Consumer Goods Startups Increasingly Breed on Online Retail

Two-and-a-half years ago, Arman Sood, 26, Ashwajeet Singh, 27, and Ajai Singh Thandi, 28, launched a premium cold coffee brand Sleepy Owl. They chose to start by selling online.

“Our target consumers are mobile and social media-savvy, and they will instinctively choose to order online,” Sood told BloombergQuint over the phone. Sleepy Owl, incorporated last year, is now available at select department stores like Foodhall. Yet, he said, it still earns nearly 70 percent of revenue from online sales.

The startup is not the only one doing this. At least half a dozen fast-moving consumer goods brands, especially in the personal grooming segment, have mushroomed in the last two-three years, betting on growing consumption in a nation where half of the 1.3 billion people are below 25 years.

Rising internet penetration, maturing digital population and growth in quality infrastructure means online retail will more than double to $40-45 billion by 2020, according to a BCG report.

And demand for food and drinks, cosmetics, and personal and home care products sold over the worldwide web, according to Euromonitor International, is expected to grow at a double-digit annualised rate over the next four years.

Selling through e-commerce channels also helps smaller companies save on the costs of setting up a physical retail network. So from grooming brands like Beardo, The Bombay Shaving Company and Letsshave.com to teaseller Vahdam Teas, such startups mostly rely on that.

“Distribution through online channels requires low investment,” Tarun Sharma, founder of Mcaffeine, a caffeine-based cosmetics brand, told BloombergQuint. And that, he said, also gives startups like his direct access to its target audience.

Mcaffeine sells through its own website, and Amazon, Flipkart and Nykaa.

Marketing and customer acquisition are cheaper online as it’s expensive for a brand that has raised around Rs 3-4 crore to buy shelf space in brick-and-mortar stores,

Kunal Khattar, partner at early-stage Venture Capital Fund advantEdge, said. “If you are selling a product online, you only need Rs 10 lakh of inventory sitting in let’s say Amazon’s Bangalore warehouse, and you can sell pan-India. That inventory will cover barely one city offline.”

Agreed retail and brand consultant Harish Bijoor. “There is a great degree of reach online,” he said, adding that physical retail requires much higher investment and labour costs. “And brands can sustain online till the clutter deepens.”

The startups are also a hunting ground for larger established companies looking for fresh ideas. Emami Ltd, the maker of Navratna hair oil, has acquired a stake in Brillare Science and The Man Company.

Colgate Palmolive Asia Pacific Ltd and Marico Ltd, owner of Parachute coconut oil, have invested in The Bombay Shaving Company and Beardo, respectively.

There is interest in these online brands as it gives the investors easy access to consumer data and a sense of what they are buying, Kanwaljit Singh, founder of consumer-focused fund Fireside Ventures, said. The online channel also gives a larger spread at a low investment, he said. But these startups will eventually have to go offline as well to expand and they will have to figure out a hybrid strategy to scale up, he said.

Funding for FMCG startups spiked in 2017 to Rs 240 crore and has already touched Rs 152 crore so far this year, according to data by Tracxn. That includes both online and offline ventures.

An investor can exit faster as online as a channel has evolved compared to what it was a few years ago, according to Singh. “Exit horizon has come down from eight years and more to about 5-7 years.”

Since most of the small brands cater to the premium urban customer, they also offer insights into new niche markets. Like Sleepy Owl found how coffee market is evolving. “There is a certain audience of coffee drinkers looking for the perfect brew,” Sood said. “We are avid coffee drinkers and realised there are very few who offer quality brewed quality.”

Sleepy Owl sells cold brew coffee pack of five (100 ml each) for Rs 500. In comparison, Nescafe chilled latte 180ml pack costs Rs 30. Similarly, Mcaffeine charges Rs 449 for a 150ml fresh pop caffeine facewash. Garnier sells its 100ml facewash for Rs 160. Beardo sells a pack of 100ml facewash for Rs 250, while Garnier sells a 100ml men’s face wash for Rs 180.

“There is a lot of potential for more players to enter the space and co-exist as it’s not possible for us to be present in every segment and do everything on our own,” Harish Agarwal, director at Emami, told BloombergQuint. “We believe that this is the best opportunity for companies like us to strike winning partnerships. The new-age startups have ideas which companies like ours can support with experience, investment power and infrastructure strength.”

(With inputs from Nishant Sharma)

This article was originally published in the BloombergQuint.