The death of D2C

And, of course, the ability to sell products through its own evolving brand stories rather than the competitive price driven construct. In reality, though, few brands today are even remotely d two c. For instance, a huge majority of, for instance, boat sales, 82%, by some estimates, come via Amazon and Flipkart. And less than or about 2% comes from directly selling to consumers. The dependence on kiranas and distributors and modern retail has merely been replaced by dependence on Amazon, Flipkart, or increasingly quick commerce companies.

Large and traditional FMCG companies, which were once acquirers of d to c startups, have sobered up. Their acquisitions haven't really scaled well even as they figured out themselves how to compete with d to c's. As a result, the acquisition premium for d two c startups has plummeted from a peak, which it attained during the post pandemic days. In some cases, even 50% discount from the peak isn't leading to deals. If you look at categories, electronics is the largest category in our scale, but profits have plummeted.

In skin care too, there's a downward spiral of competition and price pressure. A great example is Mamaearth, which is now paying the price on the shock markets. While if you look at competition, the likes of Mee Show, Firebolt, Bolt, Noise, etcetera, pushing prices dramatically lower. What is even a differentiating factor? It's hard to say right now.

The entire category looks like, and this is what my colleague Sita said, a turnstile with a 2 to 3 year cycle. Brands come in and then they compare it for 2 to 3 years, and then someone else comes and disrupts it. What's the way out? What should modern brands do to build lasting and sustainable brands? How should they cultivate consumer loyalty and connections?

What should they even be called? And that's today's discussion. And my first guest is Deepak Sherdadpourri. Deepak is the founder of DSG Consumer Partners. He founded it in 2012, and he was prescient about the potential of India's consumer opportunity back then, choosing to put the word consumer not just into his investment thesis but also literally his funds name.

Now venture capital is a notoriously hard and as a result opportunistic space, which is why you see VCs often abandoning their immense investment thesis in a wink when markets or trends turn in a specific direction. But to go all in and put consumer into your fund name back in 2012 was thus a gutsy call. Since then, DSG Consumer Partners has invested in over 80 brands and has over $300,000,000 in assets under management. I love Deepak because he isn't a traditional VC. For instance, he bootstrapped his first fund by putting his own home on the line in 2012.

While most VCs will advise their investee companies to bet everything they have on outsized outcomes, they never remotely come close to anything like that themselves. Finally, I've known Deepak since we started the Ken in 2016. He was also one of the Ken's earliest patron subscribers. Welcome to 2 by 2 from Singapore, Deepak. It's been 20 years since you made your first consumer investment in India, Sola Vineyards, in 2004.

And though today's episode is on the d two c space, and every VC and analyst and LinkedIn influencer has a thesis or opinion on that phrase, I noticed that the DSG website does not contain that phrase at all. Why?

We thought of sort of consumer products are there to serve a purpose. All brands have one thing to do. Right? They need to understand who their customers are, understand the customer's problem or needs, and build or create a product to fulfill their need. It's not that complicated.

It's a very simple thing. Before you started recording today's episode, we were talking about everyone's favorite coffee brand or coffee experience. Again, in each each of us there are only 5 of us, and each of us have a different preference, all 5 of us. That tells you why brands are important. Even for a

We can put it in any order you want. And the big question becomes, how do you get it to the customer? And that's the channel. And for us, the channel has never been the make or break of any business. Right?

If you have a product, you must do right by the consumer. If the consumer wants it in a particular channel, you have to be there or you lose that particular customer. You might take a call that that customer is not important, and therefore, I do not need to be in any particular channel. And I think it's a journey. On day 1, when you're building a brand and you are just at pre product market fit, you wanna know if consumers even think your product is worth it.

You might choose only 1 channel. And keep in mind, you know, when I started doing this, there was no Amazon or marketplaces. The whole concept of sort of Internet buying was very different. But the concept of D2C, since the topic of D2C, is I guess the term became popular in sort of modern usage in the late nineties with the ecommerce sort of boom. But if you think back of direct to consumer brands, when I was growing up and I was spending time in the UK and US, I used to buy things on L.

L. Bean, only on catalogs that's fully direct to consumer. My mom in Singapore used to buy stuff from Amway and Tupperware, which is fully direct to consumer. It might be multilevel marketing, but it's all direct to consumer. So direct to consumer only means when the manufacturer or the brand owner directly sells to a consumer without a middleman or a wholesaler.

That's simple as that. So it's a channel you choose. So we at DSGCP have a view that you need to get a product to a consumer, and we are agnostic the channel you choose. Some brands might decide to go direct, some brands might decide to go through a marketplace, some decide to have retail stores, which might be their own, which is still technically direct or through a distributor. But you just need to go and build a business with the right unit economics for that brand.

And our view is if you break out and become a very successful brand, then becomes the hard question. If you started in 1 channel, do you need to become sort of omnichannel and enter other channels? Yes or no? And how you make that journey happen.

But I'll come back to SITA. Let me introduce my second guest, Ajay Thandi. Ajay is the cofounder of Sleepy Owl Coffee, a coffee brand. It started out as a cold brew focused company selling bottles and cans of pre brewed coffee with a, quote unquote, super easy wipe to them. But now I see that they sell even instant coffee, quick brew bags, and ground coffee.

Incidentally, Sleepy Owl Coffee was founded the same year as the can 2016. Sleepy Owl Coffee has raised over $10,000,000 in venture funding since starting, including, and this is a disclosure, from DSG Consumer Partners in 2018. Before co founding Sleepy On Coffee, Ajay was an investment banker in New York. He's currently based in Mumbai, Ajay?

Sleepy Owl is, as Deepak likes to call it, an a challenger brand or insurgent brand or as how we started was let's disrupt the space of coffee because back when we started, coffee and like other consumer products in the country are commodities that need to have their own, nuanced approach to reaching to a consumer. We felt the category had not really evolved, needed to understand the new age consumer, which was the Gen Z and Millennials, and we had our own take on it. D two c, the the term when it came to consumer at that time was not as widely used in India. It was just called, let's find a way to sell our products to a consumer. Retail was the only channel.

They outright rejected us because they didn't understand what we were trying to do nor did we have the capital to, you know, pay the listing fees. So we, were lucky at that time. Shopify had just entered India. We put up a website, emailed our friends, and told them to email all their friends and and that this is the link. Buy our product and if you like it, we might have a real business.

And and and I think over the next 3, 4 years, that, that was just a channel became a moniker for challenger or new age brands or insurgents. You might call them disruptors, insurgents, challengers. D two c in India is in essence, it's it's a our colloquial version of that. New age brands are called d two c brands. But if you go into the technical definition, no one is d two c that I can think of, right, at all. Alright. They only d two c. Yeah.

Tell me, do you feel the phrase d to c makes no sense in India?

And at that point in time, this aspect of d to c did not really exist because all we did was just go to larger brands and try to get them into the marketplace. So since later, like, Rohin spoke about brands like March Tea. So I think brands like that had started coming out and saying we are going to bypass the marketplace. In some cases, they don't do that as well. In most cases, they end up on the marketplace as well.

But I really didn't understand what d two c is. And my view of d two c, quite frankly, is very colored by something that Rohit does not use, which is Instagram. Whenever I see a brand on Instagram and I find a way for me to buy it on Instagram, mentally, I have always bucketed that brand as, okay, this is a d two c brand in my head, which is probably a little unfair, but that's also a channel in its own way. So I'm looking forward to this discussion to find out what's really happening.

That's number 1. Number 2, and I see this with good intent. You know, it's very hard to build a brand. So when we meet the ajays of the world, when we meet Rajeev Sawan or Viraj Beal who wanted to build Sola, who wanted to build Veeva, There was no conversation about exit or when your exit is gonna be. We know we're gonna monetize the asset.

As a venture capitalist, I say if I do a good job and the brand becomes salient, I will find someone to buy my shares because in a good business like Vibai and Sula, every month is cash flow positive. Okay? You can put a free cash flow multiple. There's no earnings multiple, no adjusted EBITDA. No nonsense. Yeah. It's a real number. The problem with venture capital is they foie gras money to make you grow faster, but we know foie gras is not good for you. And number 2

That is why we set up the SGCP. We said consumer brands need a totally different playbook. Over the last 12 years, we've seen Carnival and, Kannan and

So all the bad behavior that comes along with hyped markets will come and go because most people don't stay in the industry long enough. So I think as we talk about what's going on, you have to add the layer of where the funding is coming from and the pressure that my VC community is putting on the edges of the world to deliver unrealistic outcomes in an unrealistic duration. So you need to find the right investor for the right playbook for the right business model. I think if once you align on few dimensions, I think the discussion becomes very different. If there was no venture capital involved, at a too early stage, I would argue the house of brands phenomena globally and in India wouldn't have played out.

Because all of them raised real venture money on terms you can read in your own publication, and they were told to go out and acquire brands. And and and they were buying brands at crazy multiples.

Right? And then they go and invest in founders and in companies and say, here's the money. I mean, I'm talking in the context of house of brands. Right? And then they're like, look.

You raise this money and do something with it, which bulks you up as quickly as possible. So the flow of have money, do things later in some senses for me is inverted because typically you need to have a reason to raise money and then do something with it. Right? When that gets inverted is when things go haywire because you have money and you are expected to do something with it. Obviously, whatever you're going to do 90% out, of the times is not going to be sustainable.

But sorry. Sita, you were saying something?

Who are its takers? Right? We we don't know that, but you're hoping, I'm gonna somehow get 10 brands together and cross sell, take them to as many, outlets and marketplaces as possible, and we'll somehow figure it out. Right? And say, the brands that, you know, all the Indian roll ups acquired. Right? I can't I haven't I'm not familiar with any of those brands. Right? Sure. They'll say, oh, they're doing 50 crores, 70 crores, in revenue on Amazon.

But that doesn't mean much. We've seen what happened with both. Right? When it filed to go public, it was actually profitable. With Zomato was

And, so they they were probably the first to tap this sort of, you know, this sort of demand for branded but cheap electronics accessories. Right? And but there was no differentiator at all. Right? You know, when when our colleague Gaurav did the story, you know, on, with a story on, you know, the the troubles of boat and noise.

Right? He I mean, you walk up to he walked up to a a a mom and pop store, and asked them. So he said they basically tell consumers. No one walks in. Very few people walk in wanting a a boat, you know, a speaker or, you know, pair of boat headphones. Right? You go in and say you ask for both. They say, no. No. Both is not really great. You know, why don't you try, you know, noise or bolt or 5

I might as well pay $300 and be happy with it for 6 months and then buy a new pair. Right? So where does this end? Right? It was So

Followers will come and undercut you on price, copy every feature that you have, possibly offer higher margins to retailers to undercut your space on their physical or virtual shelves. Consumers are fickle. Discounting is rampant in India.

If there's no problem and it just isn't nice to have, it may or may not work. And the most important thing is building that love. Why do people love that brand? Okay. It's not that physical, tactile liquid, or it's not only gonna be the coffee.

It's what sleepy hour stands for, what the brand stands for, what are the memories that come back with it. Keep in mind, I'm gonna use Sula as an example because it's the first investment I did. I invested in Sula in 2004. Company's revenues were 3 crores. It's now publicly listed half a $1,000,000,000 valuation.

It was the first of the new age wine brands. Now there are many others. But if you ask the consumer who've been with us for 20 years, for many of them, they said the first ever bottle of wine I had after finishing HR college or IIT was Asula. I could have been in Goa, could have been in Delhi, could have been in Bombay. I was with my girlfriend.

I was doing whatever, and it's a brand that's grown with me. And Rajeev stood for the new Indian. Born in Maharashtra, went to Stanford, came back to India, and then Sula san reminds me of something. It's a story. The fact that it's an Indian wine for India, there's a lot of nostalgia, the brand that you can trust. Every 2 or 3 years, we bring out different varietals. It's a challenge for Ursula now. I'm still on the board. Yeah. This is