Why Are FMCG Giants Rushing To Acquire D2C Beauty Brands?

The $5 Bn direct-to-home (D2C) beauty and personal care (BPC) space in India, decked up to reach $28 Bn in the next five years, looks too tempting for investors to keep off.

The result is foretold. India’s homegrown D2C brands are rapidly scaling up their businesses and even mapping their way to the capital market. Inc42’s State Of Indian Ecommerce Report H1 2024 has found that the BPC market is growing the fastest among all the ecommerce segments in India and stays the course to corner over 7% of the overall ecommerce market by 2030.

D2C beauty brands have garnered over $1 Bn in funding between 2014 and the first half of 2024, while legacy fast-moving consumer goods (FMCG) giants like Marico, ITC, and Emami made a dash for the booming market through strategic acquisitions, leveraging the brand equity and the market presence of the fast-growing D2C players.

The latest in this league was Hindustan Unilever Ltd (HUL), which acquired skincare and personal care brand Minimalist for INR 2,670 Cr.

Minimalist established itself as a clinically backed, performance-driven skincare brand, surpassing INR 100 Cr in revenue within eight months of launch. In FY24, the four-year-old company reported a staggering 89% growth in operating revenue to INR 347.4 Cr.

With this acquisition, as per industry observers, HUL has signalled its strong intent to expand its premium skincare portfolio to address the growing demand for science-backed, problem-solving beauty solutions.

This deal is likely to pave the way for further consolidation, as FMCG players increasingly seek innovative, functional BPC brands to firm up their position in the evolving market.

However, according to Dhruv Kapoor, partner at Anicut Capital, many of these brands need a strong moat if they want to attract big investors including FMCG giants.

“This advantage will only come from factors like scientific research, R&D, and the quality of ingredients used in product development, as customers have become increasingly discerning. Also, any brand without clear differentiation may struggle to scale successfully,” Kapoor said.

What’s Appealing FMCG Giants?

For the FMCG biggies, D2C brands seem to be the right vehicle to reach out to the emerging Gen Z consumer space, industry experts said. The Gen Z consumer is very different from their millennial peers.

“There are several subcategories within the beauty and personal care segment that could be scaled up significantly by addressing this consumer segment,” Prayag Mohanty, principal of Fireside Ventures, said.

A host of startups have designed themselves to create beauty and personal care products specifically for teens. These brands have been built from the ground up, considering every aspect – from product formulation and ingredient selection to marketing and distribution. The existence of such brands will only help FMCG players tap directly into the Gen Z space without taking too much pain. (More on this later)

Moving on, while Gen Z and teens grab the focus today, the D2C kids segment has grown quietly, which augurs great business opportunities for the FMCG players.

“Brands cannot target kids directly, but they can reach them through parents by offering high-quality organic products. There is a growing awareness among parents that incumbent brands do not meet their quality expectations,” Kapoor said.

Meanwhile, consumers today are increasingly leaning towards natural and premium products, which has made FMCGs quite ambitious to grow their portfolio of premium products. This is also where beauty and personal care D2C brands come in handy.

Not just this, the evolving consumer behaviour towards premiumisation has also attracted global marques to bring their premium beauty brands to India.

Imperative to mention that the premium beauty segment is growing, with the average order value (AOV) for mass-premium brands of INR 500-800 expected to reach INR 1,000-2,000 in the coming years, and FMCG giants want the lion’s share.

The FMCG Playbook: Buy Not Build

One of the key reasons FMCG companies are investing in D2C beauty brands is the opportunity to capitalise on emerging consumer trends and niche markets. These startups are founded by entrepreneurs who have a deep understanding of evolving consumer behaviours, allowing them to create highly targeted and trend-driven products.

“What we see is that each of these acquisitions is targeted at an emerging consumer trend or a new target group. The portfolio gaps are being filled, and the call to make is often between build versus buy. Sometimes buying makes more sense as it saves time and effort in building a brand from scratch,” Mohanty said.

Minimalist’s rise in the derma skincare category, for instance, reflects the growing demand for highly targeted skincare solutions.

Unlike legacy brands, which may find themselves restricted by existing policies and a focus on their core offerings, the D2C brands are more agile and can align quickly with evolving consumer preferences, such as the shift towards natural, organic, and wellness-focussed products, Anicut Capital’s Kapoor pointed out.

He added that FMCGs have little room and capital for innovation. “While they have been trying to innovate internally, some of these efforts have been successful, but naturally, a product built from the ground up with an entrepreneurial mindset, keeping newer trends in mind, has a faster chance of scaling and becoming successful,” he said.

Leveraging The Mutual Distribution Strengths

The acquisitions have been a win-win for both the FMCG companies as well as the D2C brands. While the deals are throwing open uncharted territories for the FMCG companies, the D2Cs are gaining access to the offline distribution channels of the acquirers.

The marriage of the online presence of the D2C beauty brands and the offline distribution channel of the FMCG companies complement each other to fan out the products across a wider market and cater to a larger section of consumers.

“Once the new D2C brands gain both market share and mindshare, legacy brands recognise a product gap in their portfolio. At that point, they are willing to pay for these brands and integrate them into their product portfolio, as incumbents have large distribution networks built over time. The newer acquisitions can leverage these networks profitably by pushing the products onto the existing distribution channels,” Kapoor said.

There are essentially two key reasons, according to him, behind the slew of acquisitions not only in the beauty and personal care space but also in the emerging segments like nutrition and health. “The limited innovation from legacy brands and the synergies gained by leveraging distribution strength built over the years,” Kapoor summed up.

A brand like Forest Essentials, for example, has seen significant growth under Estee Lauder’s ownership, largely due to the access to a wider consumer base through offline channels, Mohanty noted. In the grooming space, The Man Company was acquired and scaled significantly. Similarly, Dr Sheth’s under the Mamaearth portfolio are examples of how acquisitions have enabled these brands to scale quickly and reach consumers they otherwise might not have.

The Curious Case Of Profitability & Strategic Exits

The economics in the BPC segment are generally strong with high margins. These brands, while not necessarily large, are growing at an impressive rate, often outpacing the growth of some large FMCG players.

“Once these fast-growing startups are integrated into the portfolio of a large FMCG giant, the advantages multiply. Leveraging the distribution muscle of these giants significantly improves the profitability margin. These brands, which may already be profitable at a variable level, will see their margins grow even further once they are part of the larger system,” Mohanty said.

The D2Cs are not just high-growth businesses, they operate in categories that drive substantial margins. They not only expand an FMCG giant’s portfolio but also enhance its profitability.

“I don’t believe that legacy brands are acquiring these startups merely to fill gaps in their portfolio. Many of these legacy companies are listed, meaning their acquisitions must be accretive to their business. Therefore, these are part of a well-thought-out distribution strategy,” Kapoor argued.

Moving on, while founders are generating great value from these deals, they are also getting cheers from investors. In this BPC segment, investors don’t have to wait for an IPO to exit – a strategic exit is always an option and FMCG deals are accelerating them.

“We’ve seen numerous strategic deals happening in the BPC space, which is great for investors. From an exit perspective, investors don’t have to rely solely on IPOs or financial investors. There’s always the possibility of a strategic exit, which creates value for both investors and founders,” Mohanty said.

Kapoor believes that there are at least three or four sizable BPC companies generating a monthly revenue run rate of INR 30-50 Cr. These companies are progressing steadily towards significant scale, and once they reach a tipping point, liquidity events will happen.

He noted that investors are likely to benefit as these companies either pursue strategic acquisitions or consider listing, given the growing interest from public market investors who view these businesses as a strong bet in a consumption-driven economy.

[Edited By Kumar Chatterjee]