Ghazal and Varun Alagh can safely be categorised as “conscious consumers”. When they became parents, they paid close attention to the kind of products they used with their baby and sought to avoid any products that contained harmful chemicals. However, to their astonishment, they couldn’t find any Indian brands that sold 100% toxin-free products.
After realising the scale of this problem, the couple duo launched Mamaearth in 2016, seeking to provide natural, safe, and certified baby products. Building on their honest and responsible branding, Mamaearth quickly became one of the pioneers of the Indian Direct-to-Consumer revolution. In just five years of existence, the brand has now crossed an annualised revenue run-rate of Rs. 500 Crore.
Notably, Mamaearth has been able to leverage their early breakthrough into the baby care space, to diversify and expand into the wider skin and hair space for adults as well.
In today’s piece, we take a deeper look into the skin care market in India and decode how startups are strategising to bite into this mammoth pie. We also explore first-principle thinking, the importance of “thinking again”, and pay homage to the mighty Excel.
Let’s dive in.
Skin Care In India
By Mishaal Nathani
The skin care market globally has been growing rapidly, and the optimism has increased significantly given the recent acquisition of DECIEM, the parent company of several skin care companies including The Ordinary, Hylamide and NIOD, at a valuation of USD 2 Bn. In India as well, the skin care products industry is projected to grow at a CAGR of 9.5% in order to reach USD 5.03 Bn by 2027. The facial care market alone is estimated to be worth around USD 1.8 Bn.
For startups in the skin care space, there is also an opportunity to later expand into the wider beauty and personal care market. There is no reason for a brand to stick to only skin care products, but it could potentially serve as a great initial hook.
Why is the Indian Skin Care Market Growing?
Other than the increase in online shoppers, there are a couple of reasons for the rapid growth in the sector. At the very top of the list is the increase in both awareness and education regarding skin care. Propelled primarily by influencers and social media, the Indian consumer is a lot more educated regarding what ingredients to use for what skin problems, how to prevent skin problems at a later age, the different brands that are available in the market, and lots more. Additionally, whether due to social media or other reasons, consumers are more likely to spend money on products to fix perceived insecurities and skin care products rank high on that list. This holds true for consumers across India — even in smaller cities.
Another contributor is the rise of local D2C brands. It is easier than ever to buy a wide range of products and get them delivered to your doorstep within days. Consumers are also more likely to experiment with different products since there’s more awareness and education about them. Across the world, the skin care sector has traditionally been dominated by incumbent brands. However, D2C brands have been able to fill large product gaps, including niche requirements, and keep up with the latest trends at a much quicker rate than the incumbent brands.
Consumers are also looking to build a personal connection with brands, which is a lot easier to do with D2C brands that place a large emphasis on personalized communication and feedback from consumers. An important factor is also the shift in consumer behaviour in India in regard to the increasing trust of local brands. In fact, there’s been a steady shift to preferring Indian brands as opposed to foreign brands, which now serve more as aspirational products. An important element of this is that the quality of the Indian brands is in most cases as good, if not better, for Indian skin types and tend to be significantly cheaper.
There has also been a rise in disposable income, especially as people continue to save money during the pandemic-induced lockdowns. Globally, consumers have saved $2.9 trillion during the pandemic. People have also had a lot more time at home due to and are more likely to spend a larger amount of time on more complex skin care routines. For a lot of people, the pandemic has led to an increased emphasis on self-care.
Moreover, in India, there has been an increase in the number of working women, the demographic that has traditionally been more likely to purchase skin care products. Having said that, there is increasing awareness of skin care across people of all ages and genders, which is leading to an increase in demand overall. In turn, the rise in demand is encouraging more product innovation and further propelling the growth of the market.
Recent Trends in the Indian Skin Care Market
Traditionally, Indian consumers have been more likely to purchase products that are from Ayurvedic or 100% natural brands. However, this is beginning to change. Consumers are moving towards more clinical and scientific brands and products. As general education regarding skin care rises, consumers are gravitating towards products with specific ingredients that they’ve read about. Moreover, consumers want to know exactly what goes into a product, rather than buying a product based on its lead ingredient. For instance, as opposed to looking for just a ‘skin-brightening’ or vitamin C serum, consumers today look for a vitamin C serum with Ethyl Ascorbic Acid — vitamin C has the skin-brightening properties and Ethyl Ascorbic Acid ensures that the vitamin C does not lose its efficacy at all.
Dermatologists are observing shifts in behaviour with their patients as well. No longer are consumers waiting for a problem to arise before trying to solve it. They’re equally concerned with preventative care as they are with curing problems. This is resulting in an overall increase in demand for skin care products, especially sun prevention products.
Given that most companies end up selling very similar products, it becomes difficult for most skin care brands to find a moat or differentiate themselves from others. Thus, packaging and branding serve as key differentiators for brands. For instance, The Ordinary’s minimalist packaging that’s focused on transparency has won it a lot of plaudits and attention, given the wildly different approach that they took compared to most brands at the time.
Another important differentiation is whether the brand is sustainable and eco-friendly. More than just being a differentiator, consumers today also actively search for cruelty-free, eco-friendly and sustainable products. In a Harvard Business Review survey in late 2019, 65% of consumers said they want to buy “purpose-driven brands that advocate sustainability.” While they found back then that only 26% of consumers actually end up doing so, there’s no doubt that this number would have increased since then. Moreover, if the consumer has a choice between two similarly priced products out of which one of them is eco-friendly and sustainable, it is extremely likely that they would pick the one that is better for the environment. Most skin-care brands tend to focus on such characteristics in their marketing. In fact, MamaEarth gained a lot of credibility as being Asia’s first brand with a “Made Safe” certification. Not only does it help build consumer trust, but also helps consumers feel like they’re doing something that’s good for the environment.
Different Categories of Skin Care Products — Where is the Opportunity?
Considering that the market is seemingly very crowded, you’re probably wondering — where’s the opportunity? Before I get to that, I want to quickly explain the current situation of the Indian skin care market. For the purpose of this article, I am going to split the market into three separate categories — mass brands, mass-premium or ‘masstige’ brands, and premium or luxury brands.
I believe that the larger opportunities in the Indian market are in the mass and masstige categories. The premium category is a smaller opportunity, especially for D2C brands given the higher CAC involved and given that people are less likely to buy unknown or untested expensive products online. Moreover, the premium segment tends to be heavily driven by brand loyalty and is dominated by companies that have been around for several years, as well as the international brands that are endorsed by international celebrities.
The Mass Category
I am viewing companies that sell most of their products within the INR 200 to Rs. 450 range as mass category brands. These brands tend to appeal to a much larger audience due to the favourable pricing, and they are also able to capture a larger share of marketplaces. Moreover, people are more likely to experiment and purchase products from brands that they don’t know, when they’re reasonably priced.
There are several personal care and skin care brands within the mass category. Two great examples of D2C brands in this segment are WOW Skin Science and MamaEarth. WOW was founded in 2013, and their sales increased to INR550 crore in FY20 from INR 38 crore in FY18. MamaEarth was founded in 2016 and managed to increase revenue 6X from FY19 to FY20 by clocking revenues of INR 112 crore.
The success of these brands is based on several factors. Some reasons are —
1. They’ve been able to fill a large product gap at the right price. A lot of the products that they sell were traditionally only available from foreign or premium brands. By making them available at a more affordable price point, they’ve been able to capture a significant portion of the market.
2. Their products tend to be natural and ayurvedic, both of which in the past has led to instant trust from the Indian consumer. While this is changing in the mass-premium segment, consumers in this category are more likely to buy and trust products that have only natural ingredients.
3. They’ve done extremely well on marketplaces — especially seen in the case of WOW Skin Science and their affiliation to Amazon. By being omnipresent on marketplaces and optimizing their products for most search terms, they’ve been able to build overall brand awareness and presence.
4. Both brands have shown a sharp focus on long-term marketing and brand-building initiatives. For instance, in the case of MamaEarth, they tied up with actress Shilpa Shetty Kundra in 2018, who is also an investor in the brand. When the tie-up was announced, the actress said that she uses products for her son and that she strongly recommends the brand to other parents. They’ve also relied heavily on other parents to spread word-of-mouth. In the press release, Shilpa Shetty also said that she feels a “deep sense of responsibility towards the environment, and MamaEarth as a brand resonates that.” Marketing initiatives such as this have gone a long way in promoting the overall brand.
5. An important aspect for brands in the mass category is the ability to add new products at a very quick rate. This allows them to keep on top of trends in the market, while simultaneously being able to collect data on what products consumers are more likely to buy. One way WOW Skin Science has done this is by finding a ‘hero ingredient’ — for instance, Apple Cider Vinegar (ACV). Once they find an ingredient that consumers are reacting positively too, they quickly diversify that into several different products. They may start off with an ACV shampoo, and then release an ACV face wash, soap, hair mask, creams and lots more.
6. In line with the above point, a lot of their products tend to be ingredient-led as opposed to benefit-led. For example, they would sell a vitamin C face wash as opposed to a ‘skin brightening’ face wash. This plays a major role in optimizing digital marketing spend — which is extremely important for D2C brands at scale.
In my opinion, it will be very difficult for a new D2C brand to see similar levels of success in this category for two main reasons.
The companies that currently operate in this segment are either the larger, incumbent brands or D2C startups like WOW and MamaEarth that have been around for a while. This means that the brands that you will compete with will have large amounts of money, a huge headstart in terms of brand loyalty and data. Most importantly their manufacturing costs will be significantly lower, which will allow them to sell at lower prices.
Moreover, given the price point, the CAC for website sales for a new D2C brand in this segment will be very high. In fact, it would be prudent for new brands to focus on marketplace sales. However, the existing brands in the segment have captured and optimized for marketplaces. Moreover, most of the incumbent brands are now focusing on the marketplaces as well as a result of the pandemic.
While it is possible for a brand to break through in this segment, but it would require significant amounts of funding. I believe there is more of a gap and opportunity in the mass-premium segment.
The Mass-Premium or ‘Masstige’ Category
Within my analysis framework, I am categorizing brands that sell products in the range of INR 450 to 700 in this segment. While there are several successful brands that operate in this category, none have seen the same level of success as WOW or MamaEarth.
Undoubtedly, there are several challenges for brands that operate in this segment:
1. It is a crowded space, and thus it is difficult to differentiate from others. As discussed above, packaging and branding tend to be key methods for brands to stand out. However, it is very challenging to build a moat based on design alone. Moreover, most of the brands that operate in this category tend to be eco-friendly and sustainable, which makes it difficult to use that as a differentiator.
2. For D2C brands in the space, the customer acquisition cost (CAC) is quite high due to the amount of competition. Additionally, for companies in this segment, it is difficult to see success on marketplaces due to the higher prices. Thus, the focus tends to be on their own websites, where it is tough to build high levels of customer retention and repeat rates. This leads to the lifetime value (LTV) of the customers being relatively low in most cases. The skewed CAC - LTV ratio makes it tough for brands to achieve profitability.
3. This segment is based heavily on influencers and performance marketing. While this may lead to great results when spending a lot on marketing, it becomes hard for companies to build any brand loyalty. Furthermore, given the competitive nature of the space, the dependence on performance marketing and influencers increases the CAC significantly.
4. While there is a trend of consumers moving from natural and Ayurvedic skin care brands to more scientific and clinically backed products, there are challenges associated with this. People don’t usually buy products that are perceived to be ‘medicinal’ in nature without consulting a dermatologist. If this continues to hold true, such a brand may not work out at scale as a D2C or lifestyle brand.
5. For a lot of D2C brands, marketplaces are the best places to get noticed in the beginning. People don’t necessarily shop on brand websites they’ve never heard of, but they might buy the product on a marketplace that they trust. However, for products in this category, the pricing poses a challenge to scaling and being successful on marketplaces.
6. The ingredients for skin care products in this masstige segment tend to be more expensive — especially when they’re eco-friendly, sustainable and vegan or in a niche category such as anti-ageing. Moreover, D2C brands in the personal care space usually operate with high margins, but that becomes tough for skin care brands that are trying to stick to the INR 450 to 700 price point.
7. This is not necessarily a challenge from the entrepreneur’s perspective per se, but it is one from the investors’ viewpoint — it appears that brands in the mass-premium category tend to grow up to a certain point, say INR 100 Cr of annual recurring revenue (ARR) but then find it difficult to scale beyond that. This makes it difficult to see any potential route for an exit. Unless there is very strong brand loyalty or product innovation, it is unlikely that one of the bigger brands will want to acquire the company. IPOs are also extremely rare for personal care or skin care brands. Of course, adopting an omnichannel approach is an option, but offline retail usually requires lower-priced products. Plus, omnichannel retail requires large amounts of investment in offline advertisement and education.
Must-Haves for Success
In my opinion, there are four must-have characteristics for brands in this category.
1. This one may seem obvious, but the products need to be effective and show results quickly. Given the crowded nature of the market and the general impatience of online consumers (myself included), if the product doesn’t work perfectly, consumers will move on to a different brand without thinking twice. Once you’ve lost a customer, it is very unlikely that they will come back to try another product.
2. Brands need to have the ability to add new products quickly. Social media trends disappear as quickly as they appear — it is vital that you’re able to keep up with them. New product innovation is also a great way to differentiate yourself from other D2C brands as well as the incumbent brands in the market.
3. When it comes to skin care products, it is very difficult to find something that suits you as an individual. Thus, people tend to not experiment much when it comes to skin care because they stick to what they know works for them. To solve for this challenge, brands need ‘recruitment products.’ These products act as an initial hook to reel in customers and build initial trust with the brand. For instance, a consumer may be more willing to experiment with their lip balm or their toner as opposed to their daily moisturizer. Once they try out the toner, and they like it, they will be more willing to give the other products a go.
4. Reasonable pricing is vital. In my opinion, INR 450 to 700 is the sweet spot. It is an added bonus if you are able to find ways to be cheaper than your competitor. During my research, I came across a brand that has been able to gain a huge lead over its direct competitors by being significantly cheaper. Their secret? They sell their products in smaller sizes, which increases both the frequency of purchases and makes them appear much cheaper than the others, even if that isn’t technically the case.
Nice-to-Have Characteristics
There are several other ways for brands to boost their chances of success.
1. A great way to differentiate from your competitors while simultaneously creating an audience that is ready to buy your products is through a celebrity collaboration. This is more common within the cosmetics and beauty sector, but it will be as effective within skin care as well. An excellent case study of this is Nykaa’s collaboration with Bollywood actress Katrina Kaif, which resulted in the launch of India’s first celebrity beauty brand, Kay Beauty, in 2019. Since then, there have been a couple of more collaborations such as Manish Malhotra’s line with MyGlamm and the Masaba X Nykaa collection by Masaba Gupta. The competition within the skin care sector for celebrity collaborations is still significantly lower, which makes it a great opportunity.
2. Many skin care companies have mimicked foreign brands when it comes to packaging, branding and even formulations. However, very few brands are actually formulating their products based on the skin types of Indian consumers. The climate and pollution levels in Indian cities and the composition and problems associated with the skin of Indian consumers tend to differ significantly when compared to foreign cities and skin types. This is a gap that brands have begun to solve for, but there’s still a gap in this segment of the market.
3. In line with the previous point, another surprisingly underserved market in India is that of sun care products. Given that general education and awareness around skin care is increasing, it is likely that sun care products will see a boost in sales as it is a vital element of a daily skin care routine. Moreover, considering the intense heat that most Indian cities experience throughout the year, sunscreen is an essential product.
4. As discussed earlier, the market for natural and Ayurvedic brands is extremely crowded and almost impossible to differentiate in. Thus, it is prudent for new brands to adopt a more scientific and clinical approach.
5. If a brand is positioning itself as clinically backed, it would be extremely helpful to get dermatologists to recommend the products. Not only does it add an instant layer of trust, but also provides a reliable channel for sales since a lot of people prefer buying such products on the recommendation of a specialist.
6. For skin care brands in this category, it is important to drive sales through your own website as opposed to being heavily reliant on marketplaces. By doing so, brands increase their connection with the consumer, which in turn increases brand loyalty. Additionally, by selling through their own website, brands can focus on increasing repeat rates which in the longer term will reduce CAC. This also allows brands to avoid the competition that the marketplaces bring.
7. This is a point that has been discussed earlier, but to reiterate — brands should focus on the environmental impact of their products. Consumers today are looking for sustainable and eco-friendly products.
Looking Ahead
While the skin care market does appear to be over-crowded, it is growing rapidly and there are still gaps in the market that are underserved. In the masstige segment, no one brand has been able to see breakout success or huge scale.
Given the recent trends in the market, I strongly believe that there’s potential for a skin care focused personal care brand in the mass-premium segment to reach the same scale as WOW Skin Sciences within the next five to seven years.
Thought Leaders Speak
We love excel and we know you, our reader, also most probably love excel. As pointed out by Packy McCormick in this deep appreciation article on Excel, “Excel may be the most influential software ever built.” Read this delightful piece: Excel Never Dies
What We’re Listening To
The illusion of certainty often leads us to disastrous decision making. Replacing such certainty with curiosity, and challenging our deeply held beliefs, can be magical for our decisions. In this episode, Adam Grant explores the psychological origins of certainty and discusses his book “Think Again: The Power of Knowing What You Don't Know”.
What We’re Watching
Tim Urban explores “Original Thinking” and decodes Elon Musk leveraged the power of first-principles thinking to achieve outsized success. This one is highly recommended!
That's all for this edition! We hope you liked it and would love to get any feedback you may have. This newsletter is written and curated by Mishaal Nathani and Ashutosh Gehlot.
Enjoyed this newsletter?
Get The Skeptic Investor in your inbox every Sunday. Click below to Subscribe:
Feel free to reach out if you have any suggestions or you’d like to contribute to the TSI:
Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in the newsletter constitutes a solicitation, recommendation, endorsement, or offer by us or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.