What's In Store For D2C Brands In 2023 Experts predict continued growth in the space despite negative market conditions

In the last two years, we saw many digital-first direct-to-consumer (D2C) companies giving traditional brands a run for their money. Brands such as SUGAR Cosmetics, boAt, Mamaearth, mCaffeine, Vahdam Teas and many others have leveraged digital penetration and social media reach to carve a niche for themselves.

According to a report by Statista, in India, the total addressable D2C market is expected to grow by over 15 times from 2015 to 2025. In 2020, the total addressable D2C market was valued at $33.1 billion. By 2025, the total addressable D2C market is forecast to grow almost threefold and reach $100 billion, with fashion and accessories leading as one of the largest D2C segments in India.

"This growth is being driven by three important shifts in the sector. Firstly, Indian brands are embracing direct-to-consumer commerce, with once small or non-existent categories like fitness accessories, gardening equipment, and costume jewelry now becoming large enough to have brands being born online first. Secondly, a lot of traditional brands, which did not take e-commerce seriously, have started to invest in their online storefronts to attract and engage new consumers," said Bharati Balakrishnan, country head and director, India, Shopify.

And thirdly, the pandemic changed the way Indians shop. "More than half of consumers from non-metros now prefer online shopping, and 80 per cent of Indian consumers prefer to shop from their smartphone. This shift means that often the first time consumers discover or interact with a brand they're almost certainly doing it online," she added.

Will this shift continue to get bigger and stronger? As we are close to stepping into 2023, here are some predictions about the sector by experts.

Funding in 2023

Despite negative market sentiments, the D2C market seems to have done pretty well this year, with many players raising funds for international and offline expansion. "Yes, the market continues to be bullish on the D2C segment and there will be more investments. However, valuation expectations might vary and multiples may compress – indicating a maturing market. Activity in the D2C space will continue to scale up," said Anurag Ramdasan, partner, 3one4 Capital.

Analysts believe that companies that continue to demonstrate a strong foundation will continue to raise capital. "A strong brand and therefore, strong repeats and customer love which is driving high growth, strong unit economics, and a path to profitability, a strong team is able to raise capital from marquee investors and we will continue to see funding rounds who have built a strong foundation," said Dipanjan Basu, Partner, Fireside Ventures.

Promising segments

Since 2021, food and beverages and personal care have been ruling the D2C market. Lately, we are also seeing increased consumer spending in once-niche segments like pet care, kids, health and wellness and athleisure. The startups in these segments are expected to benefit a lot more this year.

"Innovative solutions enabling the D2C economy through logistics and technology will also come up. Smaller niche categories and brands catering to underserved markets with lower penetration such as tier 2 and tier 3 markets, will see a lot of action in 2023," said Abhishek Goenka, head and CIO, RPSG Capital Ventures.

In addition to the above, edutainment and lifestyle are emerging fast and so are the sustainable and climate tech-focused propositions at scale which are supply chain-led.

We may also see many segments see unique trends this year. Within beauty, for instance, hybrid cosmetics with skin benefits is expected to explode next year. "The hassle of using more products comes to an end with this innovation. While traditional beauty and makeup focus on cosmetics that reduce the appearance of blemishes, treat acne, or clear dark spots, it does not do it all together. Hybrid beauty opens a new avenue of customization for skin-specific concerns, including makeup for oily skin, or detoxifying and hydrating face primers or illuminating moisturizers with sun protection," said Vineeta Singh, co-founder and CEO of SUGAR Cosmetics.

She also expects the minimalistic, less-is-more approach toward beauty that we saw gradually rise during the pandemic to make a major comeback.

As Ramdasan sums up, "True supply chain specialization, product innovation, and a differentiated brand narrative will take precedence. High-moat products with IPs that have steep monetization potentials can scale and generate revenues across channels and will be rewarded by the market."

More IPOs in the pipeline?

2022 witnessed the IPO of consumer brands such as Campus Athleisure, Manyavar, and Bikaji which have done well post-IPO, up more than 50 per cent despite the market slowdown. Gurugram-based Mamaearth has also been gearing up for an IPO. Investors are very sure that we would be seeing more IPOs in the space in 2023. "These companies are valued due to their fundamentally strong foundation," said Basu, while adding that we will see several brands that deliver growth and have a profitable outlook find excellent traction in IPOs.

Further, with many D2C companies already hitting the unicorn and soonicorn marks, IPO seems to be the next natural progression. However, for more IPOs to take place, the expectations of companies need to align with public markets, feels Ramdasan. "Most D2C companies will grow in their valuations over the next couple of years which will lead to more D2C companies going public in the future," he said.

Overall, experts predict continued growth in the space in 2023 as well. "Indian merchants will continue to explore new opportunities like social commerce to reach previously untapped consumer groups by engaging everywhere consumers spend time. We also expect to see merchants continue to expand their international presence, with Indian merchants now selling on average to 10 overseas markets and 70 million international shoppers on Shopify," said Balakrishnan. Further, offline expansion and penetration into cities outside the top 30 cities will continue to happen.