have a fixed store yet. We will potentially get into the offline mode as well sooner rather than later," he said.

The success of the US-based private label aggregator Thrasio has also led to VC money chasing similar businesses in India. Mensa Brands, launched by former Myntra and Medlife CEO Ananth Narayanan, has raised $50 million from investors including Norwest Venture Partners and Accel. Global Bees, a venture by FirstCry, has raised $80 million from Softbank, TPG and others. This week, 10 Club, a venture by serial entrepreneur Bhavna Suresh, raised $40 million in the seed round—among the largest seed round funding anywhere in South Asia. That should tell us something about the dreams and dollars chasing this space.

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