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VCs, PE firms bet big on packaged consumer goods, park US$ 676 mn in 2018

Business Standard:  May 16, 2019

New Delhi: Venture capital (VC) firm A91 Partners, an offshoot of Sequoia Capital, is in talks to lead a $30-million funding in Hector Beverages, which sells Paper Boat brand of ethnic Indian drinks. The deal could value Hector at $200 million.

In the last few years, several private equity (PE) and VC firms have invested in consumer packaged goods (CPG) companies and brands such as Hector Beverages, Raw Pressery, Epigamia, Fingerlix, Nykaa, Bira 91, Veeba Foods, Kapiva Ayurveda, to name a few.

In the last 16 months alone (starting January 2018), VCs and angel investors have backed over 80 CPG firms, pumping $360 million, reveals the data compiled by Tracxn. Since 2015, VCs have pumped in over $1.18 billion across 323 deals — few start-ups have raised two or three rounds.

According to another estimate from Venture Intelligence, 2018 saw PE and VC firms investing $676 million in CPG firms across 38 deals, almost twice of what they invested in 2017. This includes investment by PE firms and other large investors and hence, the estimates vary.

What’s driving investors into the consumer space?

“Many of these businesses have real revenues, lower risks, and are less capital-intensive as customer acquisition does not need to happen in millions,” says Madhukar Sinha, partner, India Quotient, an early-stage VC firm. For others, like Ash Lilani, partner, Saama Capital, which has been investing in the consumer space since 2006, it is an opportunity to build a brand in an all-new category.

Along with DSG Consumer Partners, Saama was an early investor in Sula Wines, which created and leads the category in India. With globalisation, there’s greater awareness among consumers on global products, says Lilani.

Kanwaljit Singh, managing partner at Fireside Ventures, believes this is a unique point in history, which will see the emergence of hundreds of new brands in the Indian market. “Several macro trends are enabling this secular trend, which will continue for several decades.”

The first and most important trend is the changing consumer profile. India is a country of young consumers. The millennials and GenZ have greater exposure to global trends, are digitally connected, and have different aspirations from brands and products they consume.

“Traditionally India has been a very large consumption market, but with very few brands. So we see white spaces for new brands across the spectrum of the consumer wallet spend,” says Singh.

Two, the rapid evolution of the infrastructure to build brands, especially the digital universe. The ability to access consumers through social media, bloggers, and influencers, etc and do a more targeted and personalised brand engagement is allowing new brands to sharply target and connect with consumers. Supermarkets have made it easier for consumers to discover new brands.

The consequence of these trends and the delayed success of brands such as Paper Boat, Fogg, Epigamia, and Licious have led to a significant rise in entrepreneurship in the consumer brand space, both in terms of quantity and quality. Fireside, for instance, has seen over 1,500 investment opportunities in the last two years.

“We are seeing brands being built faster and with lesser capital than say a decade ago,” says Singh, who earlier led deals in consumer space at Helion Ventures.

Finally, the exit-ability and market valuations of consumer brands are attracting a lot of investor interest. Large strategic interest to invest in/acquire young exciting brands is also becoming stronger in recent times. Hindustan Unilver acquired Indulekha; Emami acquired Kesh King; Marico acquired 45 per stake in Beardo. The stock markets have been very bullish on consumer brands — initial public offering of TCNS Clothing (brand W) was oversubscribed 5.25 times.

But, investors need to have a long-term approach. “You need to look at long-term categories, and not short-term revenues. Build a category over 20 years — good products, packaging, premium positioning,” says Lilani.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.