STARTUP SPECIAL ....Battleground FMCG: David vs Goliath

STARTUP : Battleground FMCG David vs Goliath



The next chapter of India's consumer story is being written by challenger startup brands promising high profits and strong exits for investors. Supraja Srinivasan writes on how consumer product startups are battling roadblocks to stand out amid giants

The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.­ George Bernard Shaw in Man and Superman

Even in a land where the venerated curd is a dietary staple for nearly a billion people, Greek yogurt was able to stoke a David versus Goliath slugfest last year. A few months after Mumbai startup Drums Food International launched its Greek yogurt brand Epigamia, the world's biggest maker of packaged foods, Nestle, decided to introduce its version in India. Greek yogurt is a premium product for a niche market much too small to allow even elbow room when a giant such as Nestle enters. Epigamia, however, had a stroke of luck.

“When Nestle introduced GREKYO 4-5 months after Epigamia's entry in the market, they launched with full-page advertisements in leading newspapers.But when people searched for Greek yoghurt on BigBasket and other websites wanting to buy GREKYO, it wasn't there. What showed up instead was Epigamia,“ said Deepak Shahdadpuri, Managing Director at DSG Consumer Partners, an investor in Drums Food, which also sells Hokey Pokey ice cream. “So when Nestle launched and undertook their marketing campaigns, Epigamia's sales went through the roof.“

Over the past 4-5 years, consumer product startups have been making their mark in a domestic startup ecosystem dominated by consumer internet companies such as Flipkart and Ola. These young companies are beginning to chip away at the edges of giants such as Unilever and Marico with smart marketing and innovation that millennials are willing to spend on.With organic, healthy, and toxinfree as their flavours, startups such as RAW Pressery (premium fruit juices), Bira (craft beer) and Teabox (premium teas) have been the earliest adopters of this narrative, writing their own scripts and building India's next wave of challenger brands.

Attempting to crack markets long shaped by legacy retail giants, however, is fraught with challenges.Lean distribution and mismatches alone can choke sales, proving costly for consumer startups trying to stitch together businesses with shreds of capital and jostling for recognition in markets dominated by Goliaths.

“The key is getting the right retail distribution and that is the biggest challenge that these startups have,“ said Ash Lilani, managing partner at Saama Capital, an investor in RAW Pressery and Veeba Food Services. “Shelf space is a premium in retail stores. Not only is getting a place in offline retail key but also (important is getting) the right display positioning within a store to be able to differentiate.“

No doubt, then, that distribution and marketing are the two biggest challenges that plague consumer startups in their battle with the legacy giants.But where capital doesn't work, innovation can.

“We created an entire last-mile delivery. I hired (Mumbai's) dabbawalas for our deliveries. Dabbawalas typically handle 200,000 deliveries a day. For RAW Pressery, they had to do 50,000 deliveries in three hours,“ said Anuj Rakyan, founder of RAW Pressery. He zeroed in on Mumbai's famed dabbawalas--a semi-formal network that delivers thousands of lunch boxes to office-go ers with high accu racy--after his attempts at working with newspaper and milk delivery boys failed. Four years later and with Rs 100 crore raised in funds, RAW Pressery owns its own fleet of 25 refrigerated vehicles that not only delivers its juices but also undertakes cold-storage deliveries for other brands such as Epigamia and Wingreens Farms as also some big guns including Future Group and Burger King.

Getting the first order, though, can be tough. “It is very difficult to convince big brands to take a bet on a young, non-established company when the same product can be bought from a bigger company at a cheaper price. I used to sit around at various brands' offices the whole day seeking business,“ said Viraj Bahl, CEO of Veeba Foods, a maker of condiments such as olive oil mayonnaise and barbeque sauce.

The company, which competes with Hindustan Unilever and Nestle for a slice of India's Rs 13,580-crore sauces and condiments market, signed Domino's Pizza as its first client after a 10-month wait. Veeba now supplies to clients including KFC, Burger King and Dunkin Donuts.

Investors and entrepreneurs insist guerilla marketing is the only way for startups to beat the might of the giants. RAW Pressery, Veeba Foods, Bombay Shaving Company have all tapped social media influencers to initiate conversations around their brands and businesses.

“The product led to the audience,“ said Rakyan. “We identified and reached out to fitness gurus and influencers. Yoga teachers and dieticians started calling me... I would also stand outside gyms to sell juice bottles.“

Investors believe there is no set rule to making a mark in this industry. “Product trials are the most powerful marketing a brand will ever have,“ said Shahdadpuri of DSG Consumer Partners. “To understand what drives someone to buy and consume a product, nothing but trial, trial, trial till you get it right.“

Veeba Foods tapped into a grow ing food-blogging network to get social influencers such as Hebbar's Kitchen, Archana's Kitchen and Your Food Lab to sample and build conversions for its products.

Bombay Shaving Company, which makes premium grooming products for men including razors and facial scrubs, sent samples to retail industry bigwigs including Future Group's Kishore Biyani and DMart's Radhakishan Damani as well as actors and cricketers when it launched. “Whether they used it or not we don't know, but a lot of them tweeted about it,“ said CEO Shantanu Deshpande. “You have to hack your way into (the system) somehow.“

Some startups use storytelling to create interesting content around their products. For Siliguri-based Teabox, which ships its teas to 112 countries, this worked wonders in creating a steady consumer base.“There is a lot of history when it comes to tea. So we created a lot of content around our products such as on the region, the plantation and the people surrounding it. We essentially created a form of storytelling that generated a lot of hook for us.We then used targeted searches on Google to get our first few customers,“ said founder Kaushal Dugar.

Consumer goods giants have begun taking notice of such startups despite their small scale and almost negligent market share. “Consumer goods majors want to find premium products in new growth categories,“ said Lilani of Saama Capital.“They don't always want to build something from scratch. They would rather see something that has reached some scale and then acquire that.“

Also, the large sizes of companies such as Dabur and Procter & Gamble do not allow them to take bets a startup can. It is easier for new entrants to tap small, niche markets that have typically urban consumers craving and willing to pay a premium for value-based products.

“If Kellogg's launches an initiative in India, it has to be at least worth Rs 50-100 crore. Otherwise, it makes no sense for them. If it doesn't move the needle, why would they bother?“ said Shahdadpuri. “For segments where the market size is not proven, it will be very difficult for large companies to get their boards to sign off on anything that is too small to be relevant.“

Instead, consumer goods giants would rather wait for the startups to start raking in enough demand to show scale. “When a startup breaks through the Rs 30-crore revenue base, it is for real; when it crosses Rs 100 crore, consumer goods companies start waking up; and when it crosses Rs 200 crore, they start thinking if they should look at buying it,“ said Lilani. But to reach that position and scale, consumer product startups need to look beyond creating a single product, he said.

With Unilever's $1-billion acquisition of US-based grooming startup Dollar Shaving Company last year, its $140-million purchase of New York-based condiments startup Sir Kensington's in April, and Marico's undisclosed investment in Ahmedabad-based men's grooming brand Beardo in March, the M&A script between consumer goods Goliaths and Davids has only begun.

The rising wave of consumer startups has triggered a surge in investments this year. Data from research platform Venture Intelligence show $230 million was infused into consumer product startups in just the first three quarters of this year, as compared with $78 million all through 2016.

While investors such as DSG Consumer Partners, Saama Capital, Sequoia Capital and Fireside Ventures are increasingly looking at this sector in specific, several others are looking to cash in on an opportunity that could provide strong investment exits. “All the branded plays typically work in a gross margin range of 40-45% and that leaves a lot of room to build profitable businesses,“ said Navin Honagudi, investment director at early stage investment firm Kae Capital. “(For investors) the thesis is that in the long-term at least 20 brands will be built across food, beverage, apparel, etc. That's what has changed for investors to focus on this space.“

Supraja Srinivasan Oct 13 2017 : The Economic Times (Mumbai)