Established FMCG firms accelerate acquisition of D2C brands with distinct business models: Crisil Ratings

New Delhi [India], September 25 (ANI): Many established fast-moving consumer goods (FMCG) companies are acquiring direct-to-consumer (D2C) players with fundamentally distinct business models in terms of distribution and marketing, according to Crisil Ratings.

The rating agency stated that the outcome is a clear boost to growth and expansion into premium segments for FMCG companies.

These acquisitions provide FMCG companies with access to personalised consumer insights, a unique feature of the digital channels that can drive accelerated feedback, rapid innovation cycles and targeted marketing. Thus far, the modest size of these acquisitions has not impacted the credit profile of acquirers.

A study of 82 FMCG companies rated by Crisil Ratings, along with 58 D2C companies, supports this trend. These rated FMCG firms alone contribute to one-third of the sector’s total revenue, the rating agency added.

It was observed that around two-thirds of the acquisitions by FMCG players have been in the D2C space over the past five fiscal years. D2C companies gained prominence post-pandemic owing to their differentiated products and unique marketing campaigns, enabled by internet and smartphone penetration.

Accordingly, further enabled by the premium positioning of D2C brands sold through online channels (with pricing 1.5×4.5x higher than established alternatives across categories), revenue of D2C companies logged a 40 per cent compound annual growth rate (CAGR) between fiscals 2021-2024, albeit on a low base. Meanwhile, established FMCG players clocked a more moderate 9 per cent CAGR during the same period.

“Acquisitions of D2C brands by FMCG players have led to a win-win for both sides. FMCG firms have been able to enter new and premium categories as well as gain access to consumer insights, accelerating feedback loops. On the other hand, D2C companies have been able to mitigate the challenges of scalability and profitability. Prior to acquisition, less than 15 per cent of the D2C companies in our sample set had managed to cross Rs 250 crore in revenue and only a third reported operating profits,” said Anuj Sethi, Senior Director, Crisil Ratings.

The agency said that the acquisitions have further strengthened the business profiles of traditional FMCG players by providing them with entry into niche product categories, aiding diversification and premiumisation of the overall product basket.

Crisil observed that they have provided growth avenues, particularly in highly penetrated categories, while expanding the total addressable market through adjacencies such as specialised ingredients.

“About 60% of the acquisitions by FMCG players have been in personal care, and the rest in the food and beverage segment, supporting their premiumisation journey. About 85 per cent of the acquisitions were undertaken to enter niche and premium segments, with 35 per cent in the health and wellness segment, 20 per cent in the specialised ingredients segment, including organic and herbal inputs, and 10 per cent in the men’s grooming segment amongst others. A few acquisitions were also undertaken to manage competition,” said Aditya Jhaver, Director, Crisil Ratings.

The acquisitions have not dented the financial profiles of acquirers as D2C players are in early stages of scaling up and hence acquisition costs have not been material relative to the size of the FMCG players. The average consideration for acquisitions has been less than 5 per cent of net worth of the acquirers, indicating negligible strain on balance sheets of FMCG companies and, thereby, keeping their credit profiles stable, the agency added. (ANI)

(ANI)

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