Building High-Growth Profitable D2C Businesses (Part 2)

Backgrounder – 2

Fortune writes: “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…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.””

From an HDFC Securities report: “D2C is here to stay; omni-channel the way forward: There are about 600 to 800 digital first companies in India. While many of these companies are only present on digital platforms and marketplaces, companies that have achieved a certain scale are endeavouring to expand into the offline channel. Speakers [at our conference] were of the consensus that online and offline channels will coexist. Selling on own websites is beneficial in terms of cost-effectiveness and easy access to data (that helps develop products), while an online-only presence limits the scope of growth…While an online presence gives customers easy access to the products, offline helps products achieve sustainable growth…Customer acquisition cost has sharply risen in digital space, which is a risk for D2C brands, if repeat purchases are not high… While D2C companies start to become sizable, many traditional companies are adopting the digital way. It is done through incumbents acquiring existing D2C brands to enter new niches that the brands were present in.”

The report has a couple of good slides which compares D2C with traditional FMCG:

A story in Economic Times summarises key findings from a report on D2C by ICICI Securities:

The era of mega brands is behind us and large companies will have to do a lot more hustle and have a portfolio of multiple mid-sized brands and a disruptive approach on some of the emerging trends, said a report by ICICI securities.

D2C or direct to consumer brands are better placed over large companies in select areas, not just restricted to the speed of execution.” With some of the underlying shifts in the environment, it’s getting a ‘level-playing’ field where large companies will have limited competitive advantages. Better consumer-level data and targeted marketing capabilities place consumer companies at an advantage to the larger players,” said the report.

D2C brands refer to businesses that have the majority of their revenue or customer acquisition from direct-to-consumer online channels or started with an online-first distribution before going omni-channel.

“Slowly but surely D2C players will impact large FMCG companies with their innovative product offerings and variety of flavours. With the kind of time people spend online, they are coming across D2C brands more often and the recall is increasing. Already D2C brands are seeing increased trials as consumers are now looking at options from their regular brands. Be it apparels, personal care or foods,” said Soumyadeep Mukherjee, cofounder, Spicestory. “The challenge for D2C brands however, will be to scale offline. At some point in time, all brands will have to go offline and build volumes there in order to keep treading the path to profitability.”

Another story in Economc Times lays out some of the challenges for D2C:

One of the primary disadvantages of a D2C-only brand is discoverability. Online marketplaces such as Amazon, Myntra, and Nykaa help consumers find new brands either with the help of search engine optimisation or marketing tools within the category search with the help of banners and more. Either way, coming across a new brand and trying it out (as the consumer trusts the retail channel) is much easier using marketplaces.

However, digital-first brands are engaging with their target audience with the help of focused content which allows them to have followers on social media channels, which in turn makes even first-time consumers feel confident about shopping from these D2C channels. Therefore, once the brand and consumer have come in contact, chances are that the consumer will place her next order through the D2C channel, app, or the brand’s social media page.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.