Two-Third of Acquisitions by FMCG Firms in Last 5 Fiscals in D2C Space: Crisil Ratings

Around two-third of acquisitions by FMCG players in the past five fiscals have been in the D2C (direct-to-consumer) space, offering established players a boost to growth and expansion into premium segments while enabling the acquired entities to mitigate challenges of scalability and profitability, according to Crisil Ratings.

Hindustan Unilever Ltd's (HUL) acquisition of Uprising Science Pvt Ltd (Minimalist) for ₹2,706 crore; Marico's buying of Satiya Nutraceuticals Pvt Ltd (Plix) for ₹380 crore; Emami Ltd's ₹272-crore takeover of Helios Lifestyle Ltd (The Man Company) and ITC Ltd's acquisition of Sproutlife Foods Pvt Ltd (Yoga Bar) for ₹225 crore are some of the notable instances of established players acquiring D2C brands, Crisil Ratings said in a statement.

Stating that FMCG companies are on a D2C buyout spree for growth, premiumisation, Crisil Ratings said 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, it said, citing a study of 82 FMCG companies in its rated portfolio and 58 D2C companies.

"In the past five fiscals, around two-third of the acquisitions of FMCG players have been in the D2C space. D2C companies gained prominence post-pandemic owing to their differentiated products and unique marketing campaigns, enabled by internet and smartphone penetration," the credit rating firm said.

"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," Crisil Ratings Senior Director Anuj Sethi said.

On the other hand, he said, "D2C companies have been able to mitigate challenges of scalability and profitability. Prior to acquisition, less than 15% of the D2C companies in our sample set had managed to cross ₹250 crore in revenue and only a third reported operating profits." The acquisitions have further strengthened the business profiles of traditional FMCG players by providing them entry into niche product categories, aiding diversification and premiumisation of the overall product basket, while also enabling them to enter segments with rapid innovation cycles and access to select customer cohorts with unique preferences.

"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% of the acquisitions were undertaken to enter niche and premium segments, with about 35% in the health and wellness segment, 20% in the specialised ingredients segment," Crisil Ratings Director Aditya Jhaver said.

Crisil Ratings noted that 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% of net worth of the acquirers, indicating negligible strain on balance sheets of FMCG companies and, thereby, keeping their credit profiles stable," it added.

Yet, it noted that the ramp-up of the acquired D2C brands post-acquisition to a much larger scale, while improving profitability over the medium term, will bear watching.