Every time you look up Licious, you are sure to browse through the day’s special combos on offer. Or, going by your browsing history, several brands like Sleepy Owl, Svami or 4700BC may keep reminding you to buy things you may have momentarily forgotten or “saved for later”. Or, Swiggy may send you a text saying: “How about ordering that Shawarma you’ve been craving for days” or Amazon may tell you to “grab that product x lying in your checkout cart?” That’s how D2C brands have become a part of our lives today, creating a constant buzz around them and sending us reminders to spend more!
And, the pandemic was just another reason to boost our online shopping with lockdowns imposed across the globe. While some raided the local supermarket aisles and stocked up supplies, most took to online orders of essential goods and groceries. Out of convenience and necessity, the COVID times also exposed a drastic transformation in consumer behaviour, along with whopping sales in the e-commerce space.
In terms of sheer numbers, gross e-commerce sales from mid-October to November 2020 touched $8.3 billion compared to $5 billion in 2019 in gross sales. A Boston Consulting Group (BCG) report stated that until August this year, 20% new users were added to the online shoppers’ universe, driving growth for categories such as food and staples.
Meanwhile, the pandemic has pushed the Indian consumer to evolve in many ways. From an increased familiarity of digital commerce to looking for specific products that suit their needs, the Great Indian Consumer of the ‘new normal’ is more aware of product availability and its quality, and demands a seamless experience and looks for quick delivery options.
While offline retail had lost its momentum during this period, several brands quickly jumped at the opportunity to adopt omnichannel solutions where they targeted the right customers at the right time to maximise their reach and impact. According to a report, prior to the pandemic, omnichannel was largely about “endless aisle”, where online customers could virtually browse products that are either out of stock or not sold in-store and have them shipped to the store or their home later.
However, a post COVID-19 scenario, there is a spike in ‘Ship from Store’ orders, which means companies are using these stores as warehouses to deliver online orders received by the brand, reveals the report. “This not only reduces the logistics cost for the brand but also ensures that the customer is able to receive the product in a much shorter time, which is critical in these uncertain times.”
So, as India’s e-commerce market blossoms and matures, many brands now prefer connecting with their customers directly, rather than taking the traditional route.
A peek into Nike’s D2C revenue growth from 2009 to 2020:
Let’s consider the example of Nike. The company had announced its decision to pull out its products from Amazon and focus on direct sales. But, how did Nike manage to shake off revenue blues in the middle of a pandemic? The brand went from over 30,000 distributors down to a focus on 40 of them. This pivot apparently helped Nike have control of the brand and keep close ties with its customers, a strategy called “Consumer Direct Offense”. The company saw its direct-to-consumer sales go up by 32% while its digital sales were up 84%. Meanwhile, a key driver of the increase in digital sales comes from loyal Nike members and the use of the mobile app which grew 200% in the second quarter.
Trends that have perpetrated the growth of D2C brands:
1. Changing incomes & demographic profiles of consumers: The Indian population is over 135 crore people. That’s around 17% of the world’s population. Of this, over 62% of India’s population is between productive ages of 15-59 years. The median age of our population is around 27 years of age and for the next 20 years, we will hold onto the claim of being one of the younger demographics in the world.
This means that consumer demand should keep growing for many years to come, thereby, propelling India’s GDP. What it also implies is that the kind of products, services and experiences available today will undergo a sea change to keep pace with the outlook of the millennials and GenZers.
Another key factor contributing to growth is the rise in income levels. This trend is not just limited to the Metros but extends to tier 2 and 3 cities as well. With growing incomes, people’s propensity to spend is now expanding in these smaller cities, which are turning into the new power centres of demand.
2. Growing access to Internet & ubiquity of smartphone usage: India’s internet penetration has crossed 50% this year. Meaning, already half of the population in India uses the internet. This is a rather fast jump, looking at the fact that in 2015, only 19% of the Indian population was actively using the internet at 243 million users.
Perhaps more importantly, social media users in India skyrocketed by 48% or 130 million between April 2019 and January 2020. This is a mind-boggling trajectory which clearly shows how fast Indians are adopting not only the internet but the most popular platforms as well. Moreover, the number of India’s internet users are set to touch 1 billion active users by 2025.
The culmination of growing Internet users and smartphone users means these devices are a window to the world and are now, a means of expressing one’s opinion and individuality. They have also become new virtual retail stores.
3. Growing Health & Environment Concerns: With climate change and health-related concerns plaguing consumers, consumers been extremely conscious of what they are buying. With pandemic adding its bit to the health scare, more and more consumers are giving equal, if not more importance, to the quality and source of ingredients than they did earlier. Regulations on the product and environmental safety are becoming stronger too.
4. Technological Innovation: The entry of e-commerce marketplaces such as Amazon, Flipkart, and Facebook, to name a few, has altered the importance of the new role played by technology in disrupting long-held business models. Technology, today is helping businesses serve customers in a manner that was unimaginable before. From mobility, analytics, 3D to machine learning, technology is bringing about revolutionary changes in the creation, delivery and consumption of products.
5. Complex decision-making for consumers: Earlier consumers in India directly walked into a small Kirana store while most of their decision making was made by the well-informed owner of the store. However, with a rapidly growing economy and free trade, the number of products now available have spiked massively.
While consumers have a huge variety to choose from, they also have many more product categories on offer. Earlier, one product served multiple consumer needs, now we have various brands, and within these are numerous variants and pack sizes catering to sub-segments with refined needs.
While lack of variety caused consumers to move from small traditional stores to bigger and more modern ones, we now expect to see complexity driving them towards sources that will help to simplify and ease their choice-related and purchase decisions.
To simplify the decision-making process, several D2C brands are now identifying customers’ needs clearly through innovative marketing and communication tactics and optimising the use of technology. Here are some examples:
Case 1: MamaEarth has a clear need identification strategy for customers looking for toxin-free products specifically catering to baby and mother needs.
Case 2: Soap Square is another beauty brand which is focussed on chemical-free, natural products, focussing on sustainability and zero-waste living. Their innovation/introduction of Organic Shampoo Bars has been a big hit. Their influencer marketing model through their customers’ video reviews has been working incredibly well for this D2C brand.
Case 3: Fast & UP cleverly uses gym/fitness trainers/ Yogis/ Runners’ Groups as influencers for assisted sales and marketing. Their storytelling approach through this directly connects with trainers’ clients, thereby increasing their customer base.
Case 4: Licious has been successful in marketing antibiotic-free meat sourced directly from farmers while ensuring an efficient cold chain strategy. Additionally, operational efficiencies through third-party integrations, outsourcing manufacturing and eliminating middle-men have worked well for them!
Case 5: Lenskart has been successful with its omnichannel presence through a vertically integrated supply chain mechanism.
Case 6: CaratLane launched a virtual 3D imaging app enabling users to try on a variety of jewellery on the go. Effective use of technology for control over demand forecasting, cost optimization, quality control and traceability has helped this brand grow immensely.
Growth potential aplenty for D2C Brands
Several other brands in the F&B, Beauty, Fashion, Home & Furnishings segments have been experimenting as they continue to use multiple strategies to scale and evolve as they interact directly with consumers.
According to Avendus, Food & Beverage is a $12 trillion market globally, making it the largest retail category in India. High growth in the millennial population and a shift in dietary preferences towards organic and plant-based products have led to this growth. “Incumbents such as Beyond Meat, Nestle, Pepsi, and Coca-Cola are also adding a direct-to-consumer model to their distribution channel. The F&B category is currently witnessing a consumption-led growth in India.” As a result, large FMCG companies have consistently been making strategic investments in food brands with the objective of category expansion, increasing depth of portfolio, diversifying business model and geographic expansion.
Another key D2C segment — the Beauty & Personal Care market — is expected to touch $725 billion by 2025. D2C brands in this category have flourished on the back of product and price white space, business model innovation and growth capital. Their efforts towards customer interaction, social media engagement and next-door credibility of influencers have helped them capture a new wave of customers driven by influencer marketing.
However, D2C brands should be aware of some execution challenges like revenue stagnation, low retention or high customer acquisition costs in India even as multiple Billion Dollar valuation outcomes have been created across the US and China.
Striking a balance between Retailers Vs. Consumers
Selling directly to customers, however, doesn‘t necessarily translate to better customer experience. If companies don‘t have the necessary insight, processes and culture in place, they won‘t be able to provide a seamless customer experience. An understanding of the end consumer is required to ensure that any direct sales effort improves the customer experience.
Of course, building a brand through a direct-to-consumer strategy also presents some complications. Especially, a robust D2C presence could endanger another important marketing channel: selling through retail partners. For example, Nike’s aggressive push for direct sales (as listed above) put the brand’s relationship with retailers in an awkward position.
Though companies like Nike tell with a straight face that online sales really don’t contribute much to their volume of sales and that it has done so to increase awareness of the brand and that retail partners shouldn’t be afraid of that, several sportswear chains have folded following its D2C move.
Therefore, brands/companies may have to avoid upsetting their retail partners as they expand their D2C channel, companies need a more holistic understanding of their consumers and to use that insight to find the right balance, says a “Study of Direct-to-Customer as a Strategy in Organized Retailing in India”. For instance, companies need to figure out which consumer segments prefer to buy directly from retailers — and why.
Companies could also use their D2C channels to bring insight to their partners. For instance, this channel could be a way to test new products and campaigns in a smaller, safe environment before they are scaled out to retail partners. Customer intelligence can help companies make better decisions about their D2C efforts and provide the necessary insight to help their retail partners sell more.
Regulatory challenges hinder growth
It is a known fact that regulatory challenges continue to plague every Indian business. While there have been attempts to provide regulatory unlocks to the retail industry in the recent past, a lot more needs to be done. Regulatory barriers at the Central/ state-level have limited the sector’s ability to:
- Build an efficient system to compete while also trying to let the unorganized sector survive
- Grow rapidly to build a scalable business
- Access to FDI
Let’s discuss the operational barriers that companies face. From challenging labour laws at the Central level to multiple laws for clearances and several regulations required for operations stifle several businesses with delays and uncertainty. Additionally, lack of clarity with respect to tax policies, uninhibited, complex and excessive taxation at the state and central level are causes of concern. Rent and tenancy laws are another area of dispute for business operating in the space.
These regulatory barriers, if unlocked, can provide the sector with a much-needed impetus to improve profitability, be competitive with global peers, get access to capital and unlock growth. Moreover, the sector needs a nationwide FDI policy that gives confidence to foreign players to commit resources for the longer term.
M&As may see an uptick in D2C Space
Despite the regulatory concerns, D2C has been witnessing a rise in VC funding over the past few years. In the backdrop of a global pandemic, the trust of investors in the D2C space has wavered with businesses in the sector seeing a decline of 69% in the third quarter of 2020 as against total funding of $117.6 million through 30 deals in 2019.
According to an Inc42 report, fashion is the most lucrative category for D2C brands not only from the perspective of the consumer base but also funding outlook. “Fashion brands have secured the most funding ($876.2 Mn) among D2C brands with 65 unique fashion startups drawing in investments. Among the D2C fashion startups are the likes of Fablestreet, Bombay Shirt Company, Clovia, Bewakoof, StalkBuyLove and Lenskart.”
Despite the highest number of investment deals (124) in the seed stage D2C startups, the contribution of seed funding towards the total funding in D2C startups remained minuscule (4.21%) from 2014 to Q3 2020. Given the nature of the business, large funding rounds would probably be limited, but secondary transaction activity is expected to be high.
However, the D2C industry has the potential of creating great outcomes with high capital efficiency. Mergers & Acquisitions (M&As), either through roll-up strategy or acquisitions by incumbents, are likely to be witnessed over the next 2-3 years. Market experts predict that 4 to 5 strong IPO stories could come out of the consumer sector in the next 5 years.
Embracing the omnichannel world
Omnichannel is enabling the brands to fully leverage the supply chain, and offer faster delivery and with better inventory utilization, which is critical especially in today’s time where logistics remains stretched due to limited workforce. In fact, it’s not just the brands, marketplaces are also investing in becoming fully omnichannel to provide a wider assortment and enhanced shopping experience to their customers.
These marketplaces are collaborating with brands to list their store catalogue (which is typically fresh season stock) and also enable them to “ship from store”. It’s a win-win situation for both marketplace and brands, as brands whose offline stores are running at low capacity are able to clear inventory and marketplace is able to fulfill orders at a much faster pace by shipping orders directly from the nearest brand store, besides providing a richer assortment to the end consumers.
To craft this value proposition and deliver their promises consistently, successful retailers have relied on:
- Creating the “shopping” spaces map along with associated revenue & profit pools.
- Prioritizing spaces to win in basis attractiveness and starting position.
- Developing store category concepts.
- Integrating into a full-store identity, proposition and commercial model.
- Conducting pilots.
- Refining the design, finally roll-out to the complete fleet.
While traditional stores have a natural advantage of a closer understanding of customer behaviour, meeting the needs of “touch and feel”, instant gratification, an omnichannel retailer who has built capabilities is, therefore, better positioned in offering a seamless consumer experience than a pure-play e-commerce player.
Transitioning from traditional channels to multi-channel processes requires a deeper understanding of the customer purchase journey. Simply replicating the old ways of functioning into the new environment may result in failure to capture synergies present across channels such as those of scale.
While omnichannel supply chain strategy works effectively if implemented well, D2C brands also need to accommodate strong brand advocacy methods to influence consumers by recruiting effective brand advocates. They can do so by building a powerful message around product experience, engaging with customers without expecting anything in return (build a community), build continuous relationships and virality of messaging through a multi-channel environment.
Significance of Consumer Data & Influencer/Content-led strategy
For many brands, the most compelling reason to sell directly to consumers is the potential to collect massive amounts of customer data. Analysing this data can produce valuable intelligence and insights that can help retailers make smarter decisions across various processes of the value chain.
- Creating segments for a differentiated shopper experience and drive behaviour differentially.
- Target with specific content, channel and type of offer differentially.
- Carry out sentiment analysis from social media platforms e.g. Facebook, Instagram, etc.
- Assess customer value based on recency, frequency and monetary purchase. value and arrive at customer life-cycle value.
- Assess by segment drivers of customer loyalty and retention.
D2C brands are, perhaps, best known for their effective use of social media to find their target customers, particularly on Facebook and Instagram. Even unconventional business-to-consumer (B2C) tactics like content marketing (email marketing, contests, digital ads, polls) are being used to go “over the top” of traditional media channels to reach and acquire customers.
The Hypeauditor chart shows the distribution of influencers by specific niches. We see that the biggest categories are Beauty & Fashion (19.2%), Fitness & Yoga (8.6%) and Music (7.3%) The majority of influencers create content on this theme. The least competitive niches are Books & Literature (0.2%) Technology & Science (0.6%), Business and Careers (0.7%).
For many marketers, engagement is the most important metric and a popular KPI of brand awareness. Engagement rate is used as a benchmark of success on Instagram as it can determine if an influencer is connecting with their audience. What this means is highly engaging content with many likes and comments often stand a better chance of organically appearing on an Instagram feed.
Future of D2C: New capabilities, rural expansion
Whilst retailers would witness strong growth over the next few years, the shape of this growth would be very different. A BCG report claims that the Indian Retail sector is expected to become an $1100 Billion market even as India grabs its place as the 5th largest retail market in the world. Of this, the e-tail market (in India) is likely to have a $200 billion pie by 2025, adds a report by Avendus.
For instance: In case of apparels, 60% of consumers who have been online for over 4 years are digitally influenced compared to only 38% of consumers who have been online for less than a year. Projections indicate that by the end of this financial year, 350 to 400 million Indians will be digitally influenced while 200 to 250 million would purchase online.
With online shopping skyrocketing in the new normal, nearly 60% of e-shoppers in India believe online shopping is safe. In this emerging reality, retailers would need to build a new set of capabilities to stay ahead in the D2C game.
- Omni-channel: Ability to meet consumer needs across the purchase pathway. Consumers would increasingly demand curated/personalized offering, any time and across channels in a seamless manner.
- Analytics/ Big Data: Build BIG data capabilities to leverage data for superior decision-making to influence & expand the customer base. Enhance the usage of AI and ML tools to monitor customer and merchant behaviour as well as botnet activities.
- Agile IT platforms: Create low cost, scalable IT platforms with a learn, test, develop approach. Build checks to authenticate digital/synthetic identities.
- Supply chain: Create omnichannel fragmented supply chains capable of handling unpredictable bi-directional flows and reduce bad inventory. Implement warehouse management systems and supply chain automation tools with inbuilt fraud detection analytics.
With the D2C market receiving a splendid response from Tier-2 and Tier-3 cities in the midst of a pandemic, brands are now willing to expand to rural hinterlands with a hyperlocal model of delivery. Several e-commerce and logistics companies focussed on fulfilling consumer demand through local ‘kiranas’ or neighbourhood stores rather than relying on inter-city deliveries during the lockdown. Another strategy that D2c brands could look at is to capture the underserved online ordering market in tier-3 Indian cities. But, they will first need to:
- Build tech capabilities in tier-3 cities
- Educate local merchants to list products as well as train them to efficiently use the portal
- Address consumer data privacy concerns
- Identify fake merchants or suspicious transaction patterns
With companies willing to leap into India’s next D2C wave, retailers still find it increasingly difficult to find and retain the right resources. With intense competition, misalignment of skills, limited investment in personal growth and development of employees and legacy systems, this has been a problem area for several companies operating in this space. Employees today are ambitious and aspire to work for companies which provide them with the highest level of financial, psychological and intellectual satisfaction.
Therefore, the willingness and availability of talent pool also rely on the interest of the organizations to redefine their internal culture, proposition and build programs for their employees to develop the right skills to meet their growth aspirations. In short, openness, focus on value-creation, less bureaucracy and ability to build more capabilities will drive their growth.
As we enter a post-pandemic world, D2C brands will continue to thrive, expand and gain more mass popularity among digital consumers while brands compete to convert their online buzz to bucks more efficiently.