Challenger brands versus incumbents - a chicken-and-egg situation

Would digital-first brands sold on quick commerce and ecommerce platforms help in enhancing consumption? Digital brands, especially in FMCG categories such as personal care, beauty and food have certainly managed to win loyalists especially among the younger consumers. However, to win in India, brands need to be omni-channel and that has been a challenge for the start-up brands.

“It is hard to build brands because of the distribution paradigm we have. It’s very expensive and not too many have the money for demand generation, marketing costs as well as cost of building distribution. It’s bit of a chicken-and-egg that somebody has to break into,” explains Angshuman Bhattacharya, national leader, consumer product and retail sector, EY.

He believes that ecommerce and quick commerce platforms have enabled these digital brands who found expanding into traditional trade impossible to scale.

“That’s how the BPC (beauty and personal care) story is playing out. You go to a physical store, you will find few brands, but Nykaa is offering the whole plethora of choices,” he explains. Bhattacharya cites the example of a frozen food brand that has managed to scale up to over 30 cities thanks to quick commerce platforms.

“Given our distribution inefficiencies and lack of frozen food infrastructure, it would have been impossible for the brand to scale in the traditional route. However, quick commerce enabled it to be present in 30-odd cities.” All quick commerce companies have been building frozen food infrastructure. No wonder, one can easily buy frozen food brands such as Licious or Bono on quick commerce.

Alpana Parida, founder, Tiivra Ventures' counter to Bhattacharya is that neither the platforms nor the digital-first brands are making money, there has to be profitability in sight to build a robust business.

“At this time, it seems like a pie in the sky. Easy capital is also drying up, so newer brands which emerge will be in categories that can be sustained in ecommerce, where shipping costs, a lot of other costs are manageable.”

“We are talking about a sliver of the market. Ecommerce, I have been hearing for years how it will grow and gallop, but it’s still 8% of the total retail market. Of that, if you take out marketplaces only 2%-3% are D2C brands. They are learning that omnichannel is the way to go but that is also a very small number. Majority are struggling, the business model doesn’t really work.

It is often said that for a challenger brand to rub shoulders with an incumbent, the challenger needs to get distribution faster than the incumbent gets innovation. EY’s Bhattacharya says, “What we see is the incumbent is building innovation much faster than the start-up is able to build distribution as it needs different skill sets.”

Legacy companies such as Hindustan Unilever , Tata Consumer Products or Marico have been aggressively acquiring challenger brands and using their distribution might to ensure they are available in the traditional channels. They are also innovating their existing portfolio so that it appeals to the changing consumer.

The incumbents, argues Parida, are not pushing innovation that far. “Some of the larger companies say that they are so used to big numbers that when you start a small brand, the kind of numbers that it will get you doesn’t seem meaningful at all. Therefore, the foray of innovative products gets curtailed and that’s where they are losing out.” Parida feels that the D2C brands right now are in a flux. “We definitely need a more accessible ecosystem for start-ups to make D2C happen more profitably which is currently not happening. The much-touted ONDC has not gone anywhere either.”

Product meritocracy will win eventually, says Bhattacharya. “Channel and distribution strengths have allowed companies to rule over decades and that’s converting to product and brand-led meritocracy. It’s not enough to be a D2C company or a large multinational, the point is what you have is a product.”

The disproportionate growth that D2C companies were seeing is evening out and the kind of penetration that large companies had achieved post the pandemic when they saw huge growth, is also normalising.

The FMCG war is not just about digital first brands battling it out with the large national players. Neither of them can afford to ignore the regional brands which are giving them a tough fight.

They are innovating, modernising and they have distribution muscle in the areas they operate in. They certainly can’t be taken for granted. And, with GST in most FMCG categories being as low as 5%, they will be more regional brands that will come into the organised fold.