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Direct Connect

Direct to consumer start-ups are seeing huge investor interest as they leverage consumer data and faster feedback loops to grow. Legacy brands are taking note

Illustration by Nilanjan Das Illustration by Nilanjan Das

Vineeta Singh had always wanted to create a thriving business. But little did she know that the journey involved long-lasting, liquid matte lipsticks. At least not until major cosmetics brands turned down her offer to co-create the product.

However, based on the research and consumer data she had gathered at her first venture, a subscription-based beauty e-commerce portal, Singh was convinced that millennials were hankering for just such a product. So, like any entrepreneur, she decided to make and sell it herself.

Now, seven years later, that lipstick line is available in 52 shades and is among the top sellers at SUGAR Cosmetics, a direct-to-consumer (D2C) start-up that Singh co-founded. “These brands weren’t ready to launch e-commerce and nobody saw that this demographic of millennials will become so significant,” she says. So significant, in fact, that they powered SUGAR Cosmetics’ revenue past Rs 100 crore in FY20, a mere four years after launching.

Singh is part of a growing tribe of new-age start-up founders who eschew traditional distribution channels. Instead, they take their products directly to consumers through their own websites, apps and e-commerce channels. Investors estimate there are at least 300 start-ups that strictly qualify as D2C, meaning a majority of their sales comes from their own websites and apps. However, many of them continue to list on online marketplaces such as Amazon, Flipkart and Myntra, as well as in brick-and-mortar stores.

Most of these brands tested the waters through online marketplaces before branching out on their own, backed by a tech-based ecosystem that grew over the past five-six years to handle the more mundane bits of business. “Earlier, I had to do so much to build a consumer business — manage manufacturing, supply side and generate customer demand,” says Chaitanya Chitta, co-founder of SLAY Coffee. “Now, we have so many partners to work with for different functions that we focus on core product innovation and customer experience.”

Bypassing the middleman means higher margins, but the pulsating heart of the D2C model is the precious consumer data they gather from a shopper’s digital footprint. Brands then analyse this data to optimise their sales approach or, as Chitta says, improve customer experience. Or start a new product line, like Singh did. And that’s only a sampling of the possibilities.

Data is also indispensable to these brands to attract a fickle customer base in a market with ephemeral tastes. “Trends change very fast in the beauty sector. The minute you stop listening to the customer, she will move to another brand,” says Singh, who is also SUGAR Cosmetics’ CEO.

These new-age start-ups have attracted nearly $2 billion in venture capital funding since January 2020, according to data from market intelligence firm Venture Intelligence. Fashion, food and beverages as well as beauty and personal care (or, more specifically hair care and skincare) are investors’ favourite sectors.

“D2C appeals to us as investors because it disrupts the traditional model where only large companies with access to a high amount of capital could make a large number of consumers aware of their proposition and had the distribution strength to put them in retail stores,” says Anup Jain, Managing Partner of Orios Venture Partners, which has invested in marquee start-ups such as Country Delight and PharmEasy. Moreover, he adds, all that data gathering makes it far easier to prove consumer retention metrics and evaluate the brand’s strength.

The data-backed, digital-first approach also promises faster growth and better returns. Dipanjan Basu, Partner and CFO, Fireside Ventures, which has backed 27 D2C start-ups, estimates an average of 20-25 per cent returns from investing in such companies, compared to 15-18 per cent from the public markets.

From winning over investors to wooing away consumers, these D2C start-ups are taking on the legacy Goliath brands, armed with a very potent weapon.

Data sling-shot

D2C brands rely on customers as much for sales as for data. They use every bit of information to their advantage — where the consumer is from, how he or she discovered the brand, how often they visit the site, how much time they spentbrowsing, the status of their cart, their drop-off point in the shopping process.

“In an offline world, you don’t know the buyer. You put your product on the shelf and someone just buys it and goes. In a digital world, you have their address and email ID. You can go back to them with special offers for repeat purchases,” says Aman Gupta, Co-founder of Delhi-based audio devices start-up boAt.

For example, explains Gupta, boAt can send all consumers who bought a Type C charger from them an offer on the next Type C charger launched. Or target customers with products that are nearing their expected lifespan. Or simply nudge them to upgrade to a new version.

Therefore, he adds, the lifetime value of a customer is higher for a D2C company than a traditional one. Gupta says boAt sold around 1 crore units last year, with a 30 per cent repeat rate. That, he estimates, helped the company’s revenue cross the Rs 1,000-crore mark in FY21, in just six years after launching. (Revenues were Rs 700 crore in FY20.)

The data also comes in handy to test more products faster, usually within three-six months. “We have had 100-200 failures in the past two-three years. But we don’t lose a lot of money because it is cheaper through D2C,” says Singh.

SleepyCat knew its bulky mattresses were cumbersome and expensive to transport. So it found a way to vacuum-compress them into a compact box. But to be able to home-deliver them within 72 hours, it analysed customers’ location data to better position its manufacturing and distribution hubs. “Most importantly, the feedback time is cut to a fifth. We understood our early adopters and what new products they are looking for,” says Founder and CEO Kabir Siddiq.

That is key. If the customer is king for traditional brands, it is the engaged customer who is king for new-age ones.
SleepyCat also used the information it gathered to build a social experience for consumers through blogs, video explainers, live Instagram sessions with sleep enthusiasts as well as encouraging conversations around the product on social media. “When we started out in 2017, only 15-20 per cent of our sales were from our own website. Now, 55-60 per cent of sales are from our website,” says Siddiq.

Similarly, SUGAR Cosmetics reached out to customers over the phone and via WhatsApp during the pandemic, with advice and tips. Singh says this community building with the right content helps them reach 40 million women every month through social media. “That’s how we build a connection and get them on our platform.”

Content marketing, as it is called, doesn’t come cheap, though. SUGAR Cosmetics, for example, spends 20-25 per cent of its net revenue on content marketing. “Big FMCG brands spend Rs 50-100 crore on ads for a launch. Earlier, brands would struggle to get to Rs 100 crore revenue without spending Rs 50-100 crore on ads. But now we can do that by spending Rs 25 crore,” says Singh. Her company spends about Rs 600 to acquire a customer, whose lifetime purchase value would be Rs 3,000.

Enter the Goliath

The bigger legacy brands, meanwhile, are watching and learning. Experts estimate that e-commerce contributes less than 10 per cent of sales at legacy brands. But the tides are shifting. Some like Tata Consumer Products (TCPL) and diversified conglomerate ITC have been trying their hand at D2C, especially after the pandemic drove more consumers online.

“We are exploring the D2C space and have stepped up our focus on it. Going forward, we see D2C as a key element of the marketing mix for some of our brands, based on the consumer segment catered to,” says Sunil D’Souza, Managing Director & CEO, TCPL.

The Tata Group recently launched two premium beverages — ‘Tata Tea 1868’ and ‘Sonnets by Tata Coffee’— through the D2C model. It is also testing a content platform, called Tata Nutrikorner, as a one-stop online shop for all its products.
ITC, too, has opened up its ITCstore.in to consumers. Now, 16 per cent of revenue from its personal care segment and 8 per cent of overall FMCG revenue comes from D2C and e-commerce, respectively, says Executive Director B. Sumant. “Fiama, which sees 38 per cent sales from e-commerce and ITCstore.in, is back on the growth path after we pivoted to e-commerce and D2C,” he notes.

WareIQ, a third-party logistics and warehousing provider, says a lot of traditional retail firms have been approaching them for their e-commerce fulfilment and shipping solutions. “While they have a sophisticated offline distribution network, it doesn’t work in an e-commerce supply chain, which is built for speed,” says CEO Harsh Vaidya. “It requires a completely different technology and operation.”

To save time, some legacy brands are buying rather than building. Like Marico. The hair-oil maker bought male grooming products start-up Beardo last year and recently acquired Ayurveda-based skin and hair care brand Just Herbs. “The investment is another step towards our aspiration to build a portfolio of at least three Rs 100 crore-plus digital brands within the next three years,” Saugata Gupta, MD and CEO, Marico, had said at the time.

Earlier this year, TCPL acquired the parent of millet-based breakfast cereal maker Soulfull for Rs 155 crore, saying at the time that “there are also significant synergies possible with the existing business of TCPL (and Soulfull) in areas spanning distribution, procurement, and logistics”.

French personal care company L’Oreal, which cannot sell through its website in India, admits that D2C start-ups certainly have an edge due to their access to consumer data and faster feedback loops. “But we get that consumer research from our partner platforms,” says Chief Digital Officer Anil Chilla, referring to their e-commerce partner Kiehl’s India.

Plus, L’Oreal’s research through innovation labs, social listening, reviews and ratings and the traditional ways of getting feedback also continues, Chilla adds. “India is a nascent market for beauty. The per-capita beauty consumption here is Rs 200, compared to around Rs 2,000 in China. These digital-first start-ups are bringing a heightened sense of awareness about this category across the length and breadth of the country. We welcome their emergence and they keep us on our toes.”

War of Attrition

Even as the legacy brands are experimenting with e-commerce, the D2C brands are eyeing offline retail. Especially the ones that have already built a sizeable brand, customer base and recall value online.

“Offline is becoming a big focus for us,” says Gupta of boAt, which is present in more than 5,000 retail outlets already. SUGAR Cosmetics, which aspires to be among the top three makeup brands in the country, has 10,000 retail touchpoints.
After all, more than 90 per cent of India still shops offline. That’s where the big bucks lie, out of India’s overall $900-billion retail pie. But that’s also where the challenges arise. Getting into offline retail would mean adopting the very distribution network they once renounced.

If legacy brands struggle with developing a digital mindset, then scaling up will be a huge challenge for D2C brands, says Abhijeet Kundu, VP-Research, Antique Stock Broking. “D2C brands can get to a certain size and put all the marketing spends behind them. But after a certain point, they will fizzle out if they don’t get more investments. Even if a PE investor invests in them, they still won’t have the distribution might that the large legacy players enjoy,” he says.

And it is the strength of these distribution channels, which are far harder to crack than D2C channels, that give legacy players the edge, says Harminder Sahni, Founder & MD, Wazir Advisors. “The traditional players were aware of what’s happening but there was too much inertia in them to learn new stuff. But if they do it right, their chances of winning the game are far higher because they already have a large market share,” he says.

“Eventually, all retail businesses have to be omnichannel,” says Fireside Ventures’ Basu. “But a very different set of consumers is coming into the market. People who are teens will become spending consumers in the next few years.”
Then, as much as now, the consumer will be the ultimate winner. After all, this war of attrition will only give them a wider array of better products at multiple price points as well as a choice of destination.

As Basu says, “If 2000-2010 was the IT decade and 2010-2020 was the e-commerce decade, this is the decade of D2C, which will be seen as the rise of an evolved Indian consumer.”

@saysvidya