Why we like Consumer Brands
India is at a unique cross roads in its history. We have a fast-growing economy, a young, large, educated, and aspiring population.
Our GDP per capita stands at $1700, similar to where China was in 2005. In terms of disposable income we have hit the ₹ 1 lakh mark for the first time. Given an individual’s fixed costs grow no faster than the rate of inflation, disposable incomes tend to see far higher growth rates than the overall economic growth, thereby creating non-linear growth in spending power and fueling domestic consumption.
Simultaneously, we have achieved rapid internet penetration. Today, we have an active internet base of over 350 million people and an effective internet penetration that has tripled in the last 5 years alone. The rapid rise of the internet has created a much more level playing field for all income strata in terms of our awareness and aspirations. Today’s consumers, whether in metros or rural areas, across social strata, are all converging on trends demanding the latest and coolest products.
As a result, today’s relatively low spending power yet high levels of awareness create a unique access-aspiration gap. However, therein lies one of India’s largest opportunities – that of home-grown consumer brands. Consumer brands are born out of a consumer’s need for standardized, high quality and affordable consumption of goods. There has never been a better time than now, for that need to be more applicable in India.
India’s consumer spending is dominated by basic items like fresh foods and groceries. As any economy matures, that mix is bound to change. Looking ahead, we are most excited about Indians wanting to eat better, look better and dress better! Specifically, the sectors of fashion, packaged foods and personal care seem most attractive for churning out home-grown consumer brands. Each is grossly underpenetrated in branded consumption today e.g., Fashion is at 15% vs. China at 60% and packaged foods at 22% vs. China at 52%. Numerically, this translates into over $150 billion in addressable market opportunity.
Now, what does it take to build a great consumer brand? The best consumer brands are built on a great product. Great products are themselves born out of a deep understanding of consumer psyche, one that often enables the best founders to see around corners and predict the needs of people before they even know it. Such products allow for the most robust, sustainable and monetizable businesses. The world over, the best brands have been built around hero products that drive revenues and profit. For example, the iPhone is the majority of Apple’s sales while commanding a 60%+ gross margin. Louis Vuitton took something as mundane as a bag and turned it into a 65%+ GM business. Even affordable goods like Zara and Coca Cola both command 60% odd gross margin levels. All these enabled by truly unique, high quality, aspirational products.
Although the product is core to a brand, there are both supply side and demand side pillars that are necessary to build and carry the brand. The three most important of these pillars are supply chain, distribution and marketing.
The beauty in brands being built today, is the unique ability to leverage technology. Technology across all three pillars can today enable much more capital efficiency as well as a non-linear growth curve. Traditionally considered capital intensive and slow businesses, some of the best brands today have returns of capital as high as 50-60% and growth rates of in excess of 100% year on year.
In supply chain, companies are using the power of data to optimize just-in-time models to reduce working capital needs, thereby enabling much higher returns on capital and quicker feedback loops to enable better products.
Distribution in India has traditionally been among the most complex and friction-full experiences. It is among the prime reasons that behemoths like HUL participate in businesses as vastly diverse as chocolates and shampoos. Online distribution, however, has given a distinct advantage for upstarts to build new products and introduce them to the consumer directly. While the answer to scale still remains a mix of both offline and online i.e. omni-channel distribution, online retail provides significant velocity to the growth of new brands. It also allows for swaths of consumer data to be captured that again allows for yet better products.
Finally, the marketing. Story telling or creating the narrative around a product is as core as it gets to building a new brand. It includes not just effectively communicating the core value proposition, but also being able to establish an emotional connect with the consumer. Again, technology and the internet, today, allows the story telling to be personal, and targeted. Not only that it allows you to acquire customers cheaply and re-target, thereby making it easy to sell ten items to one individual as opposed to one each to ten different customers. This in turn, makes the long term value vis a vis the acquisition costs a lot more viable.
The need of the hour is for us to build businesses that create true value for the Indian consumer and can withstand the might of international behemoths dumping capital into India. Consumer brands allow for both. They not only create true value, but, if done right, can create highly differentiated businesses, with hard to replicate products, supply chains and consumer connects. All moats that are very hard to scale for new entrants.
As Warren Buffet puts it – a good business is like a large castle, with wide moats, led by a knight one can trust. Deep markets, defensible business models and the best entrepreneurs allow for all three in consumer brands.