Why we like consumer brands

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India is at a unique crossroads in its history. We have a fast-growing economy and a young, large, educated, and aspiring population.

Our gross domestic product (GDP) per capita stands at $1700, just where China was in 2005. In terms of disposable income, we have hit the ₹1 lakh-mark for the first time. Given that 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 all social stratas, are 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 the home-grown consumer brands. These brands are born out of a consumer’s need for standardised, high quality and affordable consumption of goods and this is more applicable in India. 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 percent vs. China, which is at 60 percent and packaged foods at 22 percent vs. China at 52 percent. 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 monetisable businesses.

World over, the best brands have been built around hero products that drive revenue and profit. For example, the iPhone is the majority of Apple’s sales while commanding a 60 percent-plus gross margin. Louis Vuitton took something as mundane as a bag and turned it into a 65 percent plus GM business. Even affordable goods like Zara and Coca Cola both command 60 percent odd gross margin levels. All these are 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 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 percent and growth rates of in excess of 100 percent year on year.

In the supply chain, companies are using the power of data to optimise 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-filled experiences. It is among the prime reasons that behemoths like Hindustan Unilever 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 even better products.

Finally, the marketing. Storytelling or creating the narrative around a product is as important 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 for the story telling to be personal, and targeted. Not only does it allow you to acquire customers cheaply and re-target, but also makes 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 Buffett 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.

The author leads Consumer and Media investments at Matrix Partners India, an early stage venture capital fund with $700 million under management in India.

The thoughts and opinions shared here are of the author.