D2C – Direct to Consumer : An idea whose time has really come, and is flourishing

What is common between brands like Wakefit, Boat, Mamaearth, Nykaa or Lenskart ? They are all D2C or Direct to Consumer brands. Traditionally, retail brands do not have direct access to end consumers; their reach ends at distributor or retailer, with products exchanging hands multiple times until it reaches the end consumer. However today with the help of of technology, digital commerce, social media, and various other enablers, it is possible for brands to make direct connect with end consumer and control their experience. D2C brands are such customer first retail brands. Today there are over 1000+ D2C brands across categories and the number is growing rapidly.

D2C – Direct to Consumer : An idea whose time has really come, and is flourishing ……….Kaushal Chandak & Jay Kotadia analyse the development in D2C space

D2C brands generally start as digital only distribution and as they gain traction, they move omnichannel while still connecting with end customers digitally through own websites and social media. In the post pandemic world with the increase in ecommerce penetration, D2C brands have emerged winners. Ecommerce platforms have provided necessary channel for reaching the customer; a channel which was traditionally acting as an entry barrier for brands. Launching an online brand has never been easier than today. D2C brands have been very quick in latching to this opportunity and launching innovative, differentiated products with minimal investment in fixed assets or inventory. Capital efficiency has been common underlying success mantra. It is because of this, since start of 2020, over 140+ D2C brands across different categories like apparel, food, beauty, and lifestyle products have raised $500+ million venture capital.

Rise of D2C brands suggests changes in customer preferences. India is moving from an underdeveloped / developing economy to developed economy and customer preferences are changing from NEEDS to WANTS. These aspirations and expectations of consumer have provided gaps – product and price – which D2C brands are able to fill. Therefore, we at IMAP believe that the rise of D2C brands has just started and expected to continue further.

This growth is expected to be supported by capital as the fuel. A much larger  private money is now chasing D2C brands – be it venture capital, venture debt or specialized revenue base financing companies. Successful liquidity events  like Nykaa’s IPO will further provide push to the availability of venture capital money. Super quick emergence and success of US based company – Thrasio, brings more cheers to D2C companies. Thrasio model is all about venture backed house of brands

or venture roll up strategy, trying to consolidate smaller D2C brands and supporting their growth with team of brand managers supported by common marketing and operations team. A number of home-grown venture backed Thrasio styled companies like Mensa brands, GOAT Brand Labs, GlobalBees, 10Club have already in market picking up brands.

All this growth is subject to how D2C brands handle upcoming challenges :

Amazon/Flipkart vs D2C Brand :  Majority of the Indian population still prefers to shop on the marketplaces where they find multiple options with varied price range. Also, the white label products of Amazon/Flipkart are a threat to D2C brand because they are comparatively cheaper

Decreasing Capital efficiency : With more brands, RoAS (Return on Ads spent) will keep on decreasing – Like every other business, with more players, the cost of acquiring a customer goes up. RoAS is a metric which D2C brands use to measure their performance. It is simply the ratio of revenue to the Ad spend. Industry research indicates that the revenue to ad spend ratio of 3x-4x is a good where the company is left with decent buffer for accommodating other expenses without incurring a loss

More brands = less differentiation: This itself is self-explanatory. The product overlap ultimately leads to a brand war resulting in deteriorating capital efficiency

Need for omnichannel expansion: The GTM of a D2C brand is start online, build a brand, and then have small satellite stores to have an omni-channel experience. This has worked in past but is a capital heavy exercise. In case, the brand is unable to sustain on the online sales, the whole process demands a lot of capital which may ultimately just be funding losses

Thrasio – a hype? Thrasio-model is very new, though it has been a success in terms of revenue growth. Buying out the brands may increase the top-line, but the integration of the brands also does take time and the exit of founder sometime may lead to bad performance

With so many opportunities and a few challenges, we believe that the market is undoubtedly bound to grow. There are already a 1000+ D2C brands currently in India with more to come in the next couple of years. A large number of  brands are coming up across only a few sectors and a finite set of customers, hence consolidation in the industry is inevitable. The consolidation has already begun where the smaller brands are being acquired by a larger brand (Good Glamm group acquiring The moms co. , Baby Chakra, Scoopwhoop) , Mensa brands acquiring 10 different brands and has a plan to acquire 50 more brands in the next 18 months, Traditional players like Reliance retail and Tata group acquiring these digital brands. We believe D2C brands will see alternating  cycles of Venture capital and Consolidation. This is just the beginning of consolidation cycle and over the coming 3 years, we shall see a few larger umbrella groups with multiple brands under them.

We at IMAP India, we have been successful in building a good eco-system in the D2C market and expect the market to consolidate in the near term. With the help of our partners in US & Europe, we can structure a winning formula for the investors as well the founders.