India’s D2C Brand Sweep

Nikita Das, a 27-year-old Pune-based IT professional, likes experimenting with local direct-to-consumer (D2C) brands. At present, she is using skin and hair care products by Plum. Das says she likes the way the company packages products; they are aesthetic, easy to carry and available in small packs. Most importantly, they are clean, vegan and cruelty-free, she says. “Unlike many items by traditional brands, they are pure,” says Das.

D2C, or digital-first brands, which leverage internet to sell directly, without the traditional distribution network of wholesalers, stockists and retailers, are having a dream run in India, thanks to its vast 700 million internet users and online shopper base of 140 million, third-largest after U.S. and China. India is now home to about 600 D2C brands with estimated combined revenue of over ₹14,000 crore (around $2 billion), says Ankur Bisen, senior partner at Technopak Advisors. The Indian D2C market is estimated at $1.9 billion, contributing close to 1% of the domestic FMCG, home and consumer accessories market, according to a white paper published by Technopak. It is expected to grow to $22 billion by FY25, more than 10% of the total market.

D2C brands are spread across segments ranging from beauty and electronics to pet care, fresh meat and seafood. While unicorns like Good Glamm Group, Licious and Mamaearth are well-established, the market also has a host of mid-sized players such as Wiggles, The Sleep Company and smaller brands such as Tiggle, which sells hot chocolate.

“If you think about it, everything, whether food or cars, has been globally innovated and appropriated for India. Domestic D2C brands have Indianised products. That is why D2C is here to stay. ,” says Vivek Gupta, co-founder at Licious. That is why a big chunk of demand for these brands comes from smaller towns that have so far been deprived of products tailored for their needs.

Bharat Leads D2C Growth

The D2C boom is to a large extent driven by Tier-II, III and IV cities, or what is called Bharat, where consumers, well-off but starved of brands, are willing to experiment with products. About 70% of My Glamm’s revenues come from these cities. “Three years ago, Tier-I cities used to contribute 70%,” says Darpan Sanghvi, founder & CEO, Good Glamm Group.

For Mamaearth, Tier-II cities generate more than 50% business. Bewakoof, which sells clothes, says 72% sales come from Bharat and only 28% from metros. Even for mid-sized brands like Sleepy Owl, 50-60% business comes from Tier-II and Tier-III cities, reflecting eclectic choices of customers in small-town India and their knowledge of new-age brands. “People with taste and capital do not live only in Delhi and Mumbai. There is lack of choice in smaller cities,” says Ajai Thandi, co-founder, Sleepy Owl Coffee. “They are digital consumers who interact with brands that are young and new-age,” says Amit Khatri, co-founder at Noise, a wearable watch brand. Good Glamm Group’s Sanghvi says people across the country are consuming similar content on internet and other media and that is shaping up common aspirations.

Technopak’s Bisen says D2C brands have been able to cater to consumers across the country due to digital-first proposition. He, however, says that it may be too preliminary to assume that D2C brands have captured India. After all, most have a turnover of just ₹100-150 crore. “They have addressed dispersed demand,” says Bisen. Also, it would be unfair to categorise everyone in big cities as affluent. “About 35% population of metros and mini-metros lives in slums,” he says.

However, D2C brands are getting ready for an India where demand for their products will not be constrained by lack of purchasing power. They are going all out for growth.

Bolder Bets

Initial success has emboldened D2C players to push for even faster growth. Mamaearth plans to broaden its product basket by adding categories in hair care and skin care segments. “We are developing solutions that have not been available to Indian consumers so far,” says co-founder & CEO Varun Alagh. The company also wants to expand offline. Although it is not immediately looking to scale up exclusive brand outlets, it wants to expand its network of general and modern trade channels. “Our priority will be to scale that up aggressively this year,” says Alagh. Overseas markets such as Middle East and parts of South Asia are also on the radar.

Bewakoof wants to introduce new product categories to strengthen its position as a lifestyle brand. It is looking at foraying into footwear, activewear and innerwear. Pet care brand Heads Up For Tails is gearing up to open 20 new outlets in the current year and 20-25 stores every year for the next three years, says founder Rashi Sanon. “We want to build on our omni-channel strategy. It is working for us,” says Sanon. The company has opened stores in Lucknow, Ludhiana and Kochi and is looking at more smaller cities.

Noise is looking to expand in Tier-III and Tier-IV cities by leveraging the network of big retailers like Croma and Reliance. “Customers have started demanding (our products). So, aggressive expansion across outlets and cities is required. People in Tier-III and Tier-IV towns have the knack for exploring, and they have disposable incomes,” says Khatri. The Sleep Company is planning to service Japan and UAE.

Licious will expand into Tier-II and Tier-III towns. In fact, it plans to start online delivery in 20 more cities, including Agra, Ludhiana, Jalandhar and Madurai, in next six months. “Indian consumers continue to be demanding. Having a pan-India presence is important for us,” says Gupta. The other plan is to grow the ready-to-cook business from 20% to 40-50% of revenues.

For Good Glamm Group, it’s all about acquisitions. The brand spent nearly ₹2,000 crore on acquisitions last year. Sanghvi says it will acquire brands in men’s grooming and naturals in coming months. In fact, the company has already closed two acquisitions so far this year. “By September, we want to touch $500 million annualised revenue and achieve $1 billion in 2023,” says Sanghvi.

Lenskart says it is “aggressively” adding offline stores in Tier-II and Tier-III cities. In fact, earlier this year, it launched 73 new stores covering 46 cities and 19 states, including locations like Himachal Pradesh, Jammu & Kashmir and Chhattisgarh. “We are also doubling down on our online reach with a far superior app experience which we improve on a weekly basis,” says Ramneek Khurana, co-founder, Lenskart.

Jewellery brand Melorra plans to open 350 offline stores over the next four years. “We expect to post even stronger numbers with addition of offline stores, rapid digitisation of India and higher demand for gold in the Indian market,” says founder & CEO Saroja Yeramilli.

Ease of Going D2C

One reason for the D2C boom is ease of setting up online stores, thanks to start-ups and new-age firms bridging logistics gaps, developing payment infrastructure, equipping brands with technology and enabling them to set up online storefronts. “Fledgling firms like ours went D2C because we did not have money to go to a retailer and distribute our product. Players like Shopify (e-commerce platform that enables brands to set up online stores) allowed us to reach a large customer base,” says Ajai Thandi of Sleepy Owl Coffee.

Such ecosystem enablers have allowed brands to solely focus on consumer engagement, says Deepak Gupta, COO at Bombay Shaving Company. “Today, I can start a D2C business in seven days,” he adds.

The pandemic has also helped the D2C cause by making more consumers shift online. People, confined to their homes, had the time and inclination to experiment with brands. “Post-Covid, all brands have to be digital. Covid-19 has nudged firms to think about newer ways of doing businesses,” says Amit Khatri of Noise.

D2C brands also have other advantages. Priyanka Salot, co-founder of The Sleep Company, says direct interaction between brands and consumers enables firms to control end-to-end consumer experience starting from online browsing to delivery. “D2C helps build trust between brands and users. It adds credibility to the brand. It is easier for us to personalise. That is the advantage D2C brands have over legacy brands,” says Salot.

Prabhkiran Singh, founder & CEO at Bewakoof, says they have a feature called ‘vote for design’. “If I had been selling on another online channel or an offline retail chain, how would I have done that?” says Singh.

It is, though, pertinent to note that many D2C brands have expanded offline, either through general trade channels or exclusive outlets and kiosks. This adds to the revenue pool. Besides, Indian consumers prefer to physically experience a product, say brands, some of whom have also launched experiential stores. “During the pandemic, a lot of traditional big-format horizontal retail stores were under lockdown, which drove many consumers to try direct channels —via brands’ websites, apps, etc. They continued to stick around,” says Khurana of Lenskart.

D2C on Online Marketplaces

Contrary to perception, D2C brands do not compete with traditional e-commerce marketplaces like Amazon and Flipkart. In fact, almost all of them sell on marketplaces. Some even make more money from marketplaces than own channels. For instance, nearly 80% online sales of Bombay Shaving Company come from marketplaces. Brands say cost of customer acquisition via D2C is substantial and unaffordable for many of them. Marketplaces also help brands scale up faster. “There is no CAC (customer acquisition cost) on marketplaces. Most brands scale up on marketplaces,” says Sanghvi of Good Glamm Group. “Acquiring customers for a single category via D2C is a tough task,” says Licious’ Gupta.

Investors Line Up

India’s D2C play has been supported by a good mix of large and mid-sized investors. The space attracted close to $5 billion from VC investors between 2019 and 2021, according to data by market research firm Venture Intelligence.

Investors are trying to tap the generational shift in consumer spending that India is witnessing. Consumers are now more demanding, experimental and do not hesitate to spend more, says Anurag Goel, general partner at Cactus Venture Partners. The firm will put 30-40% of its investible pool in D2C players. It plans to focus on early-stage investments, typically in series A funding rounds, with average ticket size of $5-10 million. It plans to make 15-18 such investments in two-three years. “We look for unit economics and how the founder thinks about growth versus profitability,” says Goel. The firm is looking to back D2C players in wellness and healthtech segments.

Stellaris Venture Partners, which has Mamaearth, Zouk and Nestasia in its portfolio, is looking to invest more in D2C businesses from its $230 million fund II, says partner Rahul Chowdhri. The VC firm will support differentiated brands. “Differentiation creates customer stickiness. Brands which want to win will have to go beyond functional aspects of products,” he says. D2C businesses have higher margins, making them attractive for investors, he adds.

Fireside Ventures, which has made early-stage investments in D2C brands and has unicorns Licious and Mamaearth in its portfolio, says it backs companies which have a sound three-four year strategy. “We assess costs involved, burn rates, etc,” says founder and managing partner Kanwaljit Singh. He believes firms will have to build ESG-compliant brands and think about sustainability as core to their growth.

For WEH Ventures, over 40% portfolio of its two funds comprises D2C brands or enablers of the D2C ecosystem. “We will continue to invest in brands at their earliest stage, usually when they touch ₹10-20 lakh in monthly recurring revenues. Apart from that, we will invest in software tools, marketplaces, warehouse aggregators, etc, that enable brands to perform better and scale up faster,” says general partner Rohit Krishna.

Will the bets by investors pay off?

Who Will Win?

Companies with deep pockets and unique offerings will do well, says Bombay Shaving Company’s Gupta. One reason is that with competition heating up, marketing costs have seen a steep increase. “For us, marketing costs went up 45% last year,” he says.

Even legacy brands have moved online and are spending big on marketing. To give a perspective, 15% of Hindustan Unilever’s (HUL’s) turnover comes from digital, of which its digital store is a significant contributor. “Our digital business is galloping at a swift pace. We are building digital brands and getting ready to face not just existing but also new-age competitors,” HUL chairman and MD Sanjiv Mehta said while announcing the September quarter results. ITC and Marico have also set up digital stores in the past one-and-a-half years. Recently, Aditya Birla Fashion & Retail announced its foray into the D2C space which the firm said will be built through organic and inorganic means.

Facebook and Google advertising will also keep becoming expensive. “Brands will have to create differentiation as market will be flush with me-too players,” says Stellaris Venture Partners’ Rahul Chowdhri.

The second big challenge is to increase the pace of innovation, without diluting quality, says Shankar Prasad, founder & CEO at Plum.

Small and mid-sized firms are already feeling the heat. Agra-based Tiggle says nascent D2C players are heavily dependent on platforms like Instagram and Facebook for sales. “We experienced that cost of ads fell during lockdown as more people went online, but during Diwali, when bigger brands started pushing ads aggressively, cost of ads skyrocketed,” says founder Anuva Kakkar.

Also, big brands have huge budgets and strong marketing skills. This may make consumers think that products of small brands are not ‘up to the mark’, says Krrish Chawla, founder of New Delhi-based Breathify, which makes air purifiers. With more and more brands coming online, costs on platforms like Facebook and Google are supposed to increase further, says Suraj Chaudhari, co-founder & CEO at Zlade, a personal care brand.

To win big, brands will have to step up offline play. But how many can do that? Analysts say many D2C firms are using large e-commerce platforms and are restricted to the online medium. Given that e-commerce accounts for just 2-3% share of retail, it is important to have an offline presence. “To become a ₹20,000 crore brand from a ₹2,000 crore brand, companies will have to go the traditional way. They will have to look at distribution in general trade. This is going to be a big challenge for D2C brands, especially the small and mid-sized ones,” says Rajat Wahi, partner at Deloitte. Offline distribution requires substantial capital, says Wahi. “Once some of these brands hit the ₹50-100 crore revenue mark, they will potentially get acquired by big internet companies.”

“A few big brands will corner 70% market. The rest will come and go. That is already happening,” says Khatri of Noise. Mamaearth’s Alagh expects the industry to see more consolidation in the next 12-18 months.

Brands, however, are unfazed. “We are building our own distribution step by step. We are already present in 3,500 outlets in Mumbai and building our distribution infrastructure in the rest of Maharashtra and Goa,” says Zlade’s Chaudhari. The firm claims to have already secured investment commitments to fund its plans.

In the end, it will be the survival of the fittest.