Will legacy brands handover online operations to start-ups?

Ventures which invests in consumer brands, said that steadily rising incomes, growth in digital commerce and advent of millennials and GenZ consumers have reshaped consumption

MUMBAI: This million-dollar question was raised when earlier this month oral and personal care major Colgate-Palmolive India appointed the Bombay Shaving Company (BSC), the digital-first grooming brand to handle Palmolive’s direct-to-consumer (D2C) and e-commerce businesses. Colgate will focus on traditional general trade (kiranas) and modern trade (supermarkets, convenience store chains etc).

Will legacy brands handover online operations to start-ups?

While making the announcement, the outgoing Colgate-Palmolive India MD and CEO Prabha Narsimhan, who’s been given an Asia Pacific role, said D2C is a different ball game in which they were probably not “best in class”.

The partnership for running the digital business of Palmolive has left financial investors, start-up founders and FMCG experts wondering whether this could be a sign of things to come with large consumer packaged goods companies struggling to scale their digital businesses. Could this trigger a larger trend where they outsource their digital operations to start-ups?

Opinion is divided on such handshakes though experts in the business recognize the challenges of the new consumption landscape traditional FMCG firms face. Kannan Sitaram, co-founder and partner at Fireside Ventures which invests in consumer brands, said that steadily rising incomes, growth in digital commerce and advent of millennials and GenZ consumers have reshaped consumption. “It has expanded consumer preferences and offers possibilities for start-ups,” he said.

Ujwal Sutaria, founder and general partner at TDV Partners, said start-ups have captured the wallet share of new age customers. “They have built around a specific audience and the products that audience wants, and they have created content, storytelling and a strong user base around it, mostly online, which is exactly where the incumbents lack presence. For an incumbent it is easier to partner with one of these brands than to build all of that capability from the ground up which is not their forte,” he said.

Not surprisingly, there’s been deals galore in the last few years with biggies like ITC, HUL, Marico, Dabur and L’Oreal investing in or buying out start-ups across food, wellness, beauty and personal care.

Anurag Kedia, co-founder at D2C beauty brand Pilgrim, said digital operations of start-ups and of large companies are vastly different. “Big companies acquire start-ups for their capabilities. Traditional companies are built for offline distribution, start-ups for online scaling,” Kedia said. Fireside’s Kannan agreed that a large FMCG company’s strength lies in its physical distribution and retail points. “With e-commerce and quick-commerce, that advantage has gone. The big companies may not be ceding ground in kiranas but their share in e-commerce may be lower. As e-commerce grows, their average share may decline,” Kannan said. Besides, GenZ is not using the brands their mothers used. “So, they may be large, efficient players facing strong headwinds. Structurally the market is not with them,” he said.

Even so, he doesn’t see this as a trigger for more FMCG companies outsourcing their digital operations to start-ups. Bombay Shaving Company has a digital commerce arm which does D2C marketing for Reckitt brands. Colgate-Palmolive has a minor stake in the start-up -- so giving it their digital piece was a natural fit. “I have not seen any other start-up emulate this model,” Kannan said.

Start-up fund raise and valuations do not depend on third party income which may not be stable, Kannan argued. “Investors will also ask about start-ups’ own brand and its plans. Also, they are not brand marketing agencies,” he said.

Sunitha Vishwanathan, partner, Kae Capital, is also cautious about calling it a broader trend based on one transaction. “Many large FMCG companies already run their online businesses themselves and have been investing in the right talent and capabilities for the last five to eight years,” she said. Since Colgate has invested in Bombay Shaving, this may be “as much about leveraging an existing strategic relationship and capability as it is about outsourcing an online business,” Vishwanathan said. Different companies will make different choices based on their internal capabilities and priorities, she added.

From an investor’s standpoint, the key question would be whether this meaningfully strengthens the start-up. “If it adds capabilities, improves cash flow or economics, or creates a clear strategic advantage, it could be valuable. But if it simply turns the start-up into an outsourced operator without meaningfully strengthening its own business, it would be harder to justify. The specifics of the deal and its impact on the start-up’s long-term economics would matter,” she said.

TDV Partners’ Sutaria, however, foresees a possible trend with winners on both sides. “A D2C brand like Bombay Shaving Company has spent years understanding and experimenting with how a user buys online, how to capture attention and create buying intent, and doing all of this while taking care of unit economics at scale. Similar partnerships could give the big company a good shot at online business,” he said. Legacy companies, meanwhile, can help the brand where they excel -- in offline, in product development at scale, in organisation building and much more, and may also go on to acquire them, Sutaria said.

Others said such deals would make sense if start-ups get equity for the growth they drive online for large companies instead of agency fees. “For such partnerships to work, incentives need to be aligned on both sides,” said Anurag Kedia.