India’s consumption landscape: Consumers acquire a taste for premium as mass market lags

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January 26, 2024

Sagar Malviya, Economic Times

Mumbai, 26 January 2024

Hindustan Unilever and United Spirits together present a study in contrasts that seemingly reinforces the current purchasing trends in India’s consumption sector. At the country’s biggest consumer-goods and alco-bev companies, respectively, premium brands are flying off the shelves, but mass-priced products remain relative stragglers.

“At the premium and luxury ends, they (consumers) are continuing to spend, continuing to experiment, continuing to do repertoire drinking, especially experimenting with the white spirits, drinking at home,” Hina Nagarajan, managing director at Diageo-controlled United Spirits, told investors in a post-earnings call. “However, Middle India, or the value-oriented consumer, is actually cutting down on the number of occasions (to spend) to manage their money.”

The maker of Johnnie Walker and Smirnoff posted a 12.4% volume decline in the mass-priced segments, while pricier prestige and above categories saw a 10% growth during the December quarter. The Indian unit of the world’s biggest distiller said it expects this trend in purchasing behaviour to continue over the next couple of quarters.

At Hindustan Unilever, the country’s biggest consumer company by both sales and market value, the story isn’t vastly different. The FMCG bellwether said its premium portfolio expanded more than two-and-a-half times the mass segment over the past few quarters.

This trend was seen even in the rural areas that make up nearly half the annual sales at the maker of Dove soaps and Glow & Lovely skin creams. Pricier products now constitute a third of Hindustan Unilever’s total sales. “In rural areas, there are people who can afford and spend money, and hence, the premium portfolio in has also grown well – like it has grown in urban parts of the business,” Rohit Jawa, managing director, Hindustan Unilever, told investors after the December-quarter earnings. “We have always seen that essential and discretionary are the two realities of (the) rural (market).”

Incomes & Business Cycles

This dichotomy in purchase decisions appears to be a function of income disparity and is market-agnostic, experts believe. For instance, rural India that accounts for nearly 40% of the overall FMCG market saw a noticeable drop in demand for a year due to inflation and erratic monsoons. Cities, meanwhile, appear to be at the vanguard of overall consumption demand across categories as urban incomes, typically linked to organised sectors of the economy, are more resilient to business cycles and promise better protection against broader inflationary pressures. “Even if the consuming class, mainly upper and middle class, saw an impact on their incomes, it is still not significant to affect their discretionary spends,” said Devangshu Dutta, founder of Third Eyesight, a strategy consulting firm. “There is a buffer available for higher income growth and it will hit them later in any economic downturn. At present, it is felt in the lower-income segment.”

Over the past decade and a half, consumer companies expanded sales by pushing both pricier and affordable products. Companies still have budget-friendly options in their portfolio, but lower incomes, especially in rural areas, appear to have dented purchasing power at the budget end of the market. “The real pressure on the wallet is on the lower side, where we do see upgrades are not happening from country liquor to either the popular category or the lower end of prestige,” said Nagarajan at United Spirits.

(Published in Economic Times)

Q-comm goes beyond grocery; all set to challenge e-comm dominance?

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January 8, 2024

Yash Bhatia, Afaqs

8 January 2024

In the 10th episode of Zerodha co-founder Nikhil Kamath’s YouTube podcast series, WTF, Aadit Palicha, co-founder, Zepto, says that consumer goods are the fastest-growing category for its quick commerce business. Initially, quick commerce brands just focussed on serving impulse grocery needs, but now they have changed their way to serve regular planned purchases too.

Major players like Zepto, Blinkit, Swiggy Instamart, and BBNow are expanding their offerings in gifting, makeup, ready-to-eat, baby care, pet care, meat, poultry and more to cater to a wider range of consumer needs and preferences.

Through our interviews with brands like Bombay Shaving Company, Bevzilla and Plum, it is evident that Q-comm business contributes approximately 10-25% of online revenue for different brands.

Also, according to a report by Redseer, the Q-comm market is expected to reach almost $5.5 billion by 2025. The report highlights, that these platforms can up their game by going beyond just grocery and extend their offerings to other consumables, electronics, newspapers and more.

It shows that quick commerce players would focus on other categories to reach this milestone. But, are brands ready for it? If yes, how is their strategy different for this model?

Aditi Handa, co-founder of The Baker’s Dozen, an artisanal bakery, states, “In our category, once the customers figure out a product in the physical store, then they tend to buy again on the quick commerce platforms rather than visiting a store. It works well in our category, as there is no need to touch and feel the product.”

Baker’s Dozen makes 60-65% of its online sales on Q-comm platforms.

Devangshu Dutta, founder of Third Eyesight says that quick commerce has spread across various product categories and he believes, “It is driven more by buzz than customer needs. Unless we meet a core demand with a large consumer market, there’s no sustained road to profit.”

Deepti Karthik, fractional CMO, SuperBottoms, says, “In the diaper category, there are a lot of unplanned purchases. We target customers who’re buying other products, and eventually get trails from them.”

She points out that a lot of gifting happens in the quick commerce segment. “Gift packs can be a great solution our brand can leverage.”

She predicts that for the baby-care brand, quick commerce will contribute 3-5% of overall revenue, led by gifting as a category.

Apart from the reduced delivery time, is there a reason that customers are opting to shop on quick commerce platforms?

Handa answers that two factors work in favour of Q-comm platforms: discounts and convenience. “As these players are expanding their portfolio, customers will find more reasons to go on these apps.”

Is the quick commerce business driven by celebrations?

India is renowned for its diverse festivities. Quick commerce platforms capitalise on this by selling event-related or topical assortments. For instance, they offer flutes for Krishna Jayanti, Ganesha idols for Ganesh Chaturthi, Christmas decorations for the holiday, decorative items for Diwali, and gold and silver coins for Dhanteras.

These platforms are also curating special web and app pages for such occasions, even for regional festivals like Chauth Puja. In 2023, Blinkit curated a specific page dedicated to the wedding season.

Karthik states, “The major business of this sector is driven by consumables and FMCG products. On special occasions, e-commerce brands used to curate specific products, which Q-commerce is now doing. The market share of the other modes is now being taken by the quick commerce players on festivals. That’s why every e-commerce is looking to launch its version of Q-commerce, like Amazon Fresh by Amazon, and BBnow by Big Basket.”

Handa believes differently and states that quick commerce is not taking up the market share of any other modes. “Currently we’re buying more than what we need. Quick commerce is creating some new markets, and people are spending more money as it is easy to spend now.”

Will Q-commerce take over e-commerce?

As the country embraces digital commerce, the battle between e-commerce and Q-commerce is intensifying. While e-commerce has a well-established presence with a vast user base, Q-commerce offers unmatched speed and efficiency. As Q-commerce players foray into other categories, will they take over e-commerce?

Ritesh Ghosal, former chief of marketing at Croma believes that Q-comm will not replace e-commerce. He says that Q-commerce will only be a successful mode for urgently needed products like trimmers, headphones etc.

Handa predicts, “In our category, Q-commerce will replace e-commerce purely based on better service. The only advantage that e-commerce holds is a variety of stock keeping units (SKUs). Like, some products will have a presence in e-commerce only like English Cheddar cheese, it will not be there in Q-comm, a customer can only get it through e-commerce.”

She says that quick commerce also provides a fast way to experiment with new products.

Kartik, says e-commerce will always be at the main stage for the brand and believes Q-commerce will be an incremental business for them.

She has observed that in quick commerce if a product gets listed, it starts to sell faster and gets a quick start as compared to the e-commerce route.

Challenges

While the benefits of quick commerce are evident for customers, these players in the backend face a lot of challenges including warehousing, labour expenses, and, most importantly, the orders are low-value, therefore the margins are less.

Balasubramanian Narayanan, vice president, of Teamlease services points out that the consumer preferences and buying patterns in the quick commerce segment evolve rapidly, making data collection and analysis a crucial aspect.

“Balancing data collection with user privacy is a key challenge. The data insights can help to create personalised experiences, predict demands, and improve operational efficiency. But this can be a challenge in this mode.”

Handa says in quick commerce, the biggest challenge is the stock keeping unit (SKU) mix, SKU selection is critical.

“Brands like Amazon, and Flipkart allow a plethora of SKUs, while quick commerce just allows a limited number, due to limitation of warehouse space and delivery time. The SKU selection by the brand becomes a critical aspect.”

In the physical realm, shelf presence plays an important role in reaching customers, in the online world, optimising the online presence is crucial to get the customers’ attention. She highlights that in quick commerce, the fight is to be at the top of the search bar.

“To be at the top, the brand should generate organic sales, secondly it’s about keyword bidding. A keyword that would search customers to find the product from the brand. The brand pays quick commerce players for this.”

Ghosal also agrees with this and states, “In the Q-commerce arena, most searches are by category rather than by brand. The brands have to tick more boxes in terms of categories/searches so that customers tend to look at them.”

(With additional inputs: Ruchika Jha)

(Published in Afaqs)

HUL Sets Sights On Customer Of Tomorrow, Beauty-Personal Care Split

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December 4, 2023

Sharleen Dsouza, Mumbai

3 December 2023

Hindustan Unilever (HUL)’s decision to split its beauty and personal care division and place a renewed focus on digital has been driven by its aim to serve the consumer of tomorrow, say analysts and brand experts.

HUL Managing Director and Chief Executive Officer Rohit Jawa is looking to make the company ‘future ready’, and while these bets are not for the short-term, they will eventually pay off as the Indian consumer is young and digital friendly, they add.

“Rohit Jawa comes with digital experience and he is preparing to steer HUL into serving the future consumer who is more digital friendly,” said Sachin Bobade, vice president at brokerage firm Dolat Capital.

On Friday, the consumer major also announced that it had named Arun Neelakantan its chief digital officer effective January 1. Neelakantan, who the company said was brought in to unlock growth opportunities by leveraging India’s digital ecosystem, will also join the company’s management
committee. Neelakantan is the first chief digital officer of the company who will be part of the company’s management committee.

Brand expert Devangshu Dutta, founder of business management consultant Third Eyesight, said that HUL was a traditional company but had never shied away from experimenting with different models of customer engagement.

“The profile of the younger Indian consumer is more digital friendly. This move won’t fundamentally shift the company’s business in the short term, but it is creating a connect with the younger consumer group which will be the mainstay for the future,” said Dutta.

On Friday, Jawa had said: “As we embark on our next phase of growth and transformation, we will combine our scale and discipline with innovation and agility to serve our consumers even better, and build a future-fit business,” adding that beauty and personal care continued to be a source of value creation for the company.

(Published in Business Standard)

Nykaa CEO pads up against RIL’s push in beauty market

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August 5, 2023

Viveat Susan Pinto, Financial Express

August 5, 2023

Two of the country’s best-known retailers, Nykaa and Reliance Retail, are now clashing head-on for a bigger share of the online beauty and personal care (BPC) market. Signs of this became apparent on Thursday, when Nykaa said that its CEO Falguni Nayar would “guide the marketing function directly” as part of its larger initiative to strengthen its marketing leadership and management.

The announcement, according to industry experts, came amid senior-level exits at the company and increasing competition from Reliance Retail’s Tira, which was launched in April this year as an online-cum-offline beauty destination.

Nykaa, which is estimated to have a share of 38% of the $1.3 billion (Rs 10,920 crore) online BPC market in India, says that it is evolving into a multi-dimensional business.

“Leadership roles are being augmented with an eye on strategic realignment, cost rationalisation and growing complexity of the business,” Nykaa said in a statement.

While Reliance Retail’s Tira is smaller in comparison to Nykaa, it is beginning to chip away at the heels of its bigger rival, industry sources said, within months of launch.

For instance, in four months since going live in April, the Tira app has over 1.7 million downloads and is eyeing a number of around 10 million in the next few months, persons in the know have told FE. It intends to do this on the back of aggressive tie-ups with local and international brands and positioning itself as an aspirational yet affordable beauty player. A mail sent to Reliance Retail elicited no response till the time of going to press.

The Nykaa beauty app has over 40 million downloads, but has been around longer than Tira, executives in the know said. Discounts on both platforms (Tira and Nykaa) range from 10-50% for various brands with BOGO (buy one get one) offers, virtual try-ons, blogs, tutorials, tips, recommendations and videos being part of the online experience. Tira also has a unique fragrance finder, which helps consumers match fragrances closest to their preferences.

“For beauty retailers, the game will increasingly be omnichannel,” says Devangshu Dutta, chief executive officer at Gurugram-based retail consultancy Third Eyesight. “While the consumer set is young for beauty brands, convenience and access, whether online or offline, is key for sustainable growth,” he says.

Nykaa has doubled its beauty store count from 72 outlets in FY21 to 145 stores in FY23, the company said in a recent investor call. Plans include adding another 50 outlets in FY24 and taking total store count to 150 stores, according to a report by brokerage firm JM Financial.

Reliance Retail also intends to expand its Tira footprint by setting up stores in suburbs such as Andheri in Mumbai besides BKC in Bandra and Infinity Mall in Malad, which are up and running. The Malad store, for instance, was launched just last week. Over the next few months, satellite cities such as Thane and locations such as Pune, Bangalore, Chennai and Hyderabad are likely to see Tira stores, informed sources said, with more outlets lined up in tier-I and II cities, including Delhi-NCR.

Reliance Retail is also laying special emphasis on the design of its Tira stores, with the flagship 4,300-sq ft outlet in Bandra Kurla Complex, for instance, put together by London-headquartered studio called Dalziel & Pow. The studio is best-known for its work for brands such as Marks & Spencer, Toyota, Volkswagen and Jaguar Land Rover and has designed the BKC Tira stores as a go-to destination for beauty shoppers.

(Published in Financial Express)

Nykaa Faces Uphill Beauty Battle: Can It Fight Off Tata CLiQ And Reliance Tira?

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July 25, 2023

Suprita Anupam, Inc42

Jul 25, 2023

Following a stock downgrade, Nykaa might lose some visibility among public market investors at a time when competition in the beauty ecommerce space is intensifying

Nykaa, which has been the most popular beauty marketplace, has had to fight off Reliance Tira, Flipkart-owned Myntra, Tata CLiQ and others but has to invest heavily in omnichannel and private label expansion

As its profitability and traction have declined, Nykaa needs to fix things for the long run without losing too much money as it does not have the capital reserves similar to its rivals

In the first week of July, the Nykaa stock took a significant hit, falling 42% from its 52-week high. Further, the Association of Mutual Funds in India (AMFI) downgraded the stock, dropping it from the top 100 listed companies in the country. As of now, the company is ranked somewhere between 101 and 250 on the market capitalisation threshold.

From a near monopoly in the beauty ecommerce space, Nykaa has lost its top spot. Not to mention, new competition, in the form of D2C brands and behemoths such as Tata and Reliance, has complicated the situation even more.

The downgrade by the AMFI means that Nykaa is no longer an attractive largecap stock in India, and this could have an impact on the company’s visibility in the near future.

So, what exactly triggered this collapse?

It was only in November 2021 that Nykaa’s INR 5,352 Cr IPO saw 82x subscription, the highest among large startup IPOs in India. Having withstood competition from marketplaces such as Amazon India and Walmart-backed Flipkart and Myntra, Nykaa seemingly set a new benchmark for Indian ecommerce startups with its blockbuster IPO.

But the last 20 months have been nothing short of disruptive. Reliance-backed AJIO has grown in stature, and the Indian conglomerate has also launched Tira in the beauty ecommerce space.

Meanwhile, Tata has also bolstered its beauty and personal care product assortment on its platform Tata CLiQ. Furthermore, the Tatas have added 20 beauty tech stores across the country, aligned with its ecommerce operations, while Myntra Beauty has registered 2X-3X growth in recent months and expanded its brand collection. Therefore, Nykaa needs to come up with something exceptional to compete with the aforementioned well-funded BPC contenders.

Adding to the company’s woes was the announcement of the issue of bonus shares in a 5:1 ratio and changes in key management personnel after a successful IPO. This did not go down well with investors. Bonus shares announcement was largely perceived as a way to keep the company’s anchor investors from offloading shares at the end of their IPO lock-in period.

Experts believe that amid declining year-on-year profitability, Nykaa could see a cash crunch as it prepares to combat with deep-pocketed corporations. For now, it will be interesting to see if Nykaa can hold onto its market share?

Nykaa’s Losing Its Footfall To AJIO & Myntra

First, let’s look at the bread-and-butter for ecommerce platforms such as Nykaa — that is visits, page views, engagement and repeat orders.

It must be noted that Nykaa has separate properties for fashion (Nykaafashion.com) and beauty (nykaa.com). If we look at the performance over the last 3-4 months, the fashion vertical has definitely seen some gains, but Nykaa.com itself has experienced negative growth in total visits.

The flagship property is bleeding users due to an ever-intensifying competition, which is quite clear in the graph given below.

Further, Nykaa, Nykaa Man and Nykaa Fashion have the lowest numbers when it comes to average visit durations.

On the ecommerce front, Nykaa has a lot of catching up to do against its competitors. Some of Nykaa’s private labels — take Dot&Key for instance — have become popular discounted items on Myntra, AJIO, Amazon India and other marketplaces, which shows that the company is forced to use its competition to sell its products.

In contrast, Myntra, AJIO, Tira and Amazon’s private labels are largely walled inside their respective marketplaces. To beat the competition and stay in the public spotlight, Nykaa has opted for the omnichannel strategy, and it is looking to add brand-owned stores on the retail front. But here too, the competition is stiff.

Nykaa Faces Challenges With Its Online-To-Offline Strategy

When we look at the omnichannel operations, Nykaa has 145 physical stores, 38 fulfilment centres, and 2,749 stores of its owned brands. The company plans to open more physical stores this year, according the announcements made in its last earnings call.

Nykaa’s founder and CEO Falguni Nayar had earlier said, “Physical retail is a necessary investment that we need to make, even if it adversely affects overall profitability. So, we are aiming for the optimal mix of online, offline, and duty.”

This is where the situation becomes more complicated. Being primarily an online platform, Nykaa has managed to stay lean and achieve profits thus far. However, opening more stores means more investments and a significant increase in operational expenditure, including higher employee expenses.

Plus, this entails entering into fierce competition with Tata and Reliance.

Reliance Retail alone has launched over 3,300 new stores in FY23 under its various brands, including Tira Beauty, Trends, and others.

Similarly, Tata has been a well-known name in the BPC and fashion industry. It introduced the first-ever cosmetics brand, Lakme Cosmetics, to India (later sold to Unilever). Tata has over 22 in-house labels for its Westside brand, which operates over 200 stores across the country.

While Tata plans to open 20 beauty tech stores, equipped with AI and VR, it already has 391 Zudio stores nationwide.

For Tata and Reliance, it is relatively easier to build an online business backed by their offline stores compared to Nykaa’s strategy of building an offline presence backed by online operations. These large conglomerates have years of experience in building retail brands in the offline space.

So, essentially, Nykaa seems to have lost ground in its strength areas of ecommerce and offline retail, as it is not as experienced as its rivals.

Speaking to Inc42, Devangshu Dutta, the founder and CEO of Third Eyesight, a boutique management consulting firm explained, “Apart from the impact of Covid, in the last 3-4 years, many brands have started moving offline because that’s where the bulk of the business happens. But moving offline means entering a completely different business. You’re not able to centralise inventory as much, and you may not be able to respond to market-specific segments as quickly.”

He also believes, like any other offline retail business, Nykaa will face high operational costs, but it has an advantage in the fact that it may be able to use data more effectively from its online operations. Nevertheless, this is a minor advantage.

“Your store locations have to be correct, and self-sustaining quickly, at least on a cash operating basis. At the business level you may look at profitability in a longer term,” Dutta added.

Profits Plummet: Nykaa’s Other Big Worry

India’s beauty and personal care market, presently valued at $16.8 Bn, is poised to grow at a compound annual rate of 11%, with cosmetics and perfumes categories growing at a faster clip.

According to a joint report by international beauty brand Estée Lauder and Gurugram-based business insights firm 1Lattice, a substantial portion of sales worth about $1.3 Bn are through ecommerce channels. This is expected to grow at a CAGR of 30% during FY22-27, followed by companies that retail beauty products in health and beauty stores and modern retail shops.

With 30% of India’s BPC market share, Nykaa has so far managed to stay ahead in the race. Nykaa’s beauty category (55% of the broad BPC category) saw 33% full-year growth with a GMV of INR 6,649 Cr. On the fashion side, the GMV grew 47% for the full year at INR 2,570 Cr.

BPC and fashion are the two mainstays of Nykaa’s business, even though fashion is a relatively new vertical for the Mumbai-based company. The company had earlier launched Nykaa Man, a separate platform for men’s grooming, beauty and fashion, but with less than 1 Mn visits, it has failed to grow over the last few years while AJIO has grown from 0-37 Mn users, as per analysts.

“At one end, Nykaa’s online PAT has been going down for the last two years, while Nykaa Fashion’s loss for the year has grown consecutively, putting Nykaa business in a fix,” said an analyst from PwC.

Nykaa needs to bring a balance between short-term losses and long-term profits. However, the company’s current strategy fails to show a way out, the analyst added.

The Balancing Act For Nykaa

As per the analyst quoted above, the company’s BPC products have so far had lower prices than Myntra and AJIO, where discounts are typically lower.

However, when compared to Amazon India and its long list of D2C brands and private labels, Nykaa products were slightly more expensive. Amazon also scored over Nykaa with its better supply chain and distribution.

Nykaa banked on product assortment, the assurance of quality and authenticity of products, but as more and more brands join Tira, AJIO and Tata CLiQ, this is also fast eroding.

Access to international brands is no longer exclusive to Nykaa, so it needs to tackle distribution and supply chain, where its rivals score heavily.

Giving Nykaa the benefit of the doubt, a consultant from brokerage firm Motilal Oswal recently said, “There is no clear playbook for these businesses. When Nykaa entered the segment, it was pioneering many aspects in India.”

However, now the company needs to exercise extreme caution regarding expenses and investments because of heavyweight competition with deeper pockets.

P Ganesh, chief financial officer at Nykaa, highlighted that the company still has funds remaining from the IPO, which will be utilised to secure future capital needs.

Ganesh added, “It’s worth noting that while we have observed a considerable increase in working capital as the company scales up, the number of working capital days is expected to stabilise. This means that the amount of funding allocated to working capital should moderate in the future.”

But analysts also believed that Nykaa cannot afford to sacrifice its market share in India’s rapidly growing beauty, personal care, and wellness segment. One thing that is advantageous for Nykaa is that Reliance-owned Tira is still new in the market and will take some time to get to critical mass adoption.

This is a window of opportunity for Nykaa to stretch its lead and fight off its rivals. Nykaa’s brand value primarily comes from its online business, so it must not let offline expenses hinder its online growth plans. However, given the competition, Nykaa is in a Catch-22 situation.

In the BPC segment, owned and private label brands play a vital role in increasing long-term profitability and repeat purchases. All of this will require extensive investment from Nykaa’s leadership — there are segments in BPC where Nykaa has no private label or owned brands.

As of now, the question remains: Can Nykaa maintain its dominance in the online market while facing fierce competition on multiple fronts?

(Published on Inc42)