An alliance of the unequal is opportune

With a young, technology savvy consumer base to bank on, D2C brands will continue to do well making them attractive to legacy companies

The new year may augur well for startups operating direct-to-consumer (D2C) brands in the beauty, personal care, food and nutrition space with several large, traditional fast-moving consumer goods (FMCG) firms keen to pick stakes in them.

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2022 saw FMCG giant Hindustan Unilever Ltd (HUL) announcing two strategic investments in December. A 51% equity stake in Zywie Ventures Private Limited that owns plant-based nutrition supplements brand OZiva and a 19.8% stake in Nutritionalab Private Limited that sells vitamins and health supplements under Wellbeing Nutrition. These digital-first brands sell through their own websites and other e-marketplaces, and are now looking to expand in offline stores.

V.S. Kannan Sitaram, partner, Fireside Ventures, expects many more such deals to take place across product categories. Fireside Ventures, an early-stage venture fund, invested in Wellbeing Nutrition (where HUL has now picked a stake) a year ago impressed by its innovative product line. Nestle India too is keen on one of its portfolio companies, the nutrition food brand Yoga Bar, though Sitaram declined to comment on the status of the deal.

After the tightening of US market, startups have struggled to find investors, with many terming this as a ‘funding winter’. Sitaram prefers to call it sane investing that has come after access to easy money during the last two years led to a boom in startup valuations. With financial investors lying low, it’s the strategic investors looking for a good asset and consumer franchise who have come in to the picture, he says.

Last July, Emami picked up a stake in a pet-care startup after having invested in the digital-first nutrition firm, Tru Native. Marico, the maker of Parachute hair oil and Saffola, bought a stake in True Elements, a healthy breakfast and snacks brand in May last year. The company had earlier invested in male grooming brand Beardo and ayurvedic beauty brand Just Herbs.

With a young, technology savvy consumer base to bank on, D2C brands will continue to do well making them attractive to legacy companies. “Acquisitions are being favoured over building D2C brands from scratch for two reasons. One, acquisitions ensure instant access to the D2C market as building brands takes time. Two, the culture of many legacy companies may not resonate well with the D2C space. Acquisitions help in overcoming this challenge,” says Amit Adarkar, CEO, Ipsos India.

Investing in D2C brands helps companies address different consumer segments. “But most importantly, D2C space brings companies closer to consumers. The traditional push-based marketing model entailed a one- way communication with consumers. In the digital world, it is critical for brands to continuously talk to consumers in a two-way fashion. D2C model allows companies to stay close to consumers and trends,” adds Adarkar.

With large FMCG companies as strategic investors, startups can scale their businesses to a point where they become interesting for the large company to integrate them. “That’s when their full organisational impact – management, internal processes, buying media – can be best achieved in-house,” says Sitaram.

Ultimately, startups need to be omni-channel too to achieve scale. They need to influence shopping both online and offline else they will miss out on part of the business that their brands can have. Being omni-channel becomes an important part of customer-retention strategy.

Large consumer firms are increasingly becoming nimble in terms of speed of landing innovations in the market, micro-marketing and building closer connect with consumers. Some of these investments may not deliver immediate financial rewards, but companies cannot take the risk of not doing this, Adarkar says.

Big companies will continue investing in or acquiring small companies as several online businesses are being built using different ways of getting consumer insights. “These businesses are very innovative and wired to think differently. While the big companies acquire them to make them grow, these smaller businesses can help expand some of the brands in the large company’s portfolio,” says Sitaram, citing the example of Bombay Shaving Company which saw an investment from Reckitt Benckiser (rebranded Reckitt), the maker of Dettol and Harpic. Reckitt is now leveraging Bombay Shaving Company to market its condom brand Durex.

“So, it’s not just about your acquisition, I think people will find different ways of partnering with smaller companies to actually unlock a lot of value,” Sitaram says. It’s time for new business models to emerge from such alliances of the unequal.