Direct-to-consumer: What is the future of this red hot sector in India?

Direct-to-consumer: What is the future of this red hot sector in India?
Prayank Swaroop
Prayank Swaroop
Partner, Accel
June 2, 2022
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D2C (DTC or Direct to Consumer) is an e-commerce business model that allows businesses to sell their products directly to consumers, eliminating the need for distributing intermediaries.

In 2021, homegrown D2C startups like MamaEarth, WakeFit, MyGlamm, Licious, and many more have achieved the unicorn status with a company valuation of over 100 crore. After only six months in operation since November 2021, Mensa Brands placed itself among one of the fastest Indian startups to become a unicorn. Clearly, this disruptive space is on fire and increasingly so, as more D2C startups are entering the market.

Despite being around since 2015, the D2C sector in India has truly boomed only since the pandemic outbreak in 2020. More than 600 Indian brands have already adopted this increasingly popular business model. In 2020, most D2C brands, with dedicated websites, witnessed an 88% spike in consumer demand compared to pre-Covid years. 

Even at Accel, we’ve associated with D2C brands across various e-commerce sectors like jewellery, luggage, beauty, clothing, and more. 

Before diving into the future prospects of this red hot sector in India, let’s first understand how D2C is changing the retail sector as we know it.

How D2C's driving the retail revolution

The shift from traditional retail to D2C is majorly pinned to the changing consumer behavior with high purchasing power. Rapidly increasing online reliance, Gen-Y shopping behavior, rise in Bharat (Tier II, Tier III and Tier IV) buyers, as well the increasing reliability of ecommerce enablers, and easier payment gateways are some of the prime drivers of this retail revolution.

Moreover, consumers have moved past the ‘one-size fits all’ concept. New age consumers demand differentiated value propositions that this disruptive sector enables - be it in terms of product offering or overall user experience. Thus, besides the rise of new businesses within the D2C model, traditional businesses are also gradually venturing into this segment. The reason is simple: direct-to-consumer channels are a win-win for brands and consumers. Here’s how: 

As a brand:

  • Direct access to consumer data insights.
  • Informed decisions for several business processes like product development, pricing, sales tactics, inventory planning, distribution etc.
  • Better product personalization which increases brand credibility.
  • Higher customer acquisition, CLV (customer lifetime value), and enhanced customer loyalty.
  • Gain higher margins by eliminating middlemen.
  • Complete ownership of brand image, and customer journey. 
  • Scope to test and bring new products to the market.

As a consumer:

  • Customer-exclusive products and offers
  • Convenient, easy, and fulfilling shopping experience
  • Control over purchases and ability to customize
  • Faster deliveries
  • Be a more sustainable and conscious buyer

What’s in store for D2C in India?

How big will the market become?

Diffusion’s 2021 report suggests that brands using this strategy are penetrating mainstream consumer consciousness. The total number of native companies expected to emerge in  this sector is expected to touch 250 thousand in 2025. 

In sync with India’s rapidly growing retail industry, the D2C market is also speculated to be worth $100B in two years.  As the valuation of this market is increasing, venture capitalists like us are becoming keen to invest in these new-age digital-first D2C companies. Growth of ecommerce in most segments have been fairly rapid. The BPC (beauty and personal care) market, for instance, is expected to grow from $10B to $14B by the end of 2025. There has been a 44% increase in the fund distribution for early stage consumer brands. Above 140 digital-first brands have been VC backed between January ‘20 to August ‘21. The investments to this sector are estimated to skyrocket in the years to come. 

Possible Challenges Ahead of the $100B Opportunity 

Most of the headwinds that the new brands are facing are coming from legacy brands. PepsiCo, has already entered the D2C rush with and, offering fast and easy access to its products globally, and might bring these platforms to India soon. Conglomerates like ITC and Tata Consumer products, among others, are also turning to D2C e-commerce.  

The competition will only intensify and there are possible challenges that new age D2C brands might face encounter:

1. Customer Acquisition: 

Profitable customer acquisition is the lifeline of any business. D2C businesses thrive on low cost of acquisition (CAC) and longer lifetime value (LTV). That is to say that a customer once acquired, will continue buying for a long time so that a business can make profit in the long run. 

However, with increasing competition, brands are shelling out more money for media spends. This is pushing CAC higher, sometimes to unsustainable levels. Also, switching from one D2C brand to another needs very low effort these days. The LTV is shrinking rapidly as well, leading to a double whammy for D2C businesses. Brands will need to implement diversified marketing approaches to acquire and retain customers profitably.  

2. Order Fulfillment: 

Efficient logistics management is another major challenge to tackle, specially for small or mid-level D2C players. Seamless and streamlined end-to-end order fulfillment is crucial for the e-commerce sector. In 2022, D2C brands are rapidly banking on the tech integrated operations, pin-code reach and a vast network of expert courier services that accompany third-party logistic platforms. After all, these brands are heavily dependent on reach and customer connection through hassle-free and prompt service. Consumers today prefer the convenience of same-day deliveries. 

3. Revenue growth and scaling: 

Capital efficiency is key for a sizeable online-only D2C brand to be successful. Per unit value for a D2C model can only work profitably for categories with high engagement and retention or ones with higher AOV ( Average Order Value) items. Profitable D2C business can emerge in the following 3 categories if the market is deep enough, but they’d still have to go offline, at some point, to scale. 

  • Brands making mattresses (WakeFit), electronics, jewellery or luxury items will have large AOV. If the market is deep enough, these brands don’t need to solve for repeats and can recover their CAC within a single transaction.
  • Businesses selling moderate AOV items (with moderate repeat purchases) like premium BPC, apparel or home furnishing brands are ideal to build a profitable D2C digital-only brand. 
  • Cosmetics, mass BPC and Nutraceutical brands can recover CAC and become profit-making, only if almost 30% of their customers make five to six purchases per year. This category struggles to determine group engagement and retention. 

Trends that will move the D2C space

Personalisation and Convenience

Influencer marketing cannot be ignored anymore. Influencers, all around the world, are successfully building stronger relationships with millennials through immersive and engaging content attuned to their needs. To sustain amidst the growing competition, D2C players will have to bring in influencers as brand ambassadors to make their brand voice reach and move the target audience. Building customized products is also a must for digital-first brands to create a deeper connection with their customers. 

Voice search will also become a marketing tool for these e-commerce brands to enhance the buying and selling experience. In 2022, shopper spending through voice searches is estimated to increase up to 18%. Convenience is the key. As this tool becomes more advanced and gains popularity, it will soon turn out to be the first mode for online shopping. Thus, D2C brands must up their SEO and content game to sell their product in a user-friendly language. 

Omnichannel Culture 

More and more D2C companies will integrate an omnichannel culture that is customer centric. Present-day consumers are hyper-connected and rapidly seek retailers who provide consistent and seamless customer experience across touchpoints. Being on a brand website allows potential customers a 360 degree view on products, their prices, and multiple ways for users and the brand to connect. A customer can also share specifics like email or whatsapp which brands can use to facilitate client’s fulfillment. 

Not all Indian buyers are inclined towards online shopping. Thus, for brands to succeed in a hybrid ecosystem, it would be best to adopt an omnichannel strategy. This strategy helps companies merge digital and offline channels to improve brand awareness, reach customers virtually or in-person and create an unbreakable bond between the brand and their consumers. The integrated experience of the omnichannel culture will surely undergo innovative upgrades in the coming years. 

Cause-led brands and sustainability matters

Purpose and sustainability driven D2C brands will thrive. Shopper consciousness is gradually growing. Most millennials and GenZ buyers are not just concerned about buying a product, but also think about its implications to the environment and their future at large. 

Within the next decade, the industry will see more D2C players with sustainability at its core. To make a stronger connection of hope and contentment with buyers, brands will also adopt missions that appeal to shoppers from varied backgrounds. 

Emergence of Dark Stores for instant delivery

2022 will see a massive rise in dark convenience stores as a logical expansion plan.  Dark stores are retail stores that get converted to local fulfillment centers. The presence of these stores in high-demand regions will help companies facilitate quick fulfillment of online orders, thus enhancing customer experience.  Aside from reducing delivery time and improving product distribution, these stores will also let brands have greater control over inventory quality, eventually cutting down on operational costs. 

Additionally, companies can escape the heavy investment of opening uptown retail outlets. 

5G enabling video commerce

Capturing and retaining the attention of buyers with traditional text, email or television marketing is quite the challenge because people are increasingly expecting utility and entertainment infused product offerings. The expected launch of the 5G network in the coming years can be a great opportunity for platforms offering video shopping experience to enter the Indian retail market.

The format opens up a new channel for brands to engage customers and improve social commerce. With technological advancements, AR and VR can also be blended into the format to improve the buying experience. Enhancing the brand's uniqueness and appeal among users, live commerce will help companies with customer acquisition, satisfaction and retention. 

Subscription economy

Simplicity is the biggest trend for D2C brands to cash on. Customers want things to be easy yet efficient, thus the subscription e-commerce model is set to be huge hereon. Brands like Bigbasket are already doing it. 

In order to thrive and scale globally, startups emerging in this disruptive sector will have to quickly shift to subscription-based services to build a loyal customer base. How does it help? Customers won’t need to come back to shop for frequently required essentials everyday or every month. Instead by availing monthly subscriptions, they’ll have these products delivered at their doorstep hassle-free. On the other hand, e-commerce brands will have access to a predictable and consistent month-on-month revenue flow.

Since you will know about specific needs, inventory management will become easier and you can streamline shipping by timing orders on the same dates. 

The road ahead for D2C in India

Due to accelerated digitization and huge shift in shopping behavior, D2C brands will lead the Retail revolution of this decade. The fragmented nature of the customer base will allow both small and large D2C brands to not just co-exist, but also grow. Consequently, investors will be increasingly drawn towards this disruptive sector that will follow the birth of more D2C startups in India. 

However, since India’s sector-wise e-commerce penetration is around 2-3%, brands cannot ignore that a good amount of potential customers still shop offline. While building a digital D2C brand is crucial for capturing pan-India demand, brands will also need to have an offline presence, eventually, to  win the trust of non-metro and small town consumers and scale further.