India, a nation of more than 1.3 billion people with diverse cultures and preferences, is one of the largest retail markets in the world. Projected to surpass $1.7 trillion by 2025, the retail market is largely unorganized in nature, given the low number of malls and shopping complexes, as well as high real estate and rental costs. As far as organized retail goes, a higher e-tail penetration will lead the shift to organized retail in the next five years in India. The trend is similar to that seen in markets like China, where e-tail constitutes more than two-thirds of the organized retail share.

Rise of Online Shopping 

India’s rise in online shopping is fuelled by the 639 million strong internet population, demonstrating a 24% y-o-y growth. India has added 80 million online shoppers in the last three years alone to reach 130 million today. The COVID-19 pandemic has further accelerated online adoption amidst the temporary closure of physical retail stores and the growing wariness for public places. In this backdrop, online spending in India is expected to grow at a CAGR of 35%+ from $39 billion today to $200 billion over the next 5 years, also supported by internet and payment infrastructure developments.

Evolution of the Consumption Pattern

India is witnessing an evolution in consumer types. Women, the new class of consumer, now have the final say in more than half of the household decisions and they now form almost half of the online shoppers. Consumption trends are also evolving, and large pockets of product and price white spaces remain untapped by industry incumbents. New-age consumers seeking niche and customized products are underserved by traditional players.

Proclivity towards Direct-to-Customer Distribution 

The internet ecosystem and evolving consumer needs have made new business models viable and have led to the emergence of the direct-to-consumer (D2C) distribution channel. Companies leveraging the D2C channel invariably have an emotional connect with their consumers, fostered by a unique brand identity and a clear value proposition. D2C brands are characterized by their agile DNA, innovative marketing, efficient operational processes and effective use of technology. With access to customer data, D2C brands leverage consumption insights, work on a feedback-led model and rapidly develop products to ensure that the evolving customer needs are addressed. Even though globally D2C brands have demonstrated mixed results, some notable companies, e.g. Warby Parker, Allbirds, Away, Fenty Beauty and Perfect Diary, have created significant value for their shareholders by establishing themselves as the clear brand-of-choice for a plethora of consumers.

Emergence of D2C Brands in India 

Indian D2C brands operate in a brand starved ‘neo-consumerist’ population and have the benefit of learnings from the mistakes of global counterparts. Today, India is witnessing the rise of D2C brands across categories and is estimated to have a USD 100 billion addressable market by 2025. The space has seen increasing funding activity in earlier stages. D2C brands such as Lenskart, Licious, Zivame, BoAt, Wow Skin Science, Healthkart, Mamaearth, MyGlamm, Sugar, IncNut, Country Delight, among others, are occupying niches, and creating aspirational brands and extraordinary value in their respective sectors.

Future of D2C Brands in India

We expect high levels of funding activity in this space, increasing with the passage of time, as more successful D2C outcomes will validate the hypothesis for newer capital deployment. There will be elevated investor interest in high quality companies with good growth and focus on capital efficiency. We anticipate robust consolidation activity in the next 3-4 years, either as roll-ups or incumbents buying new-age D2C companies. Our estimate is that IPO timelines may be 3-5 years away in this sector.

In our effort to understand the D2C ecosystem better, we have explored the key drivers and success factors for the rise of D2C brands in India. We have done a deep dive into 3 segments – beauty and personal care, food & beverage and fashion – and analyse how D2C brands are occupying the whitespaces and creating value. You can download the report here for a detailed analysis of D2C brands and our perspective of this space.