In November 2019, sportswear giant Nike decided to sever ties with online retailer Amazon in the US. The reason: It wanted to create more ‘direct and personal relationships’ with consumers through its own website. Soon after, iconic brands Ikea, GAP and H&M said they too would be focusing more on own online stores. Even new-age direct-to-consumer (D2C) start-ups in the US such as Beardbrand, Supply, BirkenStock and PopSockets have exited Amazon.
What could have pushed these brands to break ties with the world’s biggest ecommerce retailer? In spite of the exponential growth that Amazon (also other ecommerce marketplaces) delivered for many of these brands, sooner or later, they found that they have got a raw deal due to myriad reasons – competition from counterfeit items, opaque algorithms of marketplaces and, more importantly, lack of access to customer data.
“There is a lot of weariness when it comes to being excessively dependent on Amazon or other ecommerce marketplaces because it impacts pricing. They are sacrificing their bargaining power. What gets seen and at what cost it is bought, everything is dictated by the marketplace,” says Anand Ramanathan, Partner (Customer & Marketing), Deloitte India.
When ecommerce started, players such as Amazon used to buy inventory from big brands and sell. The brands were happy as they thought of it as an online extension of their franchise and distributor partnerships. However, they soon realised they were not getting to know their customer and strategise according to consumer behaviour shifts. The advertising was largely carpet bombing without targeting of consumer segments.
Brands also started complaining about EBITDA margin erosion, says Ravi Hudda, Chief Digital Officer (Lifestyle Business), Raymond. “They had to spend close to 30% on margins. On top of that, they also had to discount heavily to remain relevant on the platform. This lowered Ebitda. Brands are saying they have to focus more on their own portal to grow Ebitda.” Deep discounting has been a pain point for most brands as competition on marketplaces has always centered around prices. “The response going to the brand (from ecommerce players) was that while your average discount is 20%, the discount being given by competition is 30%, and they have 5% higher sales. This pushed a lot of brands into the discount trap,” says Hudda.
Cut to India. Brands face identical issues. E-tailers such as Flipkart and Amazon refuse to share consumer data. Then there is the issue of display. If a consumer searches for Raymond formal shirts, more often than not, he is likely to be shown lower-priced options from other brands. These could either be the marketplace’s own brands or brands of those who have invested in advertising on these platforms. Therefore, the brand has to deep-discount, without getting the details of the customer it is discounting for.
Apart from this, in India, digital was an after-thought for most legacy brands which have a deep physical presence. The pandemic forced them to think digital. A lot of them are talking about prioritising their D2C channel. “A lot of legacy brands are beginning to prefer their own platforms to Amazon or Flipkart. This trend has just begun, and will play out in the next three-five years,” says Amit Sharma, CEO of distribution company Shop X. He says brands will use marketplaces for either stock liquidation or curate products exclusively for them.
Bata India, for instance, used to sell just 2-3% products online prior to the pandemic. Now, the share of digital is in mid-teens. Gunjan Shah, CEO, Bata India, says they have adopted a multi-pronged digital strategy which straddles across marketplaces, its own portal, endless aisle and store-on-wheels. While endless aisle connects all physical stores digitally (a consumer will be able to digitally see merchandise displayed due to space constraints), store-on-wheels takes Bata products to doorstep of consumers, who can order on the salesperson’s tablet. While 50% of the shoe major’s digital revenues come from marketplaces, endless aisle, Bata portal and store-on-wheels together contribute the remaining 50%. “What is commonly called D2C is, in the Bata parlance, from anywhere to everywhere. I now have access to all the PIN codes of India,” says Shah.
Farah Malik, MD, Metro Brands, has a slightly different approach. While Metro’s own portal gives access to the entire catalog, which the consumer will not get in any online marketplace, it curates collections for the likes of Myntra and Amazon. “These collections are exclusive to those platforms, so they give us access to customer data,” she says.
A legacy brand’s preference for D2C over marketplaces makes sense as Indian consumers have always been used to personalisation in clothes. Raymond, says Hudda, is evolving into a platform for style-based services. “We want to become an Uber of stylists, therefore, we are shifting from a product category to a service category. When you think of food, you think of Swiggy because of the speed with which it gets you your food. Similarly, when you think of personalised fashion, Raymond should be the natural choice.” The company has tied up with a host of stylists across the country for offering personalised styling services. The apparel major has also digitally integrated 116 of its 1,500 stores.
“If a consumer orders a shirt online, I pick it up from a store where its shelf life has been long and ship it, that’s how I rotate my inventory. We plan to eventually link all our 1,500 stores so that we are able to ship faster,” says Hudda.
The pandemic gave digital shopping a fresh lease of life in India. Even food and personal care giants such as Hindustan Unilever (HUL), ITC and Marico have set up their digital stores in the past year-and-a-half. HUL’s 15% turnover comes from digital means of which its digital store is a significant contributor. Over 30% of Lakme’s Q2FY22 revenue came from D2C; the company has also launched D2C brands such as Baby Dove, Simple and Love Beauty And Planet. “Our digital business is galloping at a swift pace. We are building digital brands and getting ready to face not just our existing competitors but also our new-age competitors,” HUL Chairman and MD Sanjiv Mehta said recently at a press conference for September quarter results.
Like HUL, Marico has a D2C meal replacement brand, Fittify, which offers a range of protein shakes and soups. It also has Cocosoul, a virgin coconut oil brand, apart from Pure Sense, a personal care range. In addition to this, the company has acquired men’s personal care D2C brand, Beardo, and Just Herbs, which is into ayurvedic products. Tata Consumer Products sells its premium tea and coffee brands, 1868 By Tata Tea and Sonnets, through its D2C platform.
Unlike Nike or GAP, which have taken a call to avoid marketplaces completely, legacy food and personal care brands are using the D2C route more for premiumisation and customer segmentation. “For legacy companies, D2C is an opportunity to segment consumers. How do I meet requirements of women between the age of 18 and 25 stepping out to work for the first time? Can I segment more finely and create brands which may not be selling in every retail outlet but are profitable in their own right? These are some of the factors that come into play in their D2C strategy,” says Kannan Sitaram, Venture Partner, Fireside Ventures.
“D2C allows us to target consumers without scattering resources across the space. It allows us to bypass execution issues and reach the consumer in a targeted way,” says Sunil D’Souza, MD & CEO, Tata Consumer Products.
For a personal care or food brand in India, D2C is all about unit economics. “The critical bit is the margin profile of the product. There should be enough margin to absorb logistics costs, marketing costs, that is the key to which brand can go D2C and which can’t,” says D’Souza.
In a country where 80% of shampoo sales are ₹2 sachets, one model will not make sense. “Sending one sachet of shampoo doesn’t work. So, how is it that you can build a subscription model or bundle more cleverly? The ticket size should make sense for logistics, the unit price has to be at a higher level, only then will it sustain,” says Deloitte’s Ramanathan.
Indian companies are beginning to realise that if their brand gets recognised on Amazon or Flipkart more than their own portal, their EBITDA will get suppressed as they will end up spending far too much on discounting and marketing. One of the major issues that global brands have against online marketplaces such as Amazon is cannibalisation of ad money. While companies pay a commission of 18-20% to marketplaces for ensuring that their brands are visible, more than often, customers actually discover their brand on platforms such as Google or Facebook and then either buy on Amazon or directly from the company’s portal.
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