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Growing Pains – Industry News
Pritesh Asher, co-founder and CEO of Juicy Chemistry, is struggling to grow his business and become profitable. But he is facing high customer acquisition costs (CAC). “The cost of acquiring a customer is extremely high even today,” he admits. “As you spend more, CAC continues to rise because you acquire each incremental customer at a higher cost. As a share of revenues, Juicy Chemistry’s advertising and promotion (A&P) spend was 52% in FY23, up from 20% in FY20. In the highly competitive D2C space of the beauty and personal care market, Asher is not alone.
Shankar Prasad, founder and CEO of Plum, recognizes that sometimes his company relies on discounts to drive sales. “If everything is on sale, you can’t stay out of the party”, he argues, adding that the company, in itself, does not believe in discounts to increase sales. Although Plum reported revenue of Rs 310 million in FY23, growing 4x in the last three years, its operating margin was negative.
In fact, Nikhil Sethi, partner at KPMG, notes that if a D2C wants to grow, it must incur costs. “We need to reach the second tier of customers who don’t have as much purchasing power. Furthermore, maintaining quality while scaling operations is very difficult.”
Some are managing to grow quickly. Minimalist co-founder and CEO Mohit Yadav says his business has been growing 100% annually for the past three years and is profitable. “We don’t believe much in terms of leveraging price growth. Instead, we focus on more innovation and finding gaps that can be exploited,” Yadav told FE. Prasad feels that operating in the price range of `400-600 has helped. “We have also increased our prices so that packaging in smaller weights is available,” he says, adding that some variants are a little more affordable than the rest of the range.
However, an analysis by Amit Sachdeva and Anurag Dayal, HSBC Global Research, of eight popular digital first and new age D2C brands, reveals that average A&P spend – as a share of sales – increased from 28% in FY20 to 39% in FY23. “Despite this, business expansion has been below average, with all but two unable to deliver positive EBITDA in FY23,” they point out. All but one company reported a net loss. “A high CAC means only a few are likely to scale, become profitable, and be available across channels. Subscale brands will have difficulties”, they opined. The brands studied, such as Juicy Chemistry, Plum, Sugar, mCaffeine, Kama Ayurveda and WOW, have existed for between nine and 22 years.
Some newer brands, such as Foxtale, which operates at the lower end, have grown rapidly but remain loss-making. Founder and CEO Romita Mazumdar says the company has managed to reduce marketing costs and is confident it will become profitable this year. Asher says discounts have been reduced from 30-35% to around 15-18%. “I think gross margins are stabilizing and we should have positive EBITDA in the next 8 to 12 months. The challenge, as EY partner Angshuman Bhattacharya notes, is to build distribution, given the fragmentation of general trade, beauty stores and cosmetics stores. “They are discovering that creating a physical network is a much slower and more time-consuming process than doing it online. It requires a huge investment in the sales team,” says Bhattacharya.
Deloitte’s Ramanathan says many D2C brands are opting for an omnichannel approach to reach a larger audience. “While there are benefits, it’s too early to say for sure whether it’s paying off for everyone, because managing online and offline channels adds complexity and can increase costs.” “Staffing in stores and managing inventory across multiple channels requires careful planning,” he points out. Asher from Juicy Chemistry says his company has a near-perfect conversion score in stores while online, conversion rates typically hover between 4-6%. On the other hand, Plum’s Prasad says conversion is better online. “In a retail store, they look at your product in a multi-brand environment, whereas online they only look at your product,” he explains. Brands like Minimalist have built a network of 500 to 600 stores that, according to Yadav, contribute 8 to 10% of revenue.
While there are some success stories, EY’s Bhattacharya expects consolidation where interesting D2C brands are acquired by large personal care companies. “This would create a perfect match between the agility that DTC brands bring and the financial and distribution power that large companies possess,” he notes. For example, MaricoOwned Beardo has increased its sales by 3x since FY21 and turned Ebitda positive in FY24. Large-scale platforms like Nykaa could also be buyers. KPMG’s Sethi believes that those “D2C beginners Founders with differentiated propositions are now increasingly willing to run them as independent small businesses rather than IPO or strategic sale as an end life”. These would be content with lower revenues, although with good margins. But others can be acquired by large platforms looking for brands with a strong proposition.