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The honeymoon may be over for D2C brands

Stagnating growth, customer-acquisition challenges and intense competition, combined with a sharp decline in funding, forcing companies to conserve cash, have given the industry a reality check

June 01, 2022 / 12:21 PM IST

In the sprawling universe of well-funded and cash-burning direct-to-consumer(D2C) startups, online tea brand Teabox was among the few that chose to travel on the road less taken, focusing on profitability rather than raising funds and burning cash to fuel growth. That decision seems to have paid off amid the funding crunch the ecosystem is grappling with now.

 “We turned profitable after Covid. That’s because Covid gave us time to evaluate a number of things. We optimised our business to bring in more efficiency,” Kaussal Dugarr, founder and CEO of Teabox, told Moneycontrol. Teabox, a direct-to-consumer brand launched in 2014, has so far raised just about $14 million.

“Even our marketing strategy changed. Pre-Covid, our revenue from e-mail marketing used to be 5 percent that went up to 35 percent after Covid. All these factors added together made us profitable,” says Dugarr.

Teabox is one of the few D2C brands that is profitable and has raised significantly less funding compared to other D2C brands.

The growth of D2C
D2C became the next big thing in e-commerce in the last couple of years, which saw a proliferation of new-age consumer brands in India selling directly to consumers through their apps, websites or via e-commerce platforms rather than the traditional and expensive offline route.

The brands mostly target millennials and GenZ, who are more discerning about what they use and are ready to experiment and discover products via social media or through peers.

Last year, the sector raised over $2 billion but the capital flow has slowed down this year. The D2C segment raised $153.4 million in the March quarter, a decent increase from $105 million a year ago. The number of deals, however, remains flat.

These brands saw unprecedented demand from customers as well as investors following the Covid outbreak, as online shopping peaked. But the honeymoon seems to be finally over. Flat growth, lower valuations, strategic investments, debt rounds and consolidations have seen them enter a bleak period.

Why it’s happening

The winds have shifted for D2C players and there are many reasons for this.

“In the last two years, people were not stepping out. So, they used the money they were saving for some impulsive buying from these online brands. It’s usually called retail therapy,” said Vinay Singh, Partner, Fireside Ventures.

“But, to expect the same growth—50-70 percent—to continue forever for undifferentiated offerings and products is obviously not possible. The growth rates have tempered to 30percent, in line with e-commerce channel growth,” he added.

After the dominance of online marketplaces Amazon and Flipkart, D2C brands brought a new paradigm into e-commerce. But a few years down the line, many of these brands, including the unicorns, are facing a number of challenges, including stagnating growth, challenges acquiring new customers, intensified competition and so on. This also comes at a time when investors are asking founders to show avenues of growth and how they plan to become sustainable and profitable when the macro headwinds are unfavourable.
Among other things, founders have to field questions and demands such as: “Will your growth be based on geographic expansion or will it be product-led growth?”  “Your topline does not matter. Show us the core model.”

Singh adds that smaller brands will feel the bigger impact, especially after the funding slowdown. “Any new online brand has to spend money to come onto the first page of an Amazon or Flipkart or raise brand awareness. If you can’t do it, you will be stuck in the loop of a certain range-bound growth rate.”

Additionally, with most of these brands going into cash-conservation mode, cutting down marketing costs significantly, new customer acquisition has proved challenging. Also, Google and Facebook have increased advertising charges, which has added to D2C companies’ problems.

Omnichannel to the rescue
Offline businesses reopening and people returning to offices or travelling are also among the reasons online businesses have been hit.

“The fight is for mobile screen time. Starting January, upward mobility started again. So, a lot of these brands, which were dependent on increased screen time by consumers and the lack of offline options, have started facing problems,” said an analyst tracking the space.

Mid-and early-stage brands clocking around 70-75 percent of their businesses from online channels are now looking at growth hurdles as new customer acquisitions are becoming more expensive.

Besides, the online market alone may not be enough for these D2C brands, especially with the number of brands in segments such as personal care, electronics, food and beverages and apparel, among a few others.

For instance, the digital market for beauty and personal care segment, which includes brands such as Mamaearth, Sugar Cosmetics and MyGlamm, is expected to grow to just about $4 billion by 2025, according to a report by Avendus Capital.

“These brands are now looking to reduce their dependencies and expand their offline channels. Many of them have even started television campaigns, against only digital campaigns earlier. But the RoI in this space does not happen immediately, like digital. That’s not how offline businesses work. It takes a longer time to develop and build and it gives you returns in the longer run,” added the analyst.

Adding to this, Kaushik Mukherjee, co-founder and COO of SUGAR Cosmetics, said: “Offline is bound to happen. Not because there are no other options, but when you see other online brands doing well offline, you obviously start trying it out well.” SUGAR Cosmetics opened its 100th store last week. Over 55 percent of its sales are now from offline outlets.

VT Bharadwaj of A91 partners, a prolific investor in the consumer brands space, believes an offline push coupled with lower price points will help expand the market.

Since 2016, over 600 D2C brands have been launched in India, says the report cited above. Among these, brands such as Licious, Mamaearth, MyGlamm and Lenskart have joined the unicorn club.

A lot of these brands, including MyGlamm and Mamaearth, apart from roll-up ecommerce firms Mensa Brands and G.O.A.T brands, have also been on a shopping spree, acquiring smaller brands to continue building a 'House of Brands’.

“Long tail brands are also competing with other smaller brands in the space to build multi-fold product lines. India saw 600 new brands emerge in the last 8-9 years, some successful like Mama Earth, Licious, Boat, Kapiva. If you cut across the spectrum of these 600 brands in total – all of them are going after very different needs and the competition within these needs also varies," said Pranav Pai, founding partner at 3one4 Capital.

"For example, in beauty and personal care there are premium, non-premium, mass brands that focus on multi-fold strategies to solve the needs and serve their customers."

He also added, "There are some smaller brands that are doing very well but they continue to struggle for reasons such as the market not being big enough or there aren’t enough repeat customers. Some companies are unable to breakout or scale up so an exit in terms of a sale to an acquirer May be the right outcome."

Some experts note that a number of these brands acquired by roll-up e-commerce startups are now struggling and have runway left for just a few more months.

Many also say that this is the right time for roll-up ecommerce firms as acquisitions will be much less expensive compared to the last two years. With fundraises slowing down and investors becoming more cautious, downward rounds, cost cuts and consolidations are on the cards this year.

“If the market leading Indian companies continue to drive their revenue growth, path to profitability, and deliver on their projected plans within reason, they will be able to raise capital at a fair valuation,” says 3one4 Capital’s Pai.

Exuding confidence
Some are still optimistic.

“Investor sentiment is dull, not consumer sentiment. This quarter is usually the slowest for brands as inventory rationalisation happens — brands take a step back to build their operations and supply chain capabilities to cater to the upcoming Q3 spike. But in reality, unlike other years, this quarter we have seen double-digit monthly growth as well,” said Mukherjee.

“But, some companies could appear to be flatlining. Usually D2C companies spend to reach a certain fundraising milestone, but with funding rounds being pushed for at least a year, these brands have shifted gears from scaling to cash-conservation mode to extend the runway and lower their customer acquisition cost.”

He also adds that while D2C brands were seeing accelerated growth during Covid and were expecting a market correction, that has already happened. “Initially, brands like ours were seen as metro brands. But, if you see brands above a certain scale, a larger part of the growth is from smaller towns and cities. We are not expecting any further drop and if anyone is losing market share, it won’t be accurate to blame consumer sentiment for it.”

A few people tracking the space also said that the higher order value for many top D2C brands helps in unit economics. Additionally, a few brands are doing well in international markets, which has been an added advantage.

Echoing similar sentiments, Sampad Swain of Instamojo, which works as an enabler for D2C brands, said: “Markets always witness a new phenomenon or trend, and these occurrences happen in phases. The most common pattern observed is a phase when there is a sudden spike or boom, which eventually fizzles out.”

“The D2C market is currently seeing a lull after the sudden growth the sector recorded through the pandemic. Though this may seem like a flat growth line, the avenues for growth are many.”

Instamojo has been seeing 20-25 percent growth in emerging micro D2C brands over the last four-five months.

Sanghamitra Kar
Sanghamitra Kar
first published: Jun 1, 2022 12:21 pm