The business of D2C – some home truths

These days, there is a lot of commentary on D2C brands — those brands that engage with consumers and sell to them either from their websites or well- known e-commerce platforms.

The commentary is about the large investments in this space, led by PE and VC firms such as our firm, Fireside (we have invested in over 30 consumer start-ups in the past few years), about unicorns and soonicorns, about IPOs and new age company valuations, and acquisitions by large firms like the Tatas, Marico, Emami and others.

There are acerbic comments on the wisdom and the lack of it in investing in this space. Some feel that these start-ups are only diverting consumers from one sales channel to another and not creating fresh value. There are dire forecasts of massive failures and closures of D2C companies.

Yes, there will be many start-ups that do not have anything new to offer consumers and the ruthless capital markets will cull them. Yes, many firms make losses in their initial years. Yes, many IPOs appear to have a lot of froth. However, all of this misses the main features of the D2C revolution.

A different approach

This is not about creating a different channel on which consumers buy, but of a different way of doing business.

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This is about levelling the playing field with the big boys by side-stepping the legacy company advantages of massive scale, distribution, and cash and instead, enabling consumers to enjoy new benefits and experiences. It is about fundamentally challenging the value chains of incumbent companies and creating new value chains built around partnership instead of ownership. And finally, there’s no such thing as pure D2C. Direct-to-consumer is where the brand’s journey begins to acquire a consumer franchise. Over time, fulfilment happens wherever the consumer shops for the category — including conventional retail.

Let’s delve some more into these aspects.

Home Truth 1: D2C brands are not just about a different channel

First and above all, it’s about building a good business, but doing it very differently from the legacy companies. And like every good business, it is always about acquiring, satisfying, and retaining consumers with a watchful eye on unit economics. boAt has always been profitable. Brands like SUGAR Cosmetics, Licious, and Vahdam are totally hard-headed about working with strong unit economics and getting to profitability.

boAt Iris

Capital is used to acquire customers at a rapid rate, who will stay with the brand for the great experience they enjoy from using the brand, and the Life Time Value (LTV) of such consumers drives profitability. Capital is also used to build strong organisations — to recruit talented business leaders, and develop organisational capabilities to help the companies compete.

Legacy companies focus on business efficiencies — they like to service large consumer segments with few products and SKUs, so that they can be produced efficiently at scale and have high inventory turnarounds for themselves and their distribution and retail partners. They minimise business risks — new products and advertising are both tested extensively over many months. A new product launch can take a year or more from inception to in-market, and a new ad, six months or more to create and air.

With their efficiency mindset, large companies focus on a few categories where they want to build leadership. On the other hand, with their consumer delight mindset, D2C start-ups want to provide several solutions across multiple categories to their consumers. The Whole Truth wants to offer consumers honest, clean-label, healthy-to-eat food — it sells snack bars, protein bars, muesli, nut butter, and dark chocolate. That’s five different categories for legacy companies, but simply deep consumer engagement for The Whole Truth.

Look at almost any D2C business and you will see the same consumer-centricity. Plum is vegan, paraben-free, and attracts consumers who want their beauty regime to be cruelty-free. Neeman’s makes comfortable shoes out of sustainable materials.

Large companies miss out on the price premium happy consumers are willing to pay for products closer to their ideal, thanks to their focus on efficiency and high SKU volume. Legacy companies perhaps do not realise or maybe even struggle to deal with the fact that the large consumer segments they have targeted are not anywhere as homogeneous as they believed.

The new-age D2C start-ups do not carry out traditional consumer research studies; they mine the internet to uncover what consumers want. They develop proprietary tech tools to scan reviews to understand what consumers are unhappy with, and conversely, to figure out what consumers are searching for. When the volume of searches starts scaling up, they start working on product solutions.

Their response is quick. Brands like Bewakoof and FabAlley leverage AI-powered product development engines to create new designs that best meet the customer’s needs. Fable Street can launch a new style collection in, literally, weeks. If the consumer likes the new product, the scale up happens — of advertising and production. If not, “fail fast” is the mantra.

D2C companies create consumer value that legacy companies have not done, through innovative products and business models. Raw Pressery serves you cold-pressed fresh juice from the best ingredients. NatHabitoffers fresh whipped face malai, andcrushed-leaf hair masks like the ones our grandmothers made at home. Licious brings high quality, fresh meat to consumers’ doorsteps. All these are/were start-ups leveraging the power of D2C to provide solutions to consumers that legacy companies have not.

Most D2C businesses will not remain purely D2C. The digital environment is where they start their business, build a franchise for their brands, and earn customer love. Thereafter, they seamlessly move into the physical retail space, to be available wherever their customers are shopping. The framework is to acquire customers online and then fulfil demand where their customers want to shop. In short, the complete opposite of how legacy companies view the customer journey.

Home Truth 2: Many D2C start-ups are built around strong values

Their world is like a fishbowl where they are fully exposed to consumer reviews. Bad reviews can kill their business. And so they are very alert to product quality. Many of them work with third-party manufacturers who have modern production facilities and world-class quality assurance systems.

Winning is important, as are valuations. We are pleased to see many start-ups go beyond these and focus on purpose. No Nasties takes the convention of fashion being wasteful and polluting, and turns it onto its head – its line of clothes is “planet-positive,” and removes more CO2 from the air than it creates to make, ship, wash, and wear. Mamaearth is about ‘Goodness Inside’ and every order on its website leads to a tree being planted to green the planet. Sustainability goals such as plastic neutrality, carbon footprint reduction, use of recyclable materials — these are goals that resonate strongly with young founders and they see no conflict between sustainability goals and financial goals.

Start-ups treat Glassdoor ratings very seriously. They work at creating great employer brands that can bring in great talent. Building a healthy, motivating work environment for employees is important. The teams are young, greatly committed to inclusivity and diversity. The companies are low on hierarchy, and employees can see the impact of their work on the business.

Governance is super important. Most of today’s start-ups are very diligent about compliance and operating within the law, and several are audited by one of the Big Four audit firms.

Home Truth 3: D2C is an idea whose time has come

Some of India’s finest new-age consumer brands are quickly making their presence felt in global markets. Today, Vahdam is in goodie bags at the Oscars, and is available widely across the US and the UK. Urban Company is in Australia. Lenskart is in the US and the UK, as is WOW Skin Science. And while these brands are proudly Made in India, global giants like Amazon are seeking out the next generation of global leaders with their start-up accelerator programmes.

The final pieces of the e-commerce puzzle are actually invisible to the eye, but have been instrumental in levelling the playing field, and allowing D2C to compete against legacy brands: Low mobile data rates; voice search; language services; payment innovations; online marketplaces; courier services; logistics.

It’s no longer either online or offline, either legacy or D2C. Across touchpoints, consumers are choosing brands and products they prefer. No other generation before has experienced this amount of choice, or this level of agency. Those are the woods the D2C doomsayers are missing for the sake of the trees, whether high valuations, or deep pockets, or crowded sectors.

Digital has truly changed the world around us, and in this new world, all brands will have to be direct-to-consumer, whether by acquisition, by adoption, or by birth, and they will have to deliver customer delight at scale.

The final word has not been written on the D2C phenomenon. Their emergence is changing several business processes for legacy companies. As several of these companies list in the public markets, they will change the way the financial markets assess and value consumer companies. And when we read the commentary in three to four years, we will find that today’s sceptics have become cheerleaders of a brave new digital world.

(VS Kannan Sitaram is Partner at Fireside Ventures)

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