Is the rise of D2C brands really challenging the incumbents?

The Indian hair care market has long been dominated by large companies such as Hindustan Unilever Ltd (HUL), Dabur India and P&G. These companies have historically focused on solutions that promote “straight” and “shiny” hair, while addressing concerns like dandruff. However, India’s hot and humid climate leads to other problems such as frizziness, which require a wider range of solutions.

“Legacy brands have been trying to use a one-size-fits-all approach for years,” Madhok told Mint. “They have taken what’s worked across the globe and replicated it here. That has led to a rise in opportunities for brands looking to cater to very specific use cases,” Madhok said.

Slick Organics was launched in 2018 to tap this latent opportunity, borrowing a home-made flaxseed recipe to build on hair styling products; it has now diversified into shampoos, conditioners, hair growth serums and related products. The D2C company, which recently closed $4 million in a series A funding round led by Unilever Ventures, will close fiscal year 2025 with a ₹75 crore top line built entirely on online sales.

While official data on the impact Arata has had on existing brands is unavailable, Madhok cited internal data indicating that it holds a 3% market share within the hair care product category on quick commerce platforms. That small but growing number epitomizes a shift in consumer demand away from legacy consumer goods brands towards niche products, and how these sales channels are making the most of this shift.

As their name suggests, D2C companies sell their wares directly to customers, bypassing wholesalers and retailers. Today, these new-age consumer brands can be seen in categories across the board, from beauty and personal care (Plum, Pilgrim, FAE Beauty), mattresses (Wakefit), and apparel (Blissclub), to meat and seafood (Licious and Freshtohome).

The shift in consumer preferences is very evident in certain categories. Per data sourced from Bain and Company, the share of these insurgents in beauty and personal care brands hit around 3% in 2023; in electronic wearables and devices it was around 10%; in jewellery and apparel & lifestyle, it is still sub-1%, but growing quickly. The data considered 147 such brands incorporated less than 15 years ago. Such brands are growing 2-3x faster, on average, as compared to market growth across categories.

“These brands share shelf space with most large incumbents inside grocery stores today. The perception earlier was that D2C brands are largely online whereas now they’ve made their way into regular channels as well as quick commerce (which has now become a fairly large channel),” said Dhruv Aggarwal, partner, Bain & Co.

Despite being an over $800 billion retail market, India has historically remained brand-starved, according to a report by venture capital firmElevation Capital. New-age brands in India could unlock a $50 billion market capitalization by 2030 as households expand their spending pool to include discretionary products, it added.

“In our view, at least 300 plus brands will cross the ₹100 crore mark by maybe 2030. Of these, approximately 25-30 brands will become large enough to be listed companies. This will be true, especially on the discretionary side; incumbents will continue to scale in categories such as staples,” said Chirag Chadha, partner at Elevation Capital. The fund’s investments include brands such as Country Delight, Wakefit, The Souled Store, SUGAR, Chaayos and Bliss Club.

But D2C brands still have a long, long way to go to eat into the market share of the incumbents. As of FY23, the combined revenue of the new-age consumer brands tracked by Elevation Capital had crossed $5.6 billion or ₹40,000 crore. While it continues to rise rapidly, that revenue figure is currently just a sliver of the broader consumer goods market—for comparison, in fiscal year 2024, HUL alone reported a turnover of ₹59,579 crore.

So, the key question is: who will ultimately capture the consumer’s wallet?

The empire strikes back

While D2C brands are a clear and present danger, the old guard hasn’t been watching idly while the insurgents nip at their heels. If anything, the incumbents have been responding actively. For instance, large companies such as Hindustan Unilever, Aditya Birla Group, Emami, Tata Consumer Products and Marico are launching their own digital-first brands and also investing in existing companies to capitalize on this opportunity.

To cite an example, earlier this month, reports emerged that consumer goods company HUL was exploring the acquisition of homegrown D2C skincare brand Minimalist. HUL is reportedly considering a deal valuing Minimalist at up to ₹3,000 crore. Founded in 2020, Minimalist has gained traction with its range of ingredient-focused skincare products such as vitamin C serums and hyaluronic acids.

Mrigank Gutgutia, partner, RedSeer Strategy Consultants, cautioned that while new-age brands are giving some competition to traditional brands, their impact should not be over-emphasized. “Traditional brands are not sitting idle—they are focusing on their digital journey. Some of them are doing mergers/acquisitions of new age brands in response,” he said.

For instance, HUL revealed in its 2030 strategy released late last year that it is betting on the fact that Indian consumers are increasingly seeking advanced formulations and convenient formats. In 2022, it invested ₹334 crore in acquiring two digital-first health and wellness companies, namely Zywie Ventures Pvt. Ltd, maker of the OZiva brand of supplements, and Nutritionalab Pvt. Ltd, which sells products under the Wellbeing Nutrition brand. It has also rolled out several premium brands such as Novology and Dermalogica in skin care and launched its own range of digital-first brands.

The D2C ecosystem continues to thrive, with digital-first and premium brands demonstrating resilience and growth.
—Saugata Gupta

Rival Marico has invested in companies such as male-grooming brand Beardo and skin and hair care brand Just Herbs, apart from its 2023 investment in D2C supplement brand Plix. Marico’s own portfolio of digital-first brands includes bath and skin care products under the Pure Sense brand, and cold-pressed coconut oils under Coco Soul.

“The direct-to-consumer ecosystem continues to thrive, with digital-first and premium brands demonstrating resilience and growth. Today, foods, premium personal care and digital-first business contribute about 21% to our top line (revenue). This part of the business was only 6% in 2020 and has been immune to any urban slowdown,” said Saugata Gupta, chief executive officer and managing director, Marico Ltd, maker of Parachute oil. He added that Plix will be the first digital brand to hit ₹500 crore revenue in the next three years, with Beardo expected to follow.

Kolkata-based consumer goods firm Emami is also looking to increase its investment in new-age firms, per recent media articles. The company has investments in grooming company The Man Company as well as pet care startup Cannis Lupus Services India.

Investors want profitability

While it has taken some big strides in recent years, the D2C ecosystem has faced its fair share of challenges. The pandemic, for instance, boosted several digital businesses but also hit the sales of others. As a result, venture capital money was flush in the market with several digital-first businesses raising funds.

Estimates by Bain & Co. and DSG Consumer Partners suggest private equity investors and venture capital firms invested over $4.7 billion in insurgent brands between 2018 and 2022. Over 75% of this funding went into food andbeverages, apparel and lifestyle and beauty and personal care.

However, 2023 witnessed a “funding winter”, with investors implementing austerity measures. This significantly impacted new-age businesses, many of which heavily rely on venture funding to scale up. This period also saw several business failures.

“Many direct-to-consumer brands did go through some kind of a funding winter over the last few years, prior to which they were growing at 50-60%. The challenge these brands need to solve now is to scale beyond a certain level,” said Redseer’s Gutgutia. While the D2C ecosystem is still “nascent” compared to the incumbents, it is heading towards a more balanced and mature growth journey vis-a-vis the last three-to-four years, he added.

In an interview with Mint, Shubhika Jain, founder and CEO, RAS Luxury Skincare, said the D2C brand’s first round of fundraising in 2022 was fairly “easy”, as the ecosystem was flush with funds. Early this month, the company raised $5 million in a series A funding round led by Unilever Ventures. Investors are expecting brands to display greater financial austerity and reduce cash burn, she said. “We spoke to almost 40-50 investors and everybody was focusing on profitability. It’s not just about growth nowadays; it’s about sustainable growth,” she said.

Early investors still remain bullish on the ecosystem. “We believe consumers will continue looking for new products and solutions. There’s more personalization, there’s more need for cleaner products, more need for healthier products…whatever it is, we believe there’s going to be an opportunity,” said Deepak Shahdadpuri, MD and founder, DSG Consumer Partners. DSG’s investments include dairy brand Epigamia, hair care brand Arata, ghee brand Anveshan, and snacking brand Farmley.

The rise of the new-age brands has clearly irked established players, said Shahdadpuri. Epigamia, for instance, built a category around flavoured-yogurts, taking on established players such as Nestle and Amul. “We think this trend is going to accelerate. Technology, whether it’s e-commerce or quick commerce, has only allowed brands to reach a broader consumer set quicker,” he added.

Offline expansion

While they are certainly making inroads, expanding offline is a challenge for many D2C companies, and that is where their legacy rivals enjoy an edge. General trade stores still account for over 80% of sales for fast-moving consumer goods today. Large, established companies have invested heavily in building extensive distribution networks, reaching millions of outlets across India. In effect, distribution is the huge muscle on which the established names thrive.

Several D2C founders said they have slowly started building an offline presence. Kerala-based banana chips brand Beyond Snack, for instance, will double outlet coverage to 40,000 stores by FY26; RAS, too, is set to add more standalone stores.

Elevation’s Chadha says that 2024 saw more companies work on improving their unit economics via a combination of owning a large chunk of their supply chain and the go-to-market route. “The more you can control distribution channels, i.e., have your app or own stores and be more backward integrated, the better it is,” he said.

We have also seen growing demand for smaller, independent brands, reflecting a shift in consumer preferences and an evolving ecosystem.
—Devendra Meel

Estimates by RedSeer suggest that in FY24, over 140 brands drew 73% of their revenue online versus 86% in FY19. It helps that platforms such as Nykaa and marketplaces such as Amazon and Flipkart have invested heavily in e-commerce infrastructure, enabling pan-India sales.

More recently, quick-commerce has enabled D2C brands to list on their platforms. Over the past six months, for instance, more than 300 D2C brands have gone live on the quick-commerce platform Zepto. When Zepto started, D2C was a niche market, but the quick commerce company views this as a “huge opportunity” today.

“We have also seen growing demand for smaller, independent brands, reflecting a shift in consumer preferences and an evolving ecosystem,” said Devendra Meel, chief business officer, Zepto.

Beyond Snacks now draws 38% of its overall sales from quick commerce. While the company did not start out as a D2C brand, the pandemic prompted the founder to latch on to e-commerce marketplaces to move. “The game really changed after covid because people started purchasing heavily on e-commerce,” said Manas Madhu, the brand’s co-founder.

“Over the last 12 months, quick commerce has certainly provided a wind in the sails for the companies. We are spotting this trend as we meet more companies,” said Gopal Jain, co-founder of private equity firm Gaja Capital. D2C consumer products is a segment of “interest” for the fund. “There are several companies that have been created over the last five years that are approaching a certain scale and maturity in unit economics,” he said.

Widening consumer base

Building a consumer brand in India is not easy. On average, Indian brands have taken approximately six years to achieve an annual revenue of ₹75 crore ($9 million), according to data from Bain & Co. However, once this milestone was reached, subsequent growth came quicker with the majority of the brands reaching the ₹200 crore ($25 million) annual revenue mark within the next two years.

The good news for brands across the board is that over the next decade, India will see millions more come into the consumption fold.Meanwhile, total consumption expenditure is expected to rise from $2.1 trillion in 2022 to $5.7 trillion by 2030, per estimates by Bain & Co.

Premiumization and new category additions are sweet spots for new-age brands, which are projected to contribute to 45% of consumption growth from 2022 to 2030, according to a May 2023 report by Bain & Co.

Eventually, many of these brands will likely follow several paths, say experts: either grow independently, potentially going public, or partner with larger companies, or be acquired by larger players.

“We’ve seen both models in action. Acquisitions will continue, but the emergence of new-age, disruptive brands remains a significant trend. We will continue to see more brands enter the market,” said Bain & Co’s Aggarwal.