The Covid-19 pandemic forced businesses to look at alternative supply chain models
Consumer brands in India witnessed an average revenue surge of 213% between 2018 and 2019
Is direct-to-consumer(D2C) the next big model for Indian retailers and consumer brands?
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The importance of effective supply has been acknowledged in one of the earlier treatises on economics by one of the most celebrated economist-philosopher in history — Adam Smith. Smith credited the relative advancement of trade and commerce in 18th century England and neighbouring countries over other nations, to the availability of easily navigable water channels which increased the capacity and efficiency of trade, according to his seminal work— The Wealth of Nation (Chapter 3, Book 1).
Today, the importance of the supply chain has again been highlighted by the Covid-19 pandemic in India and around the world. In the Indian market, the sudden announcement of a nationwide lockdown on March 25, 2020 halted the movement of numerous interstate goods carriers. On the retail front, the unforeseen spike in demand for essential goods which was fueled by mass hysteria and panic-buying created a shortage of inventory at numerous supermarkets and other local retail outlets.
The sudden change of events forced businesses to think of alternative supply chain models where the journey of a product from the manufacturer to the consumer would not involve so many links. The D2C or direct-to-customer model is considered a utopian concept where the company sells its products directly to the customer removing all middlemen/intermediaries and having end-to-end control of its products journey from their factories to the hands of their consumers. The reason D2C model is considered a utopian concept is because pure-play D2C models are almost non-existent in the market. The most celebrated D2C brands such as Dollar Shave Club, The Honest Company and others have all leveraged some or the other retailer/etailer to increase their reach.CHECKOUT DATALABS BY INC42
How India’s D2C Brands Have Fared
The fact that risk-averse venture capital firms of India seem to have unconditional love towards tried-and-tested business models in other markets, the success of D2C brands in the United States has opened up the door for Indian entrepreneurs to capitalise on the same. Given the absence of a pure-play D2C model, we have termed any brand which does not use the traditional distributor/wholesaler model to sell their products as neo-D2C.
Another unique characteristic of the neo-D2C model is that most of these brand primarily use established ecommerce platforms and marketplaces, and in some cases, supermarkets to increase their brand visibility in the short term with an intention to eventually drive the customer directly to their online portal. The use of such a support model helps the company minimise their input cost and maximise their reach and turnover in a short span of time. In addition to this, the fact that brand value plays an important role in the customer decision-making process of an Indian customer association with an established etailer/retailer gives them a competitive advantage over their competitors.
The interest towards a neo-D2C model is not only limited to startups; even established business such as Nike, OnePlus, Apple and Xiaomi are also experimenting with this concept, as these brands have slowly started diverting their customers from retailer and ecommerce to their own online portals and retail outlets. Some advantages for the D2C model is that it offers better tracking and monitoring of supply chain, superior and customised shopping experience and cost reduction.
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New-Age D2C Brands Raking In Revenue
The average revenue surge of the top 11 D2C brands in India between 2018 and 2019 was 213%, whereas the expense surge during the same period was 151%. The demand for essential goods is quite high in the D2C space, Wakefit, the new-age Indian mattress manufacturer, is already profitable which is a rarity among Indian startups. In the financial year 2019, the gross profit margin for the company stood at 41.2% compared to 38.5% in the previous financial year.
Apart from having a great product-market fit, the mattress startup has also experimented with their advertising campaigns. The highlight among them being the sleep internship guerilla marketing campaign carried out by the company with compensation worth INR 1 lakh. Innovating on the advertising front is another important factor which enhances the success factor for D2C brands as this improves brand visibility.
Why D2C Models Don’t Often Work
Contrary to the several advantages that the D2C model offers, there are some major challenges which an entrepreneur needs to overcome if they want their business to generate the maximum yield.
Brand Visibility: Standing Out From The Crowd
Brand recognition is the most important factor in increasing the brand value of a product/service in the consumer’s mind. With more and more companies venturing into the D2C segment, it won’t be long when the market will be flooded with similar products with very less differentiation, a market condition known as the perfect competition. When perfect competition is in play the profit margins of companies are poised to decrease as price wars become commonplace. In order to embed the brand name early in the consumer minds, a unique marketing strategy as adopted by many new-age brands is a must.
Establishment Of A Small Batch Supply Chain
Although owning the end-to-end journey of a product sounds very appealing, one needs to take into account the cost incurred in the transportation and maintenance of the supply chain. With most of these neo-D2C brands targeting a niche audience, the batch size of the demand will be relatively low compared to the traditional consumer goods companies which will eventually increase the overall operation cost of the supply chain if innovative practices suitable for small batch supply are not incorporated.
Precision And Data-Driven Warehousing
Finally, one surefire way to accomplish the establishment of a small batch supply chain is using geo-tagging to map the demand of the customers and establish a warehouse strategically in order to reduce the travel duration of the goods from the warehouse to the consumer. This also solves the logistics hurdles along the chain.
Overall the demand for D2C brands in India is poised to increase in the near future as the digital boundaries in the country expand, and as more and more consumers choose online platforms for grocery, home and food shopping. Whether the advent of a pure-play D2C model becomes a successful reality in India or not, depends on how well the companies who are early movers capitalise on their advantage. This group of first-mover companies is poised to hold an upper hand in the future consumer market if India goes the way of the US in terms of D2C brands.CHECKOUT DATALABS BY INC42