D2C consolidation: Value creation for FMCG majors, wealth creation for founders

While these are strategic investments for large FMCG players, thanks to the tech capabilities and customer database they get in exchange, the deals have largely turned out to be a slump sale for D2C startups

Legacy fast-moving consumer goods (FMCG) companies are quickly moving away from selling just hair oil and other traditional products. As these giants diversify into health supplements, herbal products and other categories from the premium segment, founders of direct-to-consumer (D2C) companies are cashing in.

This year alone, FMCG giants such as Marico and ITC have announced several acquisitions. While ITC bought a stake in Yoga Bar, a healthy-snack startup, for Rs 175 crore, VLCC bought shares in men’s grooming company, Ustraa, for Rs 250 crore. More recently, Marico, continuing on its acquisition spree, paid Rs 369 crore for part ownership in Plix. In the past it has also invested in True Elements, Just Herbs and Beardo to widen its portfolio of digital brands.

While these are strategic investments for large FMCG players, thanks to the tech capabilities and customer database they get in exchange, they have turned out to be slump sales for D2C startups in most cases because founders were unable to scale up their businesses beyond a point and those businesses ended up being available at a steep discount.

“It’s a distress sale for D2C companies 95 percent of the time but a win for FMCG players. All these D2c startups are jumping for somebody to give a cheque to them,” said Ankur Bisen, retail head, consumer products and food, Technopak Advisors. He added that the industry now had “a problem of plenty, where not every investor is jumping onto the D2C bandwagon. They're selective and are cherry picking. It's a buyer’s market now, not a seller’s market.”

While scaling revenues from Rs 2 crore to Rs 20 crore is a 10X jump, the potential of the business cannot be gauged based on an increase that sharp.

“Any founder saying they’re selling for synergy purposes at the Rs 50-100 crore level does not make sense. There is no synergy there. At that scale, businesses don't even scratch 0.5 percent of whichever opportunity there is. D2C businesses start to mature only at the Rs 600-1,000 crore level, not before that,” Bisen added.

Interestingly, Plix, Yoga Bar and Ustraa individually had revenue below Rs 70 crore as of FY22, the latest available data on Tracxn showed. Even True Elements, Just Herbs and Beardo separately did not have revenues of more than Rs 70 crore in FY22.

Money matters

Each of the companies mentioned above, however, got a revenue multiple of anywhere between 3 and 7 while getting sold, which means investors and founders made money for themselves during the transactions.

“The primary decision to sell off Beardo was wealth creation. We now have enough money to sustain our lifestyle for the next couple of decades,” said Ashutosh Valani, the co-founder and former CEO of Beardo.

Marico’s acquisition of Beardo was among the first few instances where an FMCG player bet on a new-age D2C player, back in 2017.

“Every founder must have an end goal. Some of the deals happening now are with first-time founders so they’re still figuring out their end goal. A few of those deals are also distress sales where founders have been in the business for 5-10 years but are not able to bring an outcome. However, they’ve still been able to sell to a large FMCG player by chance, and that is probably the most positive outcome for them,” Valani added.

Not just Valani, another founder agreed that the sale to a larger player was driven by the money aspect of the deal.

“Look, I'm a young founder, I want to reap the benefits of what I’ve built. Rs 1,000 crore in the bank at the age of 70 is not as valuable as a couple of $100 mills (millions) in my bank account today,” said a founder, who sold their D2C startup to a large FMCG player, asking not to be named.

Last resort

While some D2C players like Boat and Mamaearth have been able to mop up funds and play the long game on their own, the smaller players have struggled to convince financial investors because of which they have sought refuge under the wings of traditional FMCG players.

Sreejith Moolayil, co-founder of True Elements, a snacks and breakfast company that Marico acquired in 2022, says that food D2C startups especially are on the backfoot when it comes to raising money from venture capitalists (VCs) or private equity (PE) players.

“When I was pitted against a personal care company in front of PE, they saw that the market here (food company) was still nascent, the margins are better in beauty and personal care (BPC); BPC penetration is higher than food, so we were always on the losing side of things,” Moolayil said.

The sale to Marico has opened up distribution channels and its offline reach helped True Elements grow.

Another founder agreed that it was difficult to raise VC money and that is when a large FMCG player provided support. “We could not get VC money. We saw good traction during COVID but then came the lull, when we realised that for the next 2-3 years, we wouldn’t get back that demand and if we didn't have deep pockets, we wouldn’t be able to scale up. Then a strategic investor came through,” the founder said.

Looking for an out
Founders also said it was important to time their exit and choose a strategic investor over a financial one, when it made more business sense.

“...one should decide and time their exit when they know the markets are so difficult that equity dilution makes absolutely no sense. There is a rule book, for every Rs 1 that you raise, it has to result in at least Rs 4 of stable revenue. If that multiple does not play out, one is better off selling the company today rather than continuing,” said Suhasini Sampath, co-founder of Yoga Bar.

The reach of her company’s products will go from 5,000 stores to 20,000 stores only because of the sale to ITC. It would have otherwise stagnated.

“For players like us, it makes sense to choose a strategic partner (ITC), because we’re not going to be constrained by the capital availability in the market now,” she added.

Different FMCG players structure their deals differently. While Sampath said in three years’ time, ITC will compulsorily acquire 100% of Yoga Bar, Marico has other ideas.

Marico has the first right to fully buy out its companies after three years and integrate with the larger brand, but it can also choose to let founders continue to run the business after that timeline.

“Marico is a strategic investor of choice as we believe in incentivizing the promoters to bring a company to its maximum potential,” a senior official from Marico said.

Large FMCG players take about double the time to create similar products in-house and hence an acquisition works better and cheaper for them, experts added.

“The acquisitions of digital-first brands are strategic in nature and help expand the addressable market within categories of interest. We don't acquire just for the sake of bringing more brands under our fold. The idea is to diversify our portfolio from traditional hair oiling and the mass segment to super premium segments” Marico's senior official concluded.