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Scalability of New Age Consumer Brands

By and on September 17, 2019

Enough has been written about the need for more consumer brands in almost all spheres of our lives. Given that we are all consumers first, it is apparent that with increasing individualism, rising incomes, and scarcity of time at hand, a new set of brands will get created. If you think this post was to give gyan on all that, you will be disappointed. What we wanted to talk about is how online consumer adoption is changing the way brands can be built in a scalable manner, and what kind of categories are likely to see emergence of Digital First Brands.

There are three components to building a consumer brand business – Product, Brand and Distribution. Digital intervention can play a key role in all three aspects:

  1. Product

For purely offline brands, any new product launch is expensive and time consuming. As a start-up, one will have to produce large units of each SKU in its portfolio to convince hundreds of retailers to stock it before getting any kind of consumer feedback (remember the age-old wisdom of product-market fit?). Online presence dramatically reduces both cost and time taken to get consumer feedback. Start-up brands can produce a few hundred units (hopefully all safe and tested), launch on 3rd party platforms, see customer off take and review data to find what is working and what is not. Ultimately, this leads to shorter, cheaper and data driven product development cycles. In crude terms, how cloud infra reduced costs of starting software companies, online distribution is similarly reducing cost of starting a consumer brand company.

  1. Brand

Using online as a channel to build a brand is the least appreciated aspect of Digital First Brands. A new offline brand will either give heavy trade margins to push its products or spend on mass media to create consumer pull. There are obvious pitfalls of both these approaches. In comparison, online brands start by spending marketing dollars for paid customer acquisition. It works since the spend is targeted and performance linked, with no minimum spending threshold. However, once you become decently large, performance marketing does not scale well with increase in spends. We feel that the digital world now allows for creation of a brand with an emotional connect with its users. With increasing entertainment time share moving online, both social media and OTT platforms can be great channels to build brands that consumers associate with. This is not to undermine spends on traditional media like print, OOH, radio and live TV, which people still consume and continue to remain important.

  1. Distribution

This is the most obvious part of online consumer brands. Several horizontal transaction platforms like Flipkart, Amazon, BigBasket, Myntra, Nykaa, Swiggy, Zomato, PhonePe, Paytm etc. have large consumer traffic and are a great way to get distribution. These are all pay-to-play models where one pays when a sale is made. These platforms hence avoid issues of fixed listing fees, limited shelf space, recovery of money from distributors and working capital blockage in inventory.

While third party platforms are key component of online distribution, over dependence on them is expensive and can be detrimental to long-term sustenance. Hence, building a strong D2C (direct to consumer) channel is equally important where brands can provide better range, experience and service to your customers. We have been pleasantly surprised by the fact that several new Digital First Brands have scaled to INR 100 Cr.+ ARR on some of the above platforms. Some of them are also distributing globally via Amazon.com or eBay. At the same time, we don’t think offline is dead. At some point of time, these brands will need to step into the offline world. Hopefully, by that time they are well established in the consumer’s mind and hence that journey is relatively smoother.

Not all spaces are equally amenable on above three dimensions. E.g. A brand like Too Yumm, sold at INR 10-20 / packet, will be a hard one to build as a digital first brand; whereas a CPG company like Mamaearth is a natural candidate to be built as a Digital First Brand. Following are some of the characteristics of brands which can be built digital-first:

  • Healthy contribution margin post marketing: For D2C to work, it is important that there is enough AOV / GM in business to cover for logistics and marketing costs. E.g. if your AOV is INR 600 and business generates 60% GM, you have INR 360 gross profit. If your logistics and cost of customer acquisition is INR 250, you make healthy INR 110 post marketing costs. Given that most brands are not weekly or even monthly purchase models, companies that lose money post marketing run a thin line on long-term sustainability
  • Frequency: We feel that categories with high repeat do well in the digital world. Unlike offline distribution, where being on retail shelves keeps you in the consumer’s consideration set, in the online world consumers will need to be acquired again if they forget about you. High frequency is also a reflection of high customer acceptance for the product. One exception to high frequency businesses are categories with abnormally high order value e.g. furniture, mattress or jewelry. There one can make enough money from each transaction that you don’t mind even if customers buy only once in 1-2 years.
  • Standalone v/s basket purchase: Products which are typically part of a larger basket will be harder to build in D2C manner v/s products which can be bought standalone. E.g. Coke can be sold online via BigBasket but will be hard for consumers to buy online at scale. For the purpose of this discussion, we are keeping private labels out – in our mind, they are margin drivers as opposed to being true brands
  • Products with true IP: If there is IP in the product, creating a digital first brand becomes much easier – it is far easier to attract consumers to your site (or app) given the unique nature of the product. We are yet to see good examples of Indian brands with IP apart from few sectors like healthcare devices, home automation etc.

Digital has already redefined how brands are engaging with their consumers. Net net, we are extremely excited about the prospects for digital first consumer brands created for Indian consumers, and see immense opportunity for disruption in this space. If you are building the next big Digital First Consumer Brand, we would love to know more – please drop us a line on arpit@stellarisvp.com or rahul@stellarisvp.com.

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