Direct-to-consumer (D2C) brands such as MamaEarth, Wow Skin Science, Lenskart and boAt, among others, may have managed to ride the pandemic-induced digital boom and clocked double-digit revenue growth over the last few years. But that isn’t the overall D2C story in India. The market is slowing, according to conversations with multiple industry experts and investment bankers about the state of the sector.
The slide in the D2C market growth has coincided with a slowdown in the domestic e-commerce industry and a funding winter in the overall internet economy in the last year. Barring a few D2C brands, most are struggling to raise funds as investors turn cautious, the experts said.
The $60-billion e-commerce market in India slowed to levels of about 22% in terms of growth in FY23 from 36% reported in FY22, according to consultancy Redseer.
While the D2C segment is around 28% of the domestic e-commerce market, according to Redseer, growth rates have halved to about 25-30% from 50-70% seen during the pandemic period of March 2020-March 2022, some experts say. And the pace of growth could slow further if the funding winter and e-commerce slowdown persist into the future (FY24).
Consider this: Honasa Consumer, the parent company of MamaEarth was contemplating an initial public offering of around Rs 2,900 crore in CY23. It has since put its plans on hold due to subdued market conditions, joining the likes of Snapdeal, MobiKwik, PharmEasy, Droom, Oyo and boAt.
Honasa Consumer’s draft red herring prospectus (DRHP) filed with the Securities and Exchange Board of India showed that it had an annual revenue of nearly Rs 1000 crore in FY22 and a bottomline of Rs14 crore for the period. Topline and bottomline for the first six months of FY23 stood at Rs 722 crore and Rs 3.6 crore respectively, the DRHP showed. The six-month topline, if annualised, works out to about Rs 1,444 crore for FY23.
“The last one year has been a challenging period for D2C brands, mainly because consumers have gone back to shopping in the physical world after the Covid-19 restrictions were completely lifted,” said Harminder Sahni, founder and MD of Gurugram-based Wazir Advisors, a boutique investment advisory and consultancy firm.
“This has split the consumer’s share of wallet between online and offline, coming as a reality check for D2C brands that were digital-only and had not expanded into the offline space. For those that have expanded into the brick-and-mortar world, competition from traditional fast-moving consumer goods players is significant,” Sahni said.
At over 800 in number at the height of the pandemic, the D2C universe of brands has shrunk by at least 10-15% now, according to a report by KPMG, as the market consolidates and weaker brands fall by the wayside. It could shrink further as investors focus on profitability and unit economics, experts said.
For FMCG and even retail companies, the stress in the D2C sector is prompting quick action in terms of mergers and acquisitions. This is because many traditional firms are seeing this as an opportunity to beef up their internet capabilities with the right talent and technology and fill white spaces in their portfolio with the acquisition of key brands.
In particular, sectors such as male grooming, beauty and fashion as well as niche food are on the radar of consumer companies, investment banking sources said.
On Friday, for instance, beauty and skincare company VLCC, controlled by private equity firm Carlyle, said it was acquiring D2C men’s grooming brand Ustraa, founded by Rahul Anand and Rajat Tuli. While the deal size was not disclosed by the company, Ustraa’s existing investors InfoEdge, 360 One and Wipro Consumer Care Ventures would become shareholders of VLCC.
FMCG major Marico has picked up D2C brands such as Beardo (male grooming), Just Herbs (skin and hair care) and True Elements (breakfast and snacking) over the last few years. While ITC invested in Sproutlife Foods, which makes Yoga Bar, earlier this year, rival Hindustan Unilever (HUL) invested in Zywie Ventures, which sells plant-based supplement brand Oziva, and Nutritionalab, which has products under Wellbeing Nutrition, last year.
Vikas Gupta, VLCC’s chief executive officer, said the company would help accelerate Ustraa’s growth journey in the future. “We will leverage our pan-India distribution to help Ustraa grow in the offline space. At the same time, we will leverage Ustraa’s tech and digital background to scale up our presence in new-age commerce,” he said.
Experts said this hybrid or omni-channel approach would have to be the way forward for D2C brands if they wish to survive in the post-pandemic world.