India's beauty boom and contract manufacturers: A love-hate story?

Forbes India spoke to the contract manufacturer about this.

“I do claim that we were the first to launch the onion seed oil in the market,” says Aayush Gupta, founder of Bo International. “We supplied it to the D2C company in 2018-19.” Skimming through the details, he states, “They were demanding a price which we could not match, so, they shifted to another manufacturer. But we never shared our formulation with them.”

Then how did the D2C company continue selling the same product without informing consumers about the change? “They probably reverse manufactured it,” Gupta adds after a brief pause.

(Top) Indo Herbal’s R&D lab where new formulations are developed and tested; (bottom, from left) the micro lab where samples are tested for bacteria and fungi; products of various brands are monitored for long-term stability

A senior production manager of a leading contract manufacturer confirms the modus operandi. “They have this strategy. After the product launch, they shift their focus to higher margins, and get into cost-cutting mode and compromise on good quality,” the manager confides on condition of anonymity. “How can I sell a product that costs me Rs400 to make for Rs100?” he rhetorically asks. “I can’t go below a certain level of quality because we have some market reputation.”

The pattern repeats and the co-founders go shopping for a different vendor and the drill continues. “Any product can be replicated based on ingredients and textures, but the quality-grade of the ingredients used is important,” he observes. “On the basis of marketing, they get new customers, but they do not get repeat orders.”

A third person, a contract manufacturer who works with this D2C company, corroborates how the founders, contrary to their claims, willingly compromise on quality by pushing manufacturers to use low-grade ingredients and packaging. “They are not concerned about producing high-quality products for consumers,” he rues, requesting not to be quoted.  

This is the underbelly of India’s booming beauty industry which quietly, from the sidelines, has transformed the inner workings of the business and fuelled the D2C boom. As per industry estimates, there are 650 to 700 contract manufacturers in India’s beauty and personal care industry. Grand View Research projects that the personal care contract manufacturing market in India will expand to $1.4 billion by 2030 from $0.7 billion currently.

“The contract manufacturing suppliers and vendors ecosystem has developed,” Anand Ramanathan, partner, consumer products and retail sector leader, Deloitte India, tells Forbes India. “Contract manufacturers provide cost-effective, high-quality production and expertise in specialised formulations, which cater to the evolving consumer preferences.”

Also read: From Barabanki to Kalimondir to Raigarh, small towns are new playing ground for beauty brands

The sheer scale and size of the BPC contract manufacturing industry, coupled with the scope of services offered by them to their clients, is a formidable expression of potential and opportunity for business. Yet, it also has dark pockets, which deepen concerns of gaps in compliance, safety and efficacy.  

In the course of writing this piece, the author travelled to the beauty and personal care contract manufacturing hub of Delhi, Uttar Pradesh, Haryana, Uttarakhand and Maharashtra to visit and interact with third-party manufacturers who do private labelling for brands.

Our findings presented a mixed bag and blew the lid off questionable practices of some D2C companies, raising the question whether consumers, in the garb of new launches and an ever-widening variety of beauty and personal care products, are being taken for a ride by some new-age beauty and personal care companies.

The D2C wave

On a smoggy morning in Noida, the author walks into the corporate head office of AG Organica, a third-party manufacturer that offers private label services, ranging from formulations to packaging, to over 100 clients. The interiors are plush, lights dim, and a strong note of peppermint oil lingers around the reception area. The building houses the manufacturing facility and a warehouse.

In a nearly-two-hour meeting, Arpit Gupta, managing director, shows Forbes India around the place, and explains the industry dynamics. The experience centre showcases samples of products made for domestic and international clients. With over 2,500 SKUs (stock keeping units), there’s everything from baby care to eye care to hair care to skin care to even aromatic candles, Gupta informs.

An engineer, Gupta joined his father’s API business in 2010. Looking for new growth opportunities, the family forayed into exporting essential and carrier oils. “From two products, we went up to 200 in two years,” Gupta says. “We got an opportunity to do private labelling for essential oils and, by 2016-17, we got into BPC contract manufacturing.” 

Gupta credits Amazon for turbocharging the D2C boom in India. “It made a common man a businessman,” he gushes. “Anyone could sell a product online and this generated a lot of ideas about ingredients and formulations.” He claims the company turnover has increased six-fold over the last eight years. He adds that the US and India contribute roughly 45 percent each to revenue currently. It counts Mamaearth, MyGlamm, WishCare, Kapiva and Patanjali among its domestic clients.

AG Organica has a daily production capacity of 15,000 to 20,000 kg. On the day of our visit, shampoo, cold cream, body butter and body oil were being made inside whirring machines and blending vessels. “We are a one-stop shop for all our client’s needs,” Gupta asserts. The shop-and-deploy model allows clients to choose a pre-formulated product from the catalogue, and launch it under their brand and logo with basic customisation.  

Amazon and Nykaa, for example, have been gamechangers in the way they have democratised and connected buyers and sellers to build a thriving marketplace. In the last seven to eight years, it is relatively easier to launch and scale a new brand. With access to incisive data analytics, new-age companies are able to quickly identify ‘trending’ ingredients that consumers want to include in their beauty regimes.

The next ‘hero’ or trending ingredient could be 24K gold, batana oil, and lavender, says Gupta, based on his interactions with international clients and suppliers.

“These fads that come and go are possibly a millennial thing, or I’m not quite sure what it is, but I again think it’s faddist to a degree,” says Mira Kulkarni, founder, Forest Essentials. “I’m amazed to suddenly see these 30,000 brands… where they’ve come from… and they all look like clones of each other.”

This trend is further enforced by contract manufacturers as they enable startups to disrupt the market, expand their product catalogue at lightning speed to cater to increasingly well-informed consumers with a full range of readily available end-to-end services.

As a result, there’s a huge urgency to hit the market with a new product that is based on a trending ingredient. In the process, production timelines have shrunk from two years to less than two months. Now products are launched in the market and parallelly checked for long-term stability and efficacy, according to insiders in the know.

(Top) Formulated ingredients are mixed in blending vessels; (bottom, from left) an automatic bottle filling machine is monitored and capped; a labelling machine imprints filled tubes

However, Rubeina Karachiwalla, founder, Ruby’s Organics, claims there are no ‘dupes’ for their lipsticks. “Most lipsticks in the market are actually made by the same few contract manufacturers,” she reasons. “If you look closely, ingredients-wise, it is the same product just packaged differently,” she adds. “But we spent years doing our own R&D and replacing synthetic ingredients with plant-derived ones.”

Most contract manufacturers have a minimum order quantity depending on the size of their vessels. “We require a minimum order of 10,000 units for 100 ml products, 20,000 pieces for 50 ml products, because we don’t have smaller vessels,” a factory supervisor explains. “We need different vessels if the batch size is small otherwise air-pockets will appear.” This also allows new entrants to test their products in the market.

Finding the right manufacturing partners can be a challenge though. In February 2023, Niharika Jhunjhunwala launched her beauty brand Clayco to sell products which are a fusion of global beauty rituals and high-performance active ingredients. She says it was difficult to find manufacturers who were willing to do small lots or who could understand her vision.

“What happens in India is that contract manufacturers have a set menu. Ninety percent of them told me that you are starting off, take this rate card and just choose one of your products and we’ll put your brand logo,” Jhunjhunwala tells Forbes India. “For example, they’ll say this is an exfoliator, this is an apricot or peach exfoliator… these are the products we can offer, and you can tweak it here and there, and I can do the labelling for you, and you can sell it.”

Forbes India, based on interactions with industry players, learns that most contract manufacturers work on thin margins in the region of six to 10 percent, which is also linked to conversion costs, the type of the product and the volume.

A production manager points at a finished bottle of rosemary hair oil. “We sell this to the client for less than Rs80.” The same product is sold in the market at nearly 4.5 times. So, isn’t it better to market the product rather than manufacture it?

“The client spends as much as five to six times the cost to sell the product in the market,” the manager responds. In simple terms, many D2C companies spend Rs500 to Rs600 to sell a Rs100 product in the market. This is largely due to high advertising and customer acquisition costs. This partly explains why most D2C companies remain loss-making for years.

All in all, contract manufacturers end with a profit.

Also read: On the transformation of the business of beauty underway in India

“At first, I only share the ingredient list of our product formulation with the client. After I get a certain volume and I recover my formulation cost, I give a complete transfer to the client,” the manager explains. A tech transfer is a complete step-by-step set of instructions on how the product is manufactured.

But wouldn’t this hamper their future business as the client could move to a cheaper vendor? “We are evergreen”, the manager laughs. “We give our tech, but they can’t take our kismet [destiny]. At any given point of time, we have an ongoing pipeline of new formulations. I have five to 10 new formulations ready even now. They need us more.”

Besides there is a thriving cluster of sub-contractors who are doing brisk business out of wafer-thin margins spread over a large volume base. Forbes India visited several of these sub-contractors in the buzzing BPC hub of Haryana.

The author walked into a three-storeyed building with entire floors full of a sea of brown cartons containing manufactured tubes and bottles of finished cosmetics and other such products, with labourers lugging these cartons up and down the stairs. “These are to be dispatched today,” a lady supervising the movement of the inventory tells Forbes India.

“The client gives us all the product and labelling details. We play the role of an intermediator. We keep our mark-up and forward the requirements to the third-party. The client pays us 35 percent in advance and the balance at the time of delivery,” a sub-contractor succinctly explains. “This is a high-volume business, but margins can be under 1 percent also.” These are mainly regional and local brands with a large offline presence.

So, what’s the annual turnover? “Yeh batana zaruri hai kya madam [Is it necessary to divulge these details]?” the sub-contractor smiles shyly.

Focus on innovation

College friends of over 35 years, Sunil Bhambri and Anup Sethi co-founded Indo Herbal Products in 1991 to cater to the growing demand for natural and effective skin care. “We started on a modest scale but with a strong commitment to quality and innovation,” says Sethi, an avid biker. “Over the years, growing awareness of skin care, urbanisation, and exposure to global trends have driven significant demand.”

Forbes India visited Indo Herbal’s newly set-up 50,000 square feet state-of-the-art manufacturing facility in Haridwar. The company operates two units with a combined production capacity of 1,200 tonnes per month or 8 million pieces per month. The plants are currently operating at about 75 percent capacity levels.

The assembly line had automatic tube and bottle filling machines, cartooning machines, and labelling machines, which could manage 30 to 120 units per minute. On one such assembly floor, workers were busy monitoring the filling and labelling of sunscreen bottles for Honasa and cartooning bottles of Wow Life Science products.

On another floor, inside the R&D section, a couple of chemists wearing lab coats and hairnets were working on computers. This is where new formulations are developed and tested. There was a shelf that was full of products of various brands. These were being monitored for long-term stability, we were informed.

“Personal care isn’t as dependent on finding new molecules as the R&D focus is more about operationalising what works globally and customising it to Indian weather, ingredients, trends, and incorporating it into product formulation,” Deloitte’s Ramanathan notes. 

The production manager mentioned earlier tells Forbes India how they formulate new and ‘innovative’ products: “We pick up products doing well in the US or other markets or from product exhibitions, we study the ingredients and then we can reverse engineer those and develop it according to the Indian climate.”

He cites the example of a sunscreen recently formulated by the company. “We got a sunscreen from one of the foreign countries and we were working on making the same formulation but tweaking it for India,” he adds. “We launched it recently and now every other company is copying it.”

How did they decide which client to first sell it to? “We gave the formulation to the company that assured the largest volume,” he says. “Then we customise it for other companies with different actives such as papaya or hyaluronic acid etc, but the base is the same.”

But industry players are slowly realising the need to change tracks. “The cut-copy-paste model doesn’t work anymore. We need something which is actually innovative and works rather than just changing the fragrance or colour,” Bo International’s Gupta argues. “Now the focus is on the actual efficacy of claim-based products as consumers are becoming more aware.”  

NG Electro director Raghav Mittal, an MBA graduate from IIM-Ahmedabad who joined his father’s contract manufacturing business of crème hair colours in 2018, believes the domestic contract manufacturing industry must invest much more in research and development.

“As an industry, our appetite for innovation is increasing every year,” he says. “But we are significantly behind some of the larger global companies which invest in fundamental research and make their own molecule and create proprietary technology to achieve market dominance.”  

This long-term pivot can be a double-edged sword. “When you own the core technology, the Ebitda is slightly higher than [for] the companies that are only cloning,” Mittal explains. “But it also exposes you to the risk of your capacities being under-utilised. We should be able to commercialise 30 to 40 percent of what we develop to make it worthwhile.”   

Some brands are also showing the appetite to spend on ‘real’ innovation because they want to become market-shapers and not be seen as a me-too. In response, contract manufacturers are trying to move towards newer production technologies using innovative MicroFluids and Liposomal Vitamins for science-backed efficacy and superior textures.      

“We have to be trend drivers. Why are Korean brands telling us what skin care is? We are coming on the global grid, especially after the slowdown in China,” Mittal says.

Also read: Content creators: The new money-makers for India's beauty biz

Regulatory compliance and governance frameworks are the core as contract manufacturers scale up operations. The industry is regulated by The Drugs and Cosmetics Act which prescribes a framework to ensure that the drugs and cosmetics sold in India are safe, effective and adhere to quality standards.

There are reportedly high-level talks underway to separate the regulation of drugs and cosmetics. Industry experts also believe there’s a need for tighter norms on packaging and marketing. “The second big regulation which will come is from a packaging standpoint around how the product is to be packaged and communicated. This is where ASCI [Advertising Standards Council of India] codes will come in,” Ramanathan says. “An OTC policy is also being drafted and this could impact the sector soon.”

In May, ASCI reported Honasa Consumer as the biggest violator of advertising codes in FY24, with a total of 187 misleading ads versus Patanjali, the second biggest violator, which had 28 misleading ads. For example, ASCI noted that Honasa did not conduct a clinical study or provide any efficacy data to back its claims for a lip product.    

“The cosmetics industry requires compliance of drugs but the speed of fast fashion. That’s where the industry is stuck,” Mittal states. “You have to move fast, yet have to move very surely,” he adds. “There’s a huge trust deficit in the industry.”

Gupta agrees: “There are a lot of grey areas, people say something and put something else. The biggest challenge is the lies people say to sell their product.”

In fact, in July, in order to regulate cosmetics, in its first update in 85 years, the US FDA incorporated The Modernisation of Cosmetics Regulation Act to enforce transparency, responsibility, and safety requirements for all cosmetics.   

As a consumer, have you ever bought a bottle of shampoo, only to find that the label is peeling? Or a brand-new lipstick with fingertips on the case? These are a few consequences of poor-quality control and manufacturing practices.  

When Forbes India visited a small-scale manufacturing facility in Haryana, which was said to be GMP (Good Manufacturing Practices)-compliant, we found, for instance, some workers were not wearing hairnets, gloves or masks. There was an open washing room within the production area where containers were being cleaned and there was water on the floor. The production area felt crammed even as face serums were made in open cauldrons and a baby care product for a Nepal-based brand was being filled into bottles.

(From left) An assembly line tosses out filled and labelled squeeze tubes; packaged cartons at a warehouse scheduled for dispatch

Ramanathan believes it’s easier to establish good manufacturing practices but an uphill task to monitor it and ensure that quality and consistency. “You can look at vendor development as a key function and this is an area,” he opines. “As the sector matures, it will become more stringent in terms of monitoring and enforcing quality standards.”

As the author leaves another manufacturing facility, the team lead excitedly offers a soon-to-be launched lotion.“Madam, is ka formulation bahut acha hai, aap use karke bata na, yeh next month launch hoga (this is a great formulation, please us it, it’ll be launched next month).”

The next act

The contract manufacturing ecosystem has seen a sea change in the last decade or so. “Contract manufacturing was seen as a typical tolling business,” Mittal says. “Now, I’m not selling capacity. I’m selling products. That’s the transition the business has seen.”

But many companies are hesitant to adopt this production model. Take, for instance, Forest Essentials, a luxury ayurvedic beauty brand that strategically focuses on in-house product development and manufacturing. “There’s a huge, huge difference in getting it done from a contract manufacturer and yourself,” Kulkarni says. “Today when you put up a company so quickly, and you give it out to a contract manufacturer, and you put in all the PR… it’s not possible to keep that kind of quality control. So, would I advocate it for us? No, but it probably works for other people.”

A manager at a contract manufacturing company tells Forbes India it’s difficult for third-party players to meet the exacting production requirements of companies such as Forest Essentials. “Their plant ingredients are close to the original form, so the process is very time-consuming and it requires special vessels and procedures,” he shares.

The scenario is fast-changing and its nudging companies and contract manufacturers to rethink their strategy and rise to the needs of the changing consumer environment by exploring cost-sharing models.

“When we started, we offered the manufacturing piece. Now we’re expected to bring new technologies, proactively develop new formulas and to collaborate with brands on the entire product development and product launch piece,” Mittal says. “We proactively generate customer insights, identify what brands may want six to 12 months from now, and now we want to go a step ahead and work with brands on the storytelling part and back it with data,” Mittal adds. “This is what global manufacturers have done and that is our aspiration.”

Sethi is confident that the rising demand for natural and sustainable products along with India’s growing prominence as a global manufacturing hub will open new doors. “Brands and manufacturers act as innovation partners today, which brings both challenges and opportunities for growth,” he concurs. “Men’s grooming is also expanding, more men are investing in personal care, creating an exciting new market.”

Body Shop and Bath & Body Works are some global companies that are in talks with domestic contract manufacturers for local production, an insider tells Forbes India, requesting anonymity since the negotiations are private and not final.

As part of the reportage, Forbes India interacted on and off-the-record with more than a dozen companies, industry insiders, and sector experts. While D2C startups evaluate their business model to secure a clear and sustainable path to profitability, and large companies roll out strategic measures to address weak consumption in mass categories, contract manufacturers are in a sweet spot.

Nearly all the dozen-odd manufacturers are ramping up capacity by two to five times to tap into domestic and international orders as more and more companies scout for manufacturing partners outside of China. At least two companies are exploring an IPO in two to four years even as several others are looking to raise funds for expansion. 

“It’s my desire that AG Organica becomes a unicorn,” Gupta says. “But we will wait for a few years before we consider any sort of fund infusion."