The World of Challenger Brands

KANNAN SITARAM

Fireside Ventures is three­ years old and I have been there all these three years. It is a venture capital fund. We invest in very early stage consumer companies. We enter when they are doing business in INR 20 to 30 lakhs range of monthly turnover and help them to scale up. We focus entirely on consumer brands with tangible products. We have deep dived in these years and built an amazing portfolio of brands. We are excited at building some of India’s iconic next generation brands.

To consolidate or be consolidated

Twenty years ago, I was in the Unilever Strategy group in London. I met this gentleman, Fritz Kroeger, in 2002. He had written an article titled, ‘The Consolidation Curve,’ in Harvard Business Review along with others. They believed that every single industry would go through a phase of consolidation and there would be fewer and fewer players in each industry. This was an important theory for Unilever too! They had to decide if they are going to be the leader in FMCG industry or they are going to be consolidated by somebody else. Unilever wanted to lead the consolidation.

In many of the consumer goods industries around the world, the consolidation phase was predominantly going on from 1990 till the first decade of 21st Century, though it had been happening earlier too. Unilever acquired Pond’s, Brooke Bond, Lipton, Ben & Jerry’s and so on. In 2000, Unilever acquired Bestfoods for a staggering $24B. P&G was also busy in acquiring Wella, MaxFactor and Gillette. They bought Gillette at $57B in 2005. Between 2001 and 2005, they bought Duracell at $7B and Clairol, the hair colour brand at around $5B. L’Oreal bought Lancome and Shu uemera. So, there was a wave of consolidation.

A different story now

In the past three years, Unilever’s story was completely different. There have been no big bang acquisitions, save for Horlicks at $3.8B. They have acquired a whole lot of small brands like Olly Nutrition, which did annual sales of$100M. They bought Tatcha, a Japanese beauty and skincare brand at $500M, Laundress at $100M and The Vegetable Butcher, a Dutch producer of plant-based meat with an annual sales of$12M.

The same is the story with P&G and L’Oreal. They no longer buy big brands. They buy small brands which are not mainstream. Why do they do this?

These were not the kind of brands that Unilever used to buy earlier. Laundress had laundry detergents and home cleaning products which were advertised as having no ammonia, no synthetic dyes, no fillers and offering solutions that were gentle on the family, pets and the planet. The language was completely different compared with that of Surf or Lifebuoy. It was about why they are good for the environment.

Olly was about supplements. It is a small brand selling something called ‘Gummies’ offering solutions for complexion and sleep. The narrative of Tatcha was about Japanese beauty secrets passed down by generations that took a different approach to skincare: Less is more. These were brands with stories and purpose; they claimed to be good for the environment. These were not the kind of mainstream brands that Unilever used to acquire earlier on.

The same is the story with P&G and L’Oreal. They no longer buy big brands. They buy small brands which are not mainstream. Why do they do this? Why is the capital now being deployed in a way, quite different from the past?

The march of the ants—Brand 2.0

We call them ‘ants’ because these are small players. Since they are a new generation of brands, let us refer to them as ‘Brand 2.0.’ In India, we are seeing the emergence of a new consumer segment—e­commerce and content, with new­age Indian entrepreneurs and risk capital flowing into this space.

The emerging consumer landscape in India

Bain Consulting presented a report at the World Economic Forum recently about the moving population demographics in India. In 2005, the low income household was 69% of the population (151M), the lower middle income at 23% (51M), upper middle income at 7% (16M) and high income at 1% (1M), following a perfect pyramid shape. CK Prahald wrote about the ‘fortune at the bottom of the pyramid.’ In 2018, the low income group shrunk to 43%, lower middle increased to 33%, upper middle increased to 21% and high income increased to 3%. In 2030, it is forecasted that the low income group will shrink to 15%, lower middle will increase to 34%, upper middle will increase to 44% and high income will increase to 7% of the population. The shape is no more a pyramid. The poorest population is continuously shrinking.

In the high income group, we are referring to people with a household annual income of $40,000 which is the typical American middle­class income on a PPP basis. The emergence of a proper middle­class, upper middle­class and high income segments is what we can discern. The big brands now focus on the rural areas, marketing branded products to people who buy unbranded products. The consumption by high income groups is significantly higher than people in the other segments.

Meet Aanya and Aarav

Aanya and Aarav typify the new generation consumers. They live in the top 20 cities. They are affluent and part of the consuming population of India. They are digital natives and consumers of content on mobile. They spend 28 hours on mobile and 4 hours on TV per week.

Statistics says that between 2014 and 2017, online buyers have increased by 7x and by 2030, there will be around 180M online buyers.

Aanya and Aarav live in a nuclear family, make their own decisions and the amount of money they spend per person is much higher. They are mobile. (Covid has put a brake on that, though). They work harder, and their consumption on the go is a lot higher.

Their needs are different. They are concerned about the environment they live in. They are worried about pollution, what they and their family members eat; they desire natural and ‘clean label’ products. In my 40 years of experience, for the first time I see people reading the back of the packs looking into the ingredients of a product. They Google to study the ingredients and if it says something adverse about it, they don’t purchase that brand.

They want to live life to the fullest. They love to indulge and pamper themselves. They like to go on holidays and spend money. They live an active lifestyle and need healthy products. This has become more important after the Covid lockdown.

We know that the high end bicycle industry post­Covid is just not able to meet the demand. Dealers say that they are able to meet the need of just 1 in 2 or 1 in 3 customers. If you go to Decathlon to buy weights for your gym, you can’t get them now.

They have fewer children than the previous generations. They want to invest in their kids. They are very ambitious for their kids. They think of building their kids’ CV even before they turn three and the activities they should take up!

Time is very precious for them. They look for products that suit their lifestyle and help them save time. They go well beyond purely functional products. There is a higher order need for better experience and meeting the consumer aspirations. The amount of money such consumers spend will disproportionately increase in India.

Digital eco‐system

A rapidly evolving digital eco­system is changing shopping behaviour. Thanks to the entry of Jio in 2016, the cost of data in India has become very low. Though it is bad news for other telecom operators, for the world of e­commerce, it is the best thing that could have happened.

We have seen the onslaught of cheaper smart phones. It is estimated that 400M use smart phones in India. The internet users are exploding. One estimate says that there are 550M internet users in India today. This has been possible due to the developments in hardware and ease of access to internet.

The social media platforms —Google, Facebook, WhatsApp, Instagram—have all scaled up big time. Digital videos have come of age, thanks to which YouTube users have increased. The search for ‘How-­to’ videos has dramatically increased. We have Hotstar, Netflix, Amazon Prime and other such platforms. Vernacular social media is a more recent development. TikTok had around 200M users till it ran into security related issues.

With all these, the marketers have the power to create demand at scale. No longer do they need to go after SUN or Star TV for commercials.

The ability to supply products has also increased. All of us would have done online shopping. We are used to buying on Amazon, Flipkart, Big Basket and so on. To think that ten years ago, there was no Amazon in India and Flipkart was selling only books will be so odd now!

Bain report says that there will be 350M online shoppers by 2025. Covid has accelerated the development of e­ commerce. The big online shops are gearing up for the sharp increase in demand.

Bain report says that there will be 350M online shoppers by 2025. Covid has accelerated the development of e‐commerce. The big online shops are gearing up for the sharp increase in demand.

Companies are investing heavily in omnichannels to deliver products. Wal­ Mart and Flipkart have merged as Flipkart Wholesale in India. Reliance has launched Jio Mart and they are acquiring Future Retail with which they will have access to another 1500 retail outlets. They have realised that if they want to ensure faster fulfillment, then they need a wider physical presence.

In this bargain, physical retail is also becoming more profitable. In India, physical retailing has not been profitable and that is the reason, why Future Retail is selling to Reliance. But at this conjunction of online and offline, the demand for all the players will increase. This will help big players go deeper into rural markets. The profitability of individual players will get reshaped. Our brands participate in promotions by Amazon and Flipkart. They say that purchases are not only made from top cities anymore but from towns down the line. Vertical market places are also making a comeback. Softbank is funding Firstcry and Nyka is in talks with investors to raise large capital.

Focus on B2B

All of us who are accustomed to the traditional FMCG industry think in terms of the wholesaler­-distributor network. This is getting disrupted by B2B portals. ‘Udan’ is a good example. There is an alternate access to market over brick­-n-­mortar. Players like Metro and Wal­-Mart are launching their own B2B e­commerce sites. The B2B model which was earlier disorganized is now getting organised. A lot of capital is involved in this and I am curious to see how this whole piece is going to shape up in the next few years.

To sum up, challenger brands are very good as they are able create demand on the new age content as well as e­commerce platforms. For them, it is life or death. For many of the large brands, the offline piece is optional. Online is their default option and that is where they thrive. There are brands which are 100% online and a majority of the brands we manage in Fireside are 85 to 90% online. Very few are pure offline. This is how the challenger brands are overcoming the traditional advantages enjoyed by big players.

When we were in HUL, we prided on its enormous distribution capability. I led a field sales team which supplied a million Indian retailers, every single week, with Hindustan Lever products.

Over the last few years, with digital transformation, brands are getting built faster and more efficiently with less capital. Consumer brands make for rewarding investments. There is lot of Private Equity activity taking place in this space.

That was our big advantage. They could invest heavily in TV advertising to make their brands work.

Advantage Brand 2.0

Both these factors are no longer necessary with today’s digital ecosystem taking shape and growing in scale. You don’t need to do a 20 or 30 crore ad campaign to be on Google or Facebook. A few thousands or lakhs would suffice. You can sharply target consumers. If I want to target IT professionals who watch football, are married and live in Whitefield, Bengaluru, I can do that now on Facebook. I am able to save a huge amount of advertising money. The ants have become powerful.

Over the last few years, with digital transformation, brands are getting built faster and more efficiently with less capital. Consumer brands make for rewarding investments. There is lot of Private Equity activity taking place in this space.

New entrepreneurs

We see a new world of entrepreneurs today. A typical entrepreneur is in the age group of 25 to 35. There is no gender quota but half of our entrepreneurs are women. They come with wonderful professional qualifications and could have led a very comfortable corporate life. They are graduates of Wharton, ISB, IIM­C, IITs and so on. They have worked with companies like Unilever, McKinsey and such other best corporate names. They have decided to give up all that and go through all the pain of entrepreneurship.

Lessons from Brand 2.0:

• Do ‘insight mining’ at scale. Know about consumer issues. ‘Boat,’ a successful brand in consumer electronics religiously mines customer reviews and complaints which are a goldmine to them. ‘Mamaearth’ has an online community of mothers and hears about their needs and issues.

• Rapid prototyping enabless caling efficiently. Digital innovation funnels help in rapidly focusing on well performing SKUs.

• Be aware of the power of influencer marketing and leverage it. People who have many social media followers can influence your brands.

• Create brand leaders of tomorrow.

Opportunity set for Brand 2.0 & 3.0

• E­Commerce is penetrating deeper into India.

• Global markets are opening up for Indian brands.

• Omnichannel is energizing as a big opportunity.

• Technology is helping tocreate interesting businessmodels, perhaps bringing inBrand 3.0.

Kannan Sitaram, Venture Partner, Fireside Ventures