If you have recently bought a new skincare product or tried out a new coffee brand, chances are that you discovered them on YouTube or Instagram, navigated to their website and bought the product directly from them.

From fashion and consumer electronics to beauty and food, these are new-age digital-first brands that have seen massive adoption over the past few years and are now taking on legacy brands through a direct-to-consumer (D2C) approach. These brands are targeting the growing category of digital shoppers, engaging with them directly to identify gaps and create niche products for them.

Consumers are also clearly lapping them up. Take for instance BoAt Lifestyle, a consumer electronics brand, which crossed Rs 100 crore in revenue within two years of inception (2016) and closed last year at a turnover of Rs 800 crore, taking on a slew of established brands that make and sell earphones and speakers.

Also read:

Retail sales down 50% in June 2021 amid second COVID-19 wave

"We have grown 100 percent every year. or the First-year, we did Rs 27 crore, and next year, we crossed Rs 100 crore and last year, we closed at around Rs 800 crore turnover. Internet penetration has increased, consumer behaviour has changed, and this is what has led to disruption in the D2C sector. It gives a brand like BoAT more flexibility to market its products to consumers. That's what D2C is. You have better distribution, pricing and you are talking to the consumers directly," Aman Gupta, co-founder, BoAt Lifestyle told CNBC-TV18.

According to a report by Inc42 Plus on the D2C market landscape, the Indian D2C market is expected to triple from $33.1 billion in 2020 and touch $100 billion by 2025 on the back of the projection that online shoppers in India will reach 350 million by FY25, up from 128 million in FY21.

A Direct Connect

So what's behind this D2C frenzy? Brands and investors say the biggest advantage that D2C brands have is that at a time when internet penetration is increasing, they’re talking to their consumers directly by creating online communities and this helps them identify gaps and position their products accordingly. Also, the pandemic has given these brands a much-needed push.

Also read: CCI issues notice to Amazon; seeks explanation on FCL deal submissions made in 2019

Bewakoof, founded in 2012 as a D2C brand primarily selling mobile covers and accessories is currently doing brand sales of Rs 300 crore selling fashion, mobile accessories and personal care products, and Singh said the brand has catered to 40 lakh customers till date. Singh attributes the brand’s growth to catering to consumer demand for fun and quirky products, which at the time was not met.

"Each D2C brand starts by catering to some consumer need that is not met by legacy brands. This is a structural difference because, in retail, you cannot do that. There will always be some requirements that are not mainstream but are niche and can be fulfilled through the internet. And by catering to this, most D2C brands will start becoming a challenger to established legacy brands on their home turf - be it their core product, market, channels," said Prabhkiran Singh, co-founder of D2C fashion brand Bewakoof.com.

Sugar Cosmetics said the idea behind the brand was to cater specifically to millennial women. "We realised that the way millennial women were shopping for beauty was very different from how the previous generation shopped and of course, digital and social media made things easier. We focused on products that work very well for the millennial consumer with Indian weather and skin tone. We also invest very heavily in the content that we create because makeup has always been consumed with education. You learn and then buy it and so creating this community helps us reach more than 40 million women every month without having to TV advertising," Vineeta Singh, CEO of SUGAR Cosmetics said.

Also read: Arvind Fashions sells 'Unlimited' business to V-Mart; management explains deal rationale

The company saw its revenue in FY20 grow by over 80 percent over FY19 to cross Rs 100 crore.

Prabhkiran added that being in touch with consumers directly also helps these brands with the process of brand creation. "We saw the internet as a medium where if we have a direct touch with the consumers we can completely disrupt the process of brand creation. You can run your design in a different way. So Bewakoof has a feature called the vote for a design where everything we design is first put out for our actual customers to vote on and designs with high votes only go into production. We can own the experience better with customers," Singh said.

Better Pricing, Higher Margins

But the biggest advantage for D2C brands is on the margin front. By skipping the traditional sales route, D2C brands say they’re able to offer better pricing to consumers while earning higher margins.

"In a D2C channel, you are able to pass more value back to the consumer because you’re skipping multiple layers of distribution. So unlike the five layers of distribution that traditional brands go through, it’s just one layer between you and the consumer and you can pass on that much value to the consumer, you can have more inventory without worrying about working capital," Vineeta said.

"In an offline market, I'm not talking to the consumer myself so even if you look at pricing, you sell to wholesalers, wholesalers to stockiest to retailers, and then to the consumer. Similarly, the feedback also comes like this from the consumer to retailer to stockist to wholesaler to the brand. Here the middleman is going," BoAt's Gupta said.

Also read: HUL Q1 takeaways: Rural demand resilient, but inflation concerns remain

Also, investors are keen to be part of the growth story. As per the Inc42 Plus report, D2C brands have raised nearly a billion dollars in funding since 2019, and in the past eight years, 132 D2C brands have raised over $2 billion in funding.

Ashish Sharma, CEO of InnoVen Capital India, which has invested in D2C brands such as BoAt, Epigamia and Licious said one thing that excites investors like them is the ability to build a brand and grow it fast.

"There are a number of brands that can get to a Rs 100 crore turnover in 2-3 years which was unheard of. If you look at a traditional brand, they had to build a factory, develop a supply chain, distribution and spend a lot of money to go head to head with incumbents. But with all the changes, we’ve seen in consumers, and with digital, social ways to reach out to consumers, it has become much easier for brands that are positioned in the right space catering to a large set of consumers to go head to head with conventional brands and grow fast," Sharma said.

Also read: Post-pandemic tech trends that will reshape future of Indian retail industry

With high gross margins and strong distribution, Sharma said these are very sustainable businesses compared to the traditional consumer internet play where maybe only a couple of players can sustain with high capital, "These are very capital efficient businesses with high growth, high margins and that’s what attract us as an investor."

FMCG Majors Join The Race

In a testament to the potential of the D2C space, incumbent FMCG majors are hopping on to the D2C bandwagon to improve brand visibility and test out new launches, something they saw major value in through the pandemic. Diversified conglomerate ITC, for instance, extended its ITC eStore from just employees to consumers at large during the pandemic.

"ITC eStore plays a pivotal role in helping the company assimilate valuable consumer insights, initiate consumer engagement, build brand equity, fuel innovation, as well as serve as a testing pad for new launches, thereby increasing the probability of a mass scale success while parallelly generating rich first-party data. The endeavor is further backed by a regular feedback mechanism encouraging the company to refine and recreate products that serve consumer requirements across diverse geographies of the country," Shuvadip Banerjee, vice president, marketing services, foods division, ITC Limited told CNBC-TV18.

Also read: E-grocers turn a corner during pandemic, but challenges are far from over

FMCG major Hindustan Unilever Ltd (HUL) in its Q1FY22 earnings conference said the company is exploring new routes to reach consumers. The company launched UShop, its D2C platform in India in 2020 in a bid to directly reach consumers. UShop is an online shopping site where its global parent Unilever sells its products online in other countries as well. The company’s premium brands such as Lakme and Indulekha too, have their own shopping websites, something the company is expected to expand to its other brands as well.

"We have created packs designed exclusively for e-commerce and rolled out a range of premium products under our digital-only brand Simple. It's our endeavor to provide a seamless shopping experience for our consumers, we are exploring new routes to reach them. UShop, our multi-brand D2C platform is a step in this direction. More 10 percent demand captured digitally and this will also give us ability to run demand generation activities in a disruptive way," Ritesh Tiwari, the chief financial officer of HUL said during the earnings conference.

FMCG majors are not only launching their own digital-first D2C brands but are also eyeing existing brands to strengthen their presence in this space. Most recently Marico acquired its second D2C brand ‘Just Herbs’, which it said was part of its digital-first strategy of building at least three Rs 100-crore brands in three years, while also strengthening its position in the premium space. Tata Consumer Products acquired healthy breakfast cereal brand Soulfull earlier this year. The company launched a new brand of premium coffee 'Sonnets by Tata Coffee'.

Online or Offline? Omnichannel

While this space continues to grow exponentially, experts believe that for D2C brands to be able to scale to the next level, a pure online play may not suffice. Many brands are of the opinion that an omnichannel strategy is a way to go to be able to scale to the level of legacy brands and improve reach across the country.

Also read: Airtel announces new postpaid plans, discontinues Rs 749 family plan; check details

InnoVen's Sharma said the playbook for D2C brands has mostly been that they start as an online brand and build a large set of consumers that trust the brand and optimise the whole distribution channel and then eventually when looking to expand the brand get into an omnichannel hybrid distribution approach.

Brands like Sugar and BoAt have already built an offline presence, with Sugar also opening over 10,000 retail points across the country. "Very early on we realised that 80 percent of India is still shopping in stores, so we have an omnichannel distribution of more than 10,000 retail points along with availability on online channels. Distribution is still important to scale beyond the first Rs 100 crore of revenue and that’s the one challenge D2C brands will have to deal with and omnichannel is a good way to deal with that," Vineeta added.

"I believe that omnichannel is really the way to go. Many customers want to try out products offline before buying them online especially some of our products like soundbars which they want to see and buy. Post pandemic consumers are going to offline stores as well after having been at home for a long. So offline is going to stay and emerge even bigger. Online and offline are going to survive together and if we have to survive, we also have to do a mix both," boAt's Gupta said.

Also read: Fabindia lines up massive expansion plans, to launch two new brands targeted at 18-35-year-olds

Another major challenge that D2C brands will also have to tackle is that of retaining customer loyalty at a time when there are over 800 D2C brands, all vying for the attention of the digital shopper. According to Bewakoof’s Prabhkiran, over time multiple brands will emerge catering to the same need and the biggest challenge for D2C brands will be defending their core and expanding at the same time, speed to market is what's more important. The team which is most agile will not face any challenge here."

Sugar's Vineeta agrees with Prabhkiran and said companies will have to continuously keep figuring out product-market fit and evolve, "You have to keep catching on to new global trends in a way that suits Indian aesthetic and that process is continuous and the moment you stop doing that and you think I don’t need to innovate, someone else is going to come and take over."