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Apoorv Ranjan Sharma

Why Indian FMCG space is eliciting investors’ interest

24 April, 2017

Despite being one of the biggest contributors to the Indian economy, the fast moving consumer goods (FMCG) industry has remained relatively unaffected by the ongoing startup revolution. Several factors have contributed to this hesitation on the part of entrepreneurs and investors to be involved with the high potential sector. The market is already dominated by several large brands, a situation which serves as a deterrent to emerging players in the space. Moreover, the low profit margins in the sector make it extremely difficult to reconcile the cost of transactions with logistics. The situation is further complicated by the diverse requirements of the Indian market, which do not allow for standardisation of operational processes such as supply chain management, product procurement and, etc, which, in turn, makes a business model that is both scalable and profitable a near impossibility. But business challenges have never been able to rein in the entrepreneurial spirit, and so it is with startups in the FMCG sector. Driven by technology, better market understanding and a passion for market disruption, several new-agetech ventures are now creating ripples in the Indian FMCG space, attracting some serious investor attention and securing heavy funding.

Take, for example, Global Consumer Products. Founded by A Mahendran, former Managing Director at Godrej Consumer Products, the startup has received investments to the tune of $50 million from major investors such as Mitsui and Goldman Sachs. Major investments have also been made by Sequoia Capital into Neeraj Kakkar’s Hector Beverages, which created a huge market stir and pioneered the ethnic drinks category in India with the launch of its Paper Boat brand, and by The Abraaj Group, Sands Capital, and IFC into BigBasket. But why is the FMCG sector, which saw many startups opting for rollback or pivots in a turbulent 2016, re-establishing itself as the new poster-child of the Indian entrepreneurial landscape and garnering heavy funding from investors?

The re-emergence of FMCG startups
One of the main reasons behind big-ticket investments into the sector is innovation. Having realised that ‘me-too’ business models and investor funding cannot be solely relied upon for long-term success, Indian FMCG startups have renewed their focus on technology as the solution to market gaps. Moreover, consolidating supply chain and creating better sourcing efficiencies have become major focus areas for new ventures operating in the space that is increasingly looking to devise localised business solutions relevant to the Indian market.

A prime example of this integrated approach is the habit-forming app, Supr Daily. A subscription brand that delivers daily consumable goods such as milk, bread, eggs, coconut water, Supr Daily has differentiated itself from other players by devising a direct-to-customer model. This model, adopted from the daily milk use-case followed in the country, allowed the platform to bring down the delivery cost per order, estimated to be around Rs 50 in the e-commerce industry, by more than 90%. This service differentiation has allowed Supr Daily to be operationally profitable. The platform has also been invested in by Snapdeal founders KunalBahl and Rohit Bansal.

What’s in it for the investors?
One of the biggest benefits of investing in FMCG startups has to be the sector’s evergreen outlook. The need for meeting constant demand with continuous supply ensures that the sector usually manages to avoid the turbulence that other sectors face. This is good news for prospective FMCG investors, as investments into the sector usually face lower risks compared with other startup segments. Moreover, while the profit margins in the sector are lower, there is an immense scope for generating massive volumes for products and services as well as gaining significant market capitalisation. Customers are also more loyal, which significantly brings down user acquisition/retention costs and increases the lifetime value of the customer for players in the sector.

Another key factor for investors to pay attention to is the sector’s extremely low key talent attrition rate, which has been consistently below 5% for the past few years. Minimising the voluntary and involuntary loss of key talent from the organisation means greater operational stability and better focus on the long-term strategic vision. These are two of the most important things that investors anyway look for before investing in an emerging venture.

Last but not the least, FMCG startups provide investors with handy exit options. With the space already inundated with leading national and international brands, the rate of acquisitions and mergers in the sectoris one of the highest in the Indian market. Most of these deals are conducted by leading brands, which are looking to acquire the specialised sourcing and service delivery capabilities developed by startups in small, concentrated local markets and implement them on a larger scale to enhance and optimise their operations. This gives investors, especially those which fund a startup at an early stage, a chance to cash in on their investments and reap rich dividends.

A good example of this trend is Zed Lifestyle-owned Beardo, which caters to the high-potential male grooming and personal care market in India. Founded by entrepreneurs Ashutosh Valani and Priyank Shah in June 2016 and endorsed by veteran actor-turned-entrepreneur Suniel Shetty, the brand offers an extensive range of innovative products such as beard washes, beard balm, beard & hair growth oil, serums, face washes, beard & hair wax, soaps, and beard combs which cater to the discerning needs of the style and appearance-conscious Indian male. As one of the top-selling brands online, that it’s tapping into a highly vibrant space is evident from the fact that one of India’s leading consumer products companies, Marico, recently acquired a 45% stake in it. This underlines the kind of growth opportunities that exist in the FMCG startup space for investors as big brands such as Marico look to widen their product portfolio through nascent ventures.

The way forward
The Indian FMCG sector has been earmarked to achieve newer heights in the coming decade. The sector, which is predicted to grow at a CAGR of 13% over the next four years, is expected to cross $120 billion in market opportunity by 2020. It will bode well for investors to pay heed to this huge market potential by making investments in promising FMCG startups which are looking at tech innovation and market disruption as a means to bring greater operational efficiency and better service delivery.

Apoorv Ranjan Sharma is co-founder and president of Venture Catalysts. Views are personal.

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Why Indian FMCG space is eliciting investors’ interest

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