Daybreak - The D2C boom is over. Mamaearth's IPO is proof

Episode Date: November 19, 2023

Varun Alagh, the CEO and co-founder the skincare company, Mamaearth, likes to think of his brand as an outlier. Just a day after Mamaearth’s parent company went public, on October 31, Alagh told The Economic Times that the company’s IPO was not going to meet the same fate as other new-age startups in the recent past. The public market has been quite hostile lately and investors are especially steering clear of digital companies and startups. But despite this Mamaearth went ahead with its plan and became the first D2C brand to go public. Unfortunately though, its shares have been falling ever since.What happened to Mamaearth is not isolated. It is the beginning of the end of the D2C gold rush.Tune in to hear all about it.Also listen to: Why retail investors showed little interest in Mamaearth's IPOFree Read: 1 to 1000: The high-stakes hunt for India’s next top product designersDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first studio. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. The CEO and co-founder of the skincare company Mama Earth, Varan Alag, likes to think of his brand as a kind of an outlier, you know. Just a day after Mama Earth's parent company went public, which was on the 31st of October, he declared in an interview to the Economic Times that the company's IPO was not going to meet the same fate as other new age startups in the recent past.

But we've all seen how hostile the public market has been lately. Investors are especially staying away from digital companies and startups. And yet, Alag sounded super confident that Mama Earth would not go down that path. If you heard the last episode of Daybreak on Mama Earth, which came out right after the brand hit the borses, you will remember that I talked about how even companies like Ola and Swiggy have held off their plans to go public. Which is why Mama Earth kind of stood out from the crowd. Its founders believed that the timing was perfectly ripe for the company's public offering. And their confidence is not exactly unjustified. The digital first direct-to-consumer or D2C firm shot to fame back in 2020 when the pandemic made shopping in physical stores almost impossible.

A bunch of specialized D2C brands sprung up back then and spoiled customers for choice online. Mama Earth looked specially promising. It turned a profit last year and has already clocked a 25-crawl-ruppie profit this year. But unfortunately for the company, The IPO has made two things very clear. First, that Mama Earth is not an outlier after all. Quite like the disappointing post-listing performances of other new age companies, Mama Earth's share value also fell by 21% after the listing.

And the second and very important thing, the IPO marked an end of the honeymoon period of an entire industry made of brands like Mama Earth. I'm talking about the digital first direct-to-consumer industry. So now it's starting to look like the pandemic gold rush for these D2C brands is over. Welcome to Daybreak, a business podcast from the Ken. I'm a host, Nickda Sharma, and I don't chase the new cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time.

Today is Monday the 20th of November. Digital first direct to consumer. These are the brands that sell their products online through their own websites directly to their consumers. And as I mentioned earlier, a whole wave of D2C brands flourished during the pandemic. And this happened for two reasons. First, of course, that the timing was perfect. When consumer demand came out of the initial grip of the pandemic, online sales were the name of the game. And second, the demand for niche, highly customized products has been

going through the roof. And this was the queue for D2C brands to swoop in. They stormed almost all consumer goods segments. If you also turned into an Instagram shopper during the pandemic, I'm quite sure that you ordered from brands like Mama Earth, M Caffeine, Plum Goodness, or Sleepy Owl at least once. So basically, these brands became investor favorites and it was a full-blown gold rush. In 2021, we see funding for these D2C brands increased by 30 times and crossed more than a billion dollars. And in 2022, it got even bigger.

India's D2C market was worth almost $12 billion. But in 2023, everything changed. In this post-pandemic market, traditional in-store shopping has made a comeback. D2C darlings are kind of fading into the background now. For example, look at Mama Earth itself. On the face of it, the demand for Mama Earth shares India's first D2C beauty brand to go public was almost eight times of supply. But here's the catch.

As we mentioned it, in the earlier episode as well, this demand was mainly from institutional buyers and not retail buyers. Retail buyers showed very little interest in the offering. Now, the thing is, Mama Earth is not the only company facing this. The music has stopped for many other D2C brands. And you can actually tell if you look at the equity funding for these D2C beauty brands this year, they are on a free fall. And what makes it worse is that big FMCG companies acquiring these brands has also become rare right now.

In the food and beverages sector, for example, companies like dip maker Wing Greens farm and right bite max protein, which is a protein bar company, are actively looking for capital. Hector Beverages, the company that runs paperboat, is also thinking of an IPO right now, but this was only after it failed to finalize a very strategic stake sale. So, in all of this, one thing is quite clear. The D2C boom may have just been a quick dash for cash and not really a sustainable segment. Many D2Cs are now in a desperate struggle for survival and they have very very much. very few options to choose from.

And this change in course is not going to be easy, of course. Stay tuned to find out why, but before we move to the next segment, my colleague Dikshha has a short message for you. If I asked you why you prefer one food ordering app over the other, or like one UPI app more, offers and cashbacks aside, you'd probably say it's because of the user experience of the app, right? How smooth the interface is? In today's digital startup ecosystem, product design is literally what can make or break a firm's customer base.

Which is why product design is the new indispensable role at startups. And naturally, the demand for product designers is going through the roof. There were more than 18,000 listings for design managers on LinkedIn in April last year. Design teams have tripled in size and designers no longer just execute. orders, they get to call the shots, which is why there are top-level roles for them now, like design VPs and CDOs or chiefs of design. But there's a problem here. Even though startups are waking up to the power of design, they are finding it very hard to grow this new product design ecosystem. Firstly, for every thousand engineering graduates, India just produces

one designer. And this massive demand and superpowers. gap is just one part of the problem. If you want to get in on what's going on inside India's product design revolution, I'd highly recommend you read the deep dive that Olina Banerjee has written for the Ken. And for you to be able to do that with minimum effort, we've made this story absolutely free for exactly 24 hours, just for today the 20th of November. And we've put a link to it in the show notes of this episode.

So go ahead, give it a read, share away with your friends before the counter runs out. I'm Dixha from the Ken's audio team. Thank you for listening to us. And if you like what we do, please rate and review us wherever you get your podcasts. And now back to your host, Snigda. 2023 is turning out to be a reality check for digital first D2Cs, not just in India, but globally. Their whole model is in question right now. First, consumer goods sales in brick and mortar stores have bounced right back to pre-pandemic levels.

After being forced to stay hold up at home for more than two years, people naturally want to go out and shop. And second, these niche brands can only grow so much online. The Ken reporter Al-Kriti Bhala spoke to Pushkar Singh from the venture capital firm Tremas Capital. And he said that if a digital first brand wants to grow beyond 100 crore rupees, it needs to bet on offline sales. There is no other way. And even online, a large part of these brand sales come from e-commerce platforms like Amazon and Flipcott.

So, in this reality, D2C brands are shifting their focus away from the digital first model. Mama Earth, in its IPO documents, for example, really emphasized how offline sales are profitable for beauty and personal care products. In fact, the share of offline sales nearly double. in Mama Earth's total revenue in the year that ended in March 2023 compared to what it was two years ago. And the company actually wants to use a big amount from its IPO funds to open

more than 40 physical stores every year. Meanwhile, Reney Cosmetics, the D2C beauty brand, which is backed by Titan Capital, has also started expanding their sales into physical stores. So even though Mama Earth and other brands like it would like you to think that there should shift to offline sales is more about business sustainability and it is a very strategic move. It is more of a desperate shot at survival and profitability, of course. If you look at the top new age beauty brands in India, only two Mama Earth and the minimalist have been profitable in the year that ended in 2022. But in all of these changes that D2C brands are making to stay relevant from moving offline

to selling on channels other than their own websites, there is one question that still remains, which is how much of direct-to-consumer is actually left in these D2C brands. Are these brands kind of evolving into smaller FMCG brands? Because if that is the case, then these brands are set to face a fierce battle in the offline space. They have to face true blue FMCG giants like Hindustan Unilever, PNG and Dabar, who have dominated that space for a very, very long time now. So just to get a picture of how these D2C brands are doing in physical stores, Akrithy went to check out the beauty aisle of a supermarket in West Delhi. Stay tuned to find out what she saw. At the supermarket, Akriti noticed how brands like Mama Earth and M-Caffeine are

sharing shelf space with traditional FMCG companies like L'Oreal's Garnier. Even in the food section, VBA foods and wing greens have to compete with Kellogg's and Kis. son of Hindustan Unilever. And this fight for share space gets even tougher in Mormon pop stores or Kirana stores, as we like to call them. There, these D2C brands also have to compete with regional brands. So it's not exactly a cakewalk even after these D2C companies make it to the store shelves. Plus, big FMCGs like Unilever and PNG have perfected the offline drills years ago, From distribution to inventory to demand, they've got it all figured out. They also have solid trust-based relations with their distributors, which is very important.

For example, it just takes Hindustan Unilever 18 days to clear its stocks from a physical store. But for new age, health food brands like Yoga Bar and Whole Truth, for example, it takes them way longer. Their inventories lie unsold for around 70 days on an average. And cracking offline distribution comes at quite the cost. Many brands have to bleed cash on it and only some of them have managed to scale their business after that. Paperboat, for example, borrowed about 200 to 300 crore rupees from investors to grow its distribution. But it could not and finally it had to outsource it.

And even though Yoga Bar nearly doubled its offline sales by the end of March 2020, its losses mounted at the same time, and it was all linked to offline distribution. And also, let us not forget that Yoga Bar was only able to increase its distribution network after it got acquired by ITC. And this was obviously because of the kind of distribution experience that ITC brought to the table. So, in this context, you can imagine how this has almost become a point of reckoning, not just for these brands, but also the VCs who poured money. money into them at sky-high valuations. Investors have now realized that the true strength of a brand

only becomes apparent after the initial hype dies down and if they are able to scale the business after that. Some analysts also feel that the Mama Earth IPO will be a queue for other new age D2C brands to go public and this will become an exit route for these VCs who invested money into them. So, to sum it all up for you, there are two narratives about Indian D2Cs as of now. One is the narrative from the likes of Kunal Beheel, who is the co-founder of Titan Capital, who was also an early investor in Mama Earth. He expects a boom for new age brands in the next five years. And then, there are the skeptics. They anticipate a wave of consolidation in the industry, which will probably leave it smaller and more compact. And going by how

things are right now, it seems that the skeptics are likely to win. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Sniq Daj Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.