FDD for D2C (Direct-to-Consumer) Businesses: Evaluating Digital-First Consumer Ventures in India

Direct-to-consumer (D2C) businesses in India have emerged as a transformative force within the retail sector. Capitalizing on increasing internet penetration, evolving consumer preferences for online shopping, and a startup-friendly ecosystem, these ventures have rapidly expanded. Financial Due Diligence (FDD) plays a crucial role in evaluating these enterprises by addressing their unique operational and financial complexities.

Overview of the Indian D2C Sector

India's Direct-to-Consumer (D2C) market is experiencing explosive growth, anticipated to skyrocket from roughly $12 billion in FY22 to a staggering $60 billion by FY27, according to the India D2C Report 2022 by CII and Shiprocket.  This meteoric rise is primarily driven by several key factors: the surge in smartphone penetration and the accessibility of affordable data plans, the expansion of e-commerce platforms and robust digital payment solutions, and the escalating consumer demand for personalized and sustainable products.

Established players like Unilever and Tata Consumer are driving sector growth by acquiring D2C brands and strengthening their digital presence with the acquisition of Minimalist and Organic India respectively. Additionally, house-of-brands models like G.O.A.T. Brand Labs and GlobalBees are helping emerging brands scale rapidly and offering attractive exit opportunities for founders. This thriving ecosystem positions the D2C market as a lucrative avenue for investors and stakeholders.

Key Trends in the D2C Ecosystem

  1. Rapid Adoption of Technology: Cutting-edge technologies like AI and machine learning (ML) are revolutionizing the D2C space. For example, brands are using AI-driven facial scans to assess and monitor dermatological conditions, such as acne, by evaluating improvements and product effectiveness through weekly scans. As customer bases expand, ML can analyze millions of scans to continuously refine its learning and outcomes. Additionally, data-driven insights into consumer social behavior and purchasing history enable brands to implement smart targeting strategies, such as offering specific discounts and personalized marketing, enhancing customer acquisition and retention.
  2. Emergence of New Points of Sale and Distribution Platforms:
    Innovative distribution models are reshaping the retail landscape to align with evolving customer behaviors. The launch of 'Broadway’ by Kishore Biyani, a retail chain dedicated to offering physical outlets for digital-first D2C brands, is bridging the gap between online and offline experiences. Additionally, the introduction of D2C Zones within malls is opening new avenues for brands to engage with their target audiences more effectively.
  3. Quick Commerce and On-Demand Delivery: The rising demand for instant gratification has fueled the growth of ultra-fast delivery services. By partnering with quick commerce platforms and enhancing logistical capabilities, brands are meeting customer expectations for speed and convenience, setting new benchmarks in service delivery.
  4. Strong Trend Towards Premiumization:
    Indian consumers are increasingly gravitating toward premium and even full luxury segments across categories in the D2C space. This shift is driven by rising incomes, evolving aspirations, and a willingness to pay a premium for superior quality and exclusivity. 
  5. Omni-Channel Presence:
    While D2C has its merits, brands are recognizing the importance of an omnichannel approach to meet consumers where they are. A hybrid strategy combining online and offline touchpoints ensures wider reach and improved customer experiences. Many digital D2C brands, like Lenskart and Mamaearth, have adopted an omnichannel approach by opening physical storefronts.
  6. Focus on Sustainability and Ethical Practices: As consumers increasingly prioritize eco-consciousness, D2C brands are setting new benchmarks in sustainability. Initiatives like adopting biodegradable packaging, ensuring ethical sourcing, and transparently sharing labor practices resonate deeply with today’s socially responsible buyers.
  7. Deeper Penetration of Social Media Commerce: Social media platforms like Instagram, YouTube, and WhatsApp have evolved into robust marketing and sales engines. By leveraging engaging content, influencer collaborations, and direct purchase options, brands are creating compelling narratives that not only attract audiences but also convert followers into loyal customers, driving sustained engagement and sales growth.
  8. Preference for Niche and Personalized Products: Today’s consumers demand products tailored to their unique preferences—be it personalized skincare, dietary supplements, or curated fashion. This trend underscores a shift towards hyper-personalization, where brands use consumer data to deliver highly customized solutions.

Key Challenges Observed in D2C Companies

At Forvis Mazars, our extensive experience in conducting Due Diligence for D2C businesses enables us to identify operational inefficiencies, financial gaps, and validate business growth. Below are key findings from our recent D2C projects, reflecting the sector's unique complexities:

  1. Accounting and Operational Issues
    • Sellers often lack robust accounting systems to provide reliable information on product costing and margin analysis, which hampers strategic decision-making.
    • Frequent transitions in software solutions for inventory, billing, and accounting lead to inconsistent data and delays.
    • Marketplace reports often lack uniform formats, complicating reconciliation and analysis.
    • Absence of scalable systems for managing billing and inventory limits operational growth.
    • Aged payables resulting from high credit operations indicate cash flow challenges.
  2. Performance Marketing Expenditure
    • Heavy reliance on performance marketing, coupled with a lack of its monitoring, significantly impacts profitability.
    • Aggregator expenses, such as advertising costs and commissions, often lead to disputes between reported figures and actuals.
    • Lack of mechanisms to track lifetime value (LTV) metrics hinders strategic decision-making.
  3. Inventory and Supply Chain Management
    • Inventory planning has become increasingly complex with the rise of quick commerce, requiring localized stock systems for ultra-fast delivery. Managing inventory across multiple channels—such as D2C websites, marketplaces, and physical stores—adds further challenges, as each channel has unique requirements like specific stock allocation, lead times, and packaging standards.
    • Outdated systems necessitate manual interventions, compromising efficiency.
    • Missing agreements with suppliers and job workers increase operational dependency risks.
    • Inefficiencies in reconciling commission and shipping rates lead to cost inaccuracies.
  4. Distribution Challenges
    • For a D2C brand, choosing the right distribution mix between online and offline channels is critical but challenging. Online distribution is multifaceted, involving various horizontal and vertical platforms, each with distinct business models and operational requirements. Managing a proprietary website adds another layer of complexity, as costs continue to rise.
    • Offline distribution remains crucial; however, achieving ROI from expansion requires patient investment. The need for startups to show quick traction often makes this difficult.
  5. Regulatory and Compliance Issues
    • Non-compliance with GST filings/regulations exposes businesses to financial and reputational risks.
    • Ambiguities in contracts with marketplaces complicate revenue recognition.

Role of Due Diligence in the D2C Mergers and Acquisitions Space

A thorough due diligence process is crucial to:

  • Examine historical revenue trends, customer acquisition metrics, and scalability indicators to assess sustainability.
  • Focus on verified performance indicators like customer acquisition costs (CAC) and historical customer retention rates, ensuring realistic assessments.

FDD provides deeper insights into:

  • E-commerce infrastructure and sales channels.
  • Inventory management, operational efficiencies, and post-acquisition synergies.

Given the tight margins and high customer acquisition costs prevalent in the D2C space, FDD facilitates structured integration, mitigates identified risks, and identifies potential value-enhancement opportunities. Furthermore, the growing consumer demand for transparency and corporate responsibility emphasizes the need for robust ESG frameworks during due diligence.

 

The growth trajectory of India’s D2C sector underscores its vast potential while exposing inherent challenges. Therefore, robust Financial Due Diligence practices are vital for addressing these complexities.

With a proven track record in evaluating D2C businesses, Forvis Mazars provides a holistic approach to due diligence. Our expertise helps investors and stakeholders identify potential risks, uncover growth opportunities, and build resilient strategies for long-term success. By addressing critical areas like financial transparency, operational controls, marketing efficiency, and regulatory compliance, we present findings that enable investors to make informed decisions regarding the potential for sustainable growth and profitability of D2C businesses.

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