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No takers.
WHAT A MATCH

Why are legacy consumer firms suddenly keen on Indian startups?

By Suneera Tandon

India’s flourishing startups have caught the attention of some of its largest and most valued companies.

In August, the Asia-Pacific arm of Colgate-Palmolive picked up a 14% stake in the three-year-old men’s grooming firm, Bombay Shaving Company, which mostly operates online. This was the US-based consumer goods behemoth’s first such investment in India.

It came after United Spirits (USL), owned by the London-based global distiller and brewer Diageo, made its first technology investment in India: Rs27 crore (around $4 million) in HipBar, a Bengaluru-based online drinks-ordering and payments platform.

In recent months, others like homegrown consumer goods firms like Marico, too, have followed this trend.

Company Category Investor Stake Reason
Bombay Shaving Company Men’s grooming Colgate-Palmolive Asia Pacific 14% Expand into men’s grooming segment
HipBar Alcohol delivery and payments Diageo 26% To access new digital platforms
Beardo (Zed Lifestyle) Men’s grooming Marico 49% To access the emerging niches at the premium end
Revofit Fitness app Marico 22.5% To enter the wellness category

“World over, and in India too, we are seeing this trend of large companies buying into innovation,” Ankur Bisen, vice-president at consulting firm Technopak Advisors, told Quartz. “It has especially picked up in the consumer sector over the last four to five years. Indian companies are taking notice.”

Why startup?

The lure for legacy consumer goods firms is perhaps the hope that smaller players have technological prowess and a strong foothold in niche sectors, which would possibly rub off on their own operations.

“The consumer landscape is evolving with emerging niches and trends in the international market,” said Vivek Karve, CFO at Marico. “These ever-evolving consumer needs require a different velocity of innovation and social media engagement.”

While India remains a large mass-market, with consumers preferring wallet-friendly packages, a small but emerging class of urban consumers with higher disposable incomes is also spurring the demand for products such as organic foods, fresh juices, and on-demand grooming. This, in turn, has prompted big firms’ investment in smaller ones to leverage product pipelines and the latter’s existing affluent consumer base.

“For long, most large consumer companies focused on the middle class, but these new-age companies are going after…a very different set of shoppers,” said VS Kannan Sitaram, venture partner at investment firm Fireside Ventures. “This consumer class is one of the fastest growing segments in the country right now,” though still small.

What is also important is the consumers’ pivot to online shopping. Take Diageo’s investment in HipBar, for instance. “This…allows us to discover ideas that anticipate shifts in consumer behaviour and enables us to remain at the forefront of trends,” the alcoholic drinks major has said (pdf).

Marico’s investments in Revofit and Zed Lifestyle-owned Beardo last year were made with an eye on the “premium end of the market.” “This investment was made with an aim to fast forward its (Marico’s) consolidation journey into future-ready male grooming portfolio and to build the brand on online and premium offline channels,” Karve added.

Mutually beneficial

For the startups, the benefits of tying up with bigger firms come in the form of faster scaling of their products through their investors’ distribution network.

This is all the more pertinent given the dominance of unorganised retail in the country, accounting for 90% of India’s $670 billion retail market, and the difficulty that even established names like Hindustan Unilever face in penetrating the market deeper.

For the tender-footed startups, then, leveraging the strengths of the big players is a necessity.

“Building a consumer brand in India needs time, capital and long-term vision. After having proven product-market fit with promising repeat rates and product response, we are now looking to scale the brand,” Shantanu Deshpande, CEO, Bombay Shaving Company, said in August.

So here’s one segment where the generation gap is narrowing.