Pritesh Asher, co-founder and CEO of Juicy Chemistry is struggling to scale up his business and turn profitable. But he’s grappling with high customer acquisition costs (CAC). “The cost of acquiring a customer is extremely high even today,” he concedes. “As you spend more, the CAC keeps going up because you are acquiring every incremental customer at a higher cost. As a share of revenues, Juicy Chemistry’s advertising and promotional (A&P) spends were 52% in FY23 up from 20% in FY20. In the highly competitive D2C space within the beauty and personal care market, Asher is not alone.
Shankar Prasad, founder and CEO of Plum acknowledges that, at times, his firm relies on discounts to push sales. “If everything is on sale, you can’t be sitting out of the party,” he argues, adding that the firm doesn’t, per se, believe in discounting to boost sales. While Plum reported revenues of Rs 310 crore in FY23, growing 4X in the past three years, its operating margin was negative.
As Anand Ramanathan, partner (Consumer Products), Deloitte India, points out, D2C companies often prioritise rapid customer acquisition and invest heavily in A&P. “Their model depends on premiumisation and higher revenue per customer. In some cases, A&P expenses as a share of sales exceed the gross margin,” he explains. The high marketing costs are making it harder to scale up, says Ramanthan.
Realty has Rs 14 trillion finance opportunity between 2024-26, says report
Hindujas say no imprisonment of four family members
Zomato launches real-time order counter feature, sparks innovation debate
Agri experts calls for direct transfer of fertiliser subsidy
Indeed, Nikhil Sethi, partner, KPMG observes that if a D2C wants to scale up, it must incur costs. “It needs to reach out to the second rung of customers who don’t have as much buying power. Also, to maintain quality while scaling up operations is very tough”.
Some are managing to grow quickly. Minimalist co-founder and CEO Mohit Yadav, says his business has been growing at 100% annually in the last three years and is profitable. “We don’t believe a lot in terms of the pricing growth lever. Instead we focus on more innovation and finding gaps which can be tapped,” Yadav told FE. Prasad feels that operating in the `400-600 price point has helped. “We have also laddered our pricing so that packs in smaller grammages are available,” he says, adding some variants are slightly more accessible 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 the median A&P expense —as a share of sales—has risen from 28% in FY20 to 39% in FY23. “Despite this, business expansion has been below par, with all but two unable to deliver positive Ebitda in FY23,” they point out. All except one company reported a net loss. “A high CAC means only a few will likely gain scale, turn profitable and be available across channels. Sub-scale brands will struggle,” they opined. The brands studied, such as Juicy Chemistry, Plum, Sugar, mCaffeine, Kama Ayurveda and WOW, have been around for anywhere between nine and 22 years.
Some newer brands like Foxtale, which operates at the lower end, have grown fast but remain loss-making. Founder and CEO Romita Mazumdar, says the company has been able to bring down marketing costs and is confident it will turn profitable in the current year. Asher says discounts have been lowered from 30- 35% to about 15-18%. “I think gross margins are stabilising and we should be Ebitda positive in the next 8-12 months. The challenge as Angshuman Bhattacharya, partner, EY, observes, is building distribution, given the fragmentation of general trade, beauty stores and cosmetics stores. “They are discovering that creating a brick and mortar chain it is a much slower and longer process than doing it online. It requires a big investment in sales team,” Bhattacharya says.
Deloitte’s Ramanathan says many D2C brands are opting for an omni-channel approach to reach a bigger audience. “While there are benefits, it’s too early to say definitively if it’s paying off for everyone because managing both online and offline channels adds complexity and can add to costs.” “Staffing stores and managing inventory across multiple channels require careful planning,” he points out. Juicy Chemistry’s Asher says his firm has a near perfect score of conversions in stores while online, the conversion rates generally hover anywhere between 4-6%. On the other hand, Plum’s Prasad says conversion is better online. “In a retail store, they’re looking at your product in a multi-brand environment whereas online they’re looking at just your product,” he explains. Brands like Minimalist have built a chain of 500-600 stores which, according to Yadav, contribute 8-10% of the revenues.
While there will be some success stories, EY’s Bhattacharya expects consolidation where interesting D2C brands are acquired by large personal care companies. “This would create a perfect combination of the agility that DTC brands bring and the financial and distribution might that large companies possess,” he observes. For instance, Marico-owned Beardo has scaled its sales by 3X since FY21 and turned Ebitda positive in FY24. Large scale platforms, such as Nykaa, could also be buyers. KPMG’s Sethi believes those “D2C startups founders with differentiated propositions are now increasingly willing to run them as independent small businesses instead of IPO or strategic sale as the end life”. These would be content with smaller revenues, albeit with good margins. But others might be snapped up by large platforms looking for brands with a strong proposition.
From: financialexpress
Financial News
