India: Niche consumer firms grab investor eyeballs amid pandemic

Photo by Josh Appel on Unsplash

At the start of the pandemic in March, Ash Lilani, managing director and co-founder of venture fund Saama Capital, was especially worried about the consumer brands in his portfolio.

Over the past seven years or so, dozens of consumer startups—niche brands in categories like food, tea, clothing, shoes, personal care, bags and others—have cropped up with the promise of creating better products than traditional consumer goods makers. Many claim to be ‘digital first,’ jargon used to describe their ease with online marketing and e-commerce.

As in public markets, consumer startup investments have been seen as defensive bets. They show slower, predictable expansion than the hockey-stick growth with pure internet startups and require far less capital.

This thesis, however, looked shaky in March, when brand startups saw their businesses come to a halt because of the nationwide lockdown. As it extended, millions lost their jobs or suffered income losses. Supply chains were in a mess and consumption took a hit. Investors and entrepreneurs at these startups feared the worst.

Even many other startup brands that haven’t made full recoveries like Sugar Cosmetics, food ingredient maker Veeba Food, cloud kitchen Rebel Foods and mattress brand Wakefit are gaining market share in their respective categories.

Since June, Saama’s Lilani has begun to evaluate at least one new consumer brand investment every day. “Let me put it this way: in April, a down round was the best-case scenario for consumer brand startups; now, it’s the worst-case scenario for many,” he said.

“Consumer brand startups have certainly proved to be very resilient,” said Kanwaljit Singh, managing partner, Fireside Ventures, a specialist consumer fund. “Earlier, some investors were worried about whether these digital-first brands can scale. But because of the efficiency of the digital channel in terms of customer acquisition and distribution costs, we are seeing consumer brand founders build high-growth companies with attractive unit economics.”

Amid this gloom, Indian tech startups have fared surprisingly better than many expected, partly because of an acceleration of digitisation across sectors. Early-stage deal volumes have bounced back and many investors now say that the funding downturn that was expected even before the pandemic may not be as severe as previously feared.

Last year, consumer brand startups received $295 million in capital, up from $158 million in 2018, according to data with Venture Intelligence.

Covid boost

There are some common themes that are allowing startup brands to thrive. One, they were all relatively well-established in their categories even before the pandemic. Then, their products have now become especially attractive to shoppers (either demand in their categories on the whole has risen or because they are seen as value brands). Finally, most of these brands cater to the upper middle-class and rich segments, which have not suffered nearly as much economic pain as the lower middle-class and the poor.

Keeping in mind popular trends, Mamaearth launched new products like a plant-based vegetable wash, hand cream with germ-killing power and moisturiser and products that have Vitamin C as a key ingredient. About 20% of the increase in monthly sales since March has come from these launches, Mamaearth co-founder Varun Alagh said.

Like personal care, some segments in the electronics category are also seeing booming demand. As millions continue to work from home, they are spending big on quality headphones, laptops, sound systems and home entertainment products. This new demand has helped lift monthly revenues at BoAT Lifestyle, a digital-first brand that sells headphones, speakers, soundbars and power banks, by 20% from pre-covid levels.

The outliers

Some brands are thriving despite having poor digital operations.

After starting out in 2014, Yogabar established itself as one of the leading sellers of health bars and muesli in the country. The company put all its resources behind getting its product right and ensuring that its manufacturing processes and factory management were stringent. Before March, its digital marketing was amateurish. It lacked a fully-functioning website. Most of its sales came from offline stores.

“For us, it has been primarily about the product – the brand has become so strong in the category that we have a big first-move advantage,” Yogabar co-founder Suhasini Sampath said. “Our customers really appreciate that we’re transparent about our labels and ingredients. So we’re been rewarded for all this.”

Because it has functioned more like a traditional brand than a new age startup, Yogabar, however, is relatively weak in digital marketing and online operations, leaving scope for rivals to restrict its growth. For instance, ‘Yoga Bar’ has become a key bidding phrase for health food in online advertising, which is used by the company’s rivals to capitalise on its brand.

In fashion, too, where demand is at its weakest in decades, some startup brands are recovering fast. Fable Street, an office outfit brand for women, had to overhaul its product portfolio after it became clear that demand for its core products would disappear as work from home (WFH) became the norm.

The company launched a WFH product line including tees and t-shirts, shorts and eased-out bottoms to survive, co-founder and chief executive officer Ayushi Gudwani said.

Now, these new products contribute 60% of revenues, with the rest coming from accessories and formal wear. In August, Fable Street revenues had climbed back to more than 90% of its pre-covid levels.

Mukherjee added that while Sugar Cosmetics monthly sales were at 80% of pre covid levels in August, the company expects net revenues in this financial year to increase to 140 crore from 105 crore in FY20.

Investment outlook

Because of surging demand and improving unit economics, consumer brand startups are attracting investors including private equity firms. Early-stage funds, too, are hunting for new deals and in talks to write follow-on cheques for their standout portfolio firms.

Investor interest in consumer brands is the highest in the last five years, said Manu Chandra, managing partner, Sauce.vc, an early stage consumer fund.

“Unlike the tech companies that grow revenues fast but haven’t shown any signs of profits, the scaled-up consumer brands are growing fast and moving towards EBITDA profits as they don’t do heavy discounting. You will see several IPOs over the next two years in this space. Public market investors in India understand consumer businesses very well and many of these late-stage companies are great candidates to list,” Chandra said.

“Our consumers are in the (higher-income bracket) and most of them have actually seen a significant increase in savings—they are not stepping out, they are not going for annual vacations, not going to movies or clubbing. The economic situation will start affecting the personal care category, but the impact will be bottom-up than top-down, and our cohort will get affected last,” Mamaearth’s Alagh said.

People will not drastically cut back on consumption but become more discreet about non-essential products and more “value-conscious,” Fireside’s Singh said. “Overall, branded players, startups and others, will benefit in spite of the slowdown. And within this, digital-first brands will continue to see decent growth patterns,” he added.

 This article was first published on livemint.com.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.