‘D2C Brands Will Get Destroyed:' Private Equity Expert Haresh Chawla On Steep Fees Charged By Online Platforms

Since the pandemic, more and more Indians have turned to e-commerce for their needs, be it everyday needs like groceries to clothes. With more consumers looking for products online, India has also seen the mushrooming of many direct-to-consumer (D2C) brands from cosmetics, to gourmet groceries and even apparel. While some of these brands have grown exponentially, they must cross several hurdles before they become successful.

Online marketplaces like Amazon or Flipkart charge steep fees and promote those who can pay more, making it difficult for direct-to-consumer brands to survive. “Another challenge that we've seen, and we'll see a lot of destruction in D2C (direct-to-consumer) brands. All of these marketplaces have a 30%-50% fee, and they're designed by the algorithms to knock the number one off and give the place to somebody else who's willing to pay more,” Haresh Chawla, partner at private equity fund True North, told The Core.

Customer acquisition is an expensive affair which makes it impossible for such brands to reach their target groups as platforms like Google and Meta charge a high fee to connect brands to their customers. If companies do not have strong gross margins they would not be able to afford the rent that these platforms charge. 

Since the cost of acquiring customers is high, duopolies are forming in digital businesses across segments. “These are companies that got well funded earlier. Of course, they've done a great execution job. But today, you can't imagine a third food delivery company, for example. If you think digital is the way to grow, and that looks very enticing, and then we've raised billions of dollars of VC (venture capital) money, it's a very tough market,” Chawla said. 

While technology has created obvious duopolies, it has also democratised access and exposure. Thanks to the wide penetration of cheap data and smartphones, most of India has access to the internet. And women are the biggest group who have been empowered by technology. 

“One of the things that technology has done is empowering the women in the house. Households are thriving and surviving and are growing because she now is empowered because of technology. She can learn things on YouTube. She's seeing what's happening in the world. She knows how to dress, how to cook, how to manage money, probably,” Chawla said.

For The Core Report: Weekend Edition, financial journalist Govindraj Ethiraj spoke with Chawla on how big is the Indian consumption universe and what is real buying power.

Edited excerpts: 

Let me start by asking you when we look at the segmenting of the consumer, what's an anecdote that you've seen, or what's an anecdote that comes to your mind and from your own experience on how this market has evolved and changed? When I say market, I mean the consumer in a very broad sense. 

I think one of the biggest anecdotes is when India was going to be a place where modern retailing was going to take off. We had unorganised retail. We had kirana stores. And I had even then talked about how beating a kirana retailer is very difficult because he can service you in a way that no organised player can. And that story virtually played out in the same way. Organised retail has not taken off in India after so many years. If you look at a retailer, let's say DMart, I mean, a massively successful company, brilliantly run business. But who does it serve? The India One customer. And the customer that the Goldman Sachs report talks about, or all the fluent Indian reports talk about, does not end up going to a D-Mart. So they've all gone to BlinkIts, Instamarts, the Big Baskets, or they're going to reorganised kriana shops that have reinvented themselves and have got massive self-serve stores or even grocery chains, which are, let's say, Nature's Basket, which are very small. But if you see what's happened here, the game to be played at the top of the pyramid is very different, to be played in the middle of the pyramid and at the bottom of the pyramid is continuing to be a challenge for us. It's a massive base of essentially nonconsumers. They don't participate in the economy. But as you see what's happened everybody thought that India Two will become India One and India One will go to modern retailing. But the other thing around has happened, companies realise that India Two needs bulk discounts. They are trying to live on a budget. They need to save money. And that's where D-Mart's success story is playing out actually.

For those who are listening and may not have heard you before, what is India one, two, and three? 

See, India one, two, and three are virtually when you look at India as a market. Most markets in the world are homogeneous. India is a very heterogeneous market in multiple manners. The way a family that's been brought up conservatively in, let's say, the south of India will behave versus a Punjabi family in the north is very different, even though I have the same level of income. So that's one difference in how they consume. 

The second difference is that we behave and act like very three different countries. The bottom is sub-Saharan Africa. I mean, virtually trying to subsist and stay alive and survive. And we've seen how they need to be supported….

Like, we have a foodgrain programme

For food programmes, DBTs (direct benefit transfers), and many other rural employment guarantees. And we've done an excellent job of raising them out of poverty, but they still are not able to climb any ladder. The ladder is not even visible to them. And then there is India Two, which behaves like a middle-income country. And that's what middle India is all about. And there is India One that behaves like it's living in Europe. And the amazing thing is that these are not separated geographically in the same city. We are in Bombay, and we see 80-storied skyscrapers next to the chawls and next to the hutments. So India One, India Two, and India Three are all together in one melting pot in the cities. So people get off their BMWs and Mercedes and go to a five-star hotel, and their chauffeur is probably an India Two person who's got his family, he's earning about between Rs 25,000-35,000 a month, probably has an earning child as well, who's contributing to the family income. And then there is somebody standing on the side of the road who's unable to get a meal. 

Okay, so now there are projections about this affluent India, as we call it, or the $10,000 per capita income. So break that down from your perspective and the transition that you've been seeing or not seeing in the last eight years. 

So one of the challenges I have with these reports is that per capita as a phenomenon is not relevant in India. We don't have individual spending or individual buying. We should be doing per capita household, actually, or per household income. That's the one big difference. So therefore the number is never clear. 

So suppose the per capita income is, let's say, $10,000 or Rs 8 lakh. Now, if it's one single individual, that individual's disposable income may be fully discretionary, maybe they'll spend on their food and their rent and utilities, and let's say Rs 2 lakh is the disposable income. The moment this is a family, and now you apply the per capita metric to it and you say, okay, there are two earning members in it, that income becomes 16 lakhs. The cost of living doesn't change. The disposable income, therefore, suddenly jumps from two lakhs to probably eight or ten lakhs. And it's a 4x jump. So how the household behaves is what is very important for us. And the household is the unit of measurement that we should have in India. And this is that household that allowed us to get through Covid as well because everybody had a mechanism by which they could depend on somebody else to get them through these struggles that we went through as a nation during that time. And that the resilience of that household is what keeps our economy going, that there is some or other manner in which nobody's left alone. They have either the family or the extended family to look after them. 

And I think India is unique in that sense, that nowhere in the world does the household unit still survive, and stay together. I mean, you have seen the disintegration of that in the west, as economic progress happened. China has a different problem with their household because of the single-child policy, which has now really led to a planned disintegration in the sense that the household unit is itself not very robust and resilient. I think India stands out as a unique example of a household that has stayed together. And, now, despite multiple generations living together with very different aspirations and lifestyles it's continuing to be integrated. And that goes down to something that nowhere in the world it's been seen. 

But computationally, from saying 100 million people with $10,000 versus, let's say, 25 million or 30 million household units with, let's say, $40,000, how does that change things? 

So it changes the spending patterns completely. What I'm saying, the confidence of the household could be very different from the confidence of the individual. See, finally, our economies are a function of how much confidence people have in spending. And I think that's one of the biggest metrics of how well an economy does. As people get more confidence in their employment, and in their future cash flows that are likely to happen, they end up spending. And that, in a sense, creates a virtuous cycle of growth for the whole economy. 

I think for us, it's important to understand that 30-40 million households that have the money to spend, are paying the bulk of the taxes, and are also consuming. One of the other policies that we have is that there are, I call it the rule of 5 to 50. Now, 5% of these households contribute to 50% of consumption in many categories. So it's 5% of people who order 50% from Zomato, 5% of people, or 1% of people who take 50% of the flights. So when you look at it, there is even higher concentration, actually, even in that smaller pyramid. So it's an extremely dense pyramid on top. In the top, let's say, 1%, and the rest, let's say 9-10 percent, which we are talking about 300 million households, roughly 30 million of them affluent, earning well and spending well. But even in those, there is a question of frequency, which at the top is very high. So the first, let's say 3- 4 million households contribute to 40-50% of many category affluent category spends. 

So we're going to talk about trajectory because that's the important thing. But I'll come to that later to look at two or three things in India One and Two, and perhaps Three as well. So one is the growth of credit, and the second, of course, is premiumization. But we'll come to premiumisation in a moment. Let's talk about credit. How has that changed or fuelled consumption? 

First, at the India level, what has happened I think between the last decade, is we've seen GST (Goods and Services Tax) being implemented. We have seen demonetization, which led to rapid digitization, in a sense. We saw Covid come in and we saw UPI and Jan Dhan and all these projects get some shape. 

What has happened in India is that you can almost see the working capital cycle of India has become faster. So in a sense, you're seeing growth happen because we are faster as an economy in some sense. That money is moving faster, goods are moving faster, and there is a ripple effect on everything that happens. That's one side of the story, that's internal. Externally we are seeing that China's, let's say, challenge in Covid and therefore on the global stage have allowed some movement of focus on India and therefore investments into India. You've seen startups, China plus one, we've seen startup funding in billions of dollars pour in. Now, whether the startup survived or not, that money came in. It helped people buy cars, it helped people get jobs, it allowed people to buy apartments. So that credit flow happened in terms of an equity flow for India. Your companies have started speeding up. Your company got equity flows and that also gave them confidence for the credit flow to happen. 

So confidence led people to buy on credit. And when you buy on credit, money is seen by people as an exchange of value, but also an exchange of time. If I can be given a loan to buy a Swift Dzire car or a Kia Seltos or a Sonet or whatever, five years before I could afford it, what has happened is you advance that demand. When you advance that demand, that car starts selling. (When) the car starts selling, it generates employment, it generates a bunch of flows from my money. So I think that's what we are seeing. And we are seeing historically, two things have happened. Household savings are at a 50-year low actually, and household liabilities are up by 50% over last year. So credit card spending I think what we've gone to the other extreme that when you go and buy, let's say, a refrigerator, the cash price you pay is lower than the EMI price. It's a crazy phenomenon happening here. I'm sure RBI (Reserve Bank of India) has issued warnings on it. So we are at that unique place where we are borrowing. India Two is borrowing actually, India One doesn't need to borrow. India Two is borrowing from its future and has the confidence to borrow and is willing to work for it. 

So they've also seen their incomes go up, and they see a bright future for them. And that borrowing is resulting in production increases today, consumption increasing. And of course, the profit from that consumption, as we've seen in our economies, goes to India One. So India One progresses by India Two, becoming more aspirational, taking more credit, and consuming more. 

That credit you talked about, is the incentive to use a credit card versus paying in cash at this point. But is there a subsidisation happening somewhere, either by the finance company or something?

As a producer, if I can increase my MRP (maximum retail price) and package in a bundle, at a discount for buying via credit, I will see sales go up. So I think that some part of that is happening. Excess of it is bad, of course, because then you're allowing people who actually cannot afford to take that credit and will probably default on it. Credit card defaults are up at some multi-year high, I think, 2.75% or something like that. So I think, is credit good for us? Absolutely. And there's no question that as a country, we need to allow people to borrow and spend on consumption today because that gets us on a different production orbit. If anything, housing loans should be even further discounted. Because once a person buys a house, the knock-on effect on purchase is you buy furniture, you buy a car, you want to buy other appliances, and the whole economy starts moving. So the only thing is whether the credit is affordable and how it's recovered. I think those are some of the challenges we have to think about. 

So you talked about confidence. Now, confidence usually comes from two or three things. But one thing that I think most economists also agree with is that there's a wealth effect or a feeling of wealth, which is against stock markets, and gold. So two questions here. One is, do you agree with that? And to what extent is that driving confidence? And secondly, what's the downside of it? 

So I think the wealth effect in India has gone up dramatically because of land prices going up, especially in the rural areas as well. Because of urbanisation, the towns have become larger. Look at a city like Pune. Mumbai can't unfortunately expand, but the city expanded like a balloon. It's grown on all sides. So, that land has become valuable for people. Gold has gone up, and then the stock markets are at their all-time highs, actually now. So the wealth effect has been very positive. 

Now, the only challenge with the wealth effect is when the asset prices cool off does that leave people in a bad shape? And therefore that comes down to the amount of leverage you have. The good part is that Indian households are not very highly leveraged. So unlike America, where a wealth effect can have many more effects on the economy and spending, Indian households do not leverage it at all. So I think the debt coverage of an Indian household is very good. So I don't think we have a challenge there that this wealth effect is going to have any deleterious or any bad effects on us right now. 

I think controlling credit, which you already know, that RBI started unsecured lending actually, which is what a lot of equity money blew up by startups who are fintech, who gave money away for free, virtually to consumers. And of course, they're paying and have paid for those losses. So that money has gone to consumption. But I think unsecured lending will be a challenge that will continue for some time and we'll have to probably tighten that as we go along. 

The RBI has already tightened that and is now hinting that it will tighten further because it's alert on this phenomenon. But do you feel that this is something that can shift the numbers? I mean, without getting into how many millions or tens of millions, there were a whole bunch of people who were using credit cards or using BNPL (buy now pay later), or just swiping their cards or even on their phone and getting a loan and then buying something immediately. But is that something that could get shaken up or will it get substituted by something else?

It'll get substituted by something else. I think what is happening is that, as I said, the one phenomenon that has happened all over the world is that we've come through extreme stress one year in Covid, everything that is normal looks great right now. So I think the desire to spend has been triggered, the desire to have experience. Look at the airports, they're full, the hotels are full, the malls are full. The travel that Indians are doing all over India and globally is massive. So I think there is a certain effect, normalcy looks great now, and therefore let me spend. That's one more element in the confidence. So I think that will not go away. 

The second thing that happened is that exposure from the mobile phone, that's become a great unifier. So it's no longer necessary to be in a big town to get access to the goods and services that the people in the big towns get. So I think that democratisation is a thing that's ongoing right now in India. So you will have consumption kicking in from many. Therefore there was never any. India is very complex to understand. Multiple levers are working in different manners at any point in time. So I think that analysis is very difficult to do. As long as we don't give any shocks to the economy, we should be continuing to grow very well. 

Let's look at the bottom end now. So if we look at, let's say, results from companies like Hindustan Unilever, not so good. Companies like Nestle have done a little better because maybe they're more premium and we'll come to that. So what's your sense of the rural? Because when I talk to analysts also, they all seem to have switched off on anything that is rural-focused.

See, I think what we have to realize is that food inflation and general inflation have been very high. And that affects them much more disproportionately than it does you and me. So I think that's what is happening at India Three, actually, or India at the bottom of the two where they are struggling, actually to manage their budgets. And I think that phenomenon is a function of reasonably high unemployment and lower trickle-down happening there. 

But India Three also is and was or has always been a market, let's say, for large companies like Levers or any large consumer product company. So why are they not able to address it as well as they were earlier, assuming that people still want to consume soaps and personal care and all of that, using Levers as an example? 

I think it's a function of the capacity to pay and the amount they consume. So both. So they are not willing to pay very high prices and costs have gone up for them. So they are thinking about how to limit consumption, how to downgrade a bit. The rest of India, India Two, and India Three are on an upgrade cycle. I need not regular yogurt. I need A plus yogurt. Then I need Epigamia yogurt or whatever. I need to have Greek yogurt and then I need to have whatever. You can't have vegan yogurt, but whatever else is the fad in the world. So that upgrade cycle is on and that's a function of lifestyle changes. 

The information they're getting actually on Instagram, on Facebook, I think we are globally connected. So you launch an oat milk in America and it reaches in a year on Indian shelves. We didn't even know what oats were before the Americans talked about it. Or now there is some rice milk that's coming. 

Unfortunately, India Three is isolated in that sense because the ladder is missing. And that's, I think the key challenge for the economy is to how to create social structures and employment opportunities actually, that's why vocational training or something like that, to make them part of the larger economy. We are not leaving them behind because there are social schemes designed for them. So in a sense, they are surviving. But how do you kick start their aspiration and remove their fear of participating and taking off the growth that we are seeing? All of us are children of that, all of us are. I'm sure when you began your career, or I began 25, 30 years ago, where we thought we would reach, I mean, we've reached far ahead of what our imagination could have allowed, and therefore that privilege we've had. And we should be thankful, because actually what you're seeing is what happened in China about 30-40 years ago is happening in India now that we are at our societal level, are seeing compression of 50 years of growth into 20. India Three needs to see some form of that. And that is a challenge which has to be solved by other things than doing a scheme. 

And from a marketeer's point of view. So there was supposed to be a fortune at the bottom of the pyramid, and I'm sure there still is. This is a very specific example. Now, let's say companies you would invest in, would you think that they have opportunities still either in the consumption space, consumer space, or discretionary space, at the bottom of the pyramid? 

I sense that companies that are solely operating on the bottom of the pyramid, I think there'll be a challenge getting funding, and we're seeing some of that play out in the startups that tried to go there as well. So I think India One, and India Two are the markets where monetisation will happen. India Three is where you have to sachetise everything. And there is a question of whether that is margin accretive to the business. 

I think that question still remains. That market will get added on. I don't know how many companies will say, okay, I want to address that market because the challenges of reaching them are massive. The challenges of making money from that market are massive. So till those people get employed actually in some manner, and they start generating incomes on their own, and therefore you have to get them schemes which help them reach a certain level and then they generate income. That's when it'll become a market. 

So premiumization is the word of 2023, I think. Tell us about how you see this word, what it represents and what's changed and not in contrast to previous years. 

My sense is that everybody is finding power users in every category. And every company realises that there is a margin available to afford an international lifestyle for the top end of the market. It's almost not Indian in that sense, in the way they demand their service, in the way they expect product quality, and their willingness to pay. So, therefore, you can go to a Starbucks and pay Rs 300 for a coffee. We know that it costs maybe 15 bucks to make it right, but the service, the ambiance. So I sense that the way a company would think is that if I premiumise, it helps my brand send the signals and then I'll figure out how to make a mid-range offering. I think that's what most brands will end up doing. 

And we've seen success in a company like Cred, for example. I mean, in a market that is very tough for fintech companies, has put together an offering for the top end of credit card users. Or if you look at what Air Vistara is doing compared to what IndiGo did. So I think you're seeing these companies start developing models saying that there is a certain high-paying and high-frequency customer. Remember, that frequency is very important because that suddenly changes all the maths. It's very good to say that there are 150 million customers. How many of them are buying frequently? And the frequent buyers are the ones that are dedicated and leave profit on the table. 

I think in every category you're finding this shift in foods, that's happening. You're seeing a bunch of brands coming up, or the existing brands trying to premiumise and modernise. You're seeing that in retailing. I mean, look at what grocery stores have done. The kirana store, which we thought would get pummeled by the entry of technology and modern trade, survives and thrives. I mean, you see those chaps are buying the next-door shop and making their shops bigger. And they know that they can serve customers well and make money. So I think it's happening across. There are clothes as well. I mean, if you look at apparel again, a company like Trent discovered Zudio as a model. Can I serve India Two or India two and a half? Let me call it that. Somewhere there… with a very good value for money offering while keeping the whole look and feel international. So international at Indian prices is a big segment that's coming up. 

So it's actually, the pyramid is bloating in the middle for the clever player. D-Mart also, it's a bloat in the know. Let me not try and run a premium store in south Mumbai. They hardly have any stores in Mumbai. Actually. Let me go to the cities that are emerging where customers don't have a relationship with kirana stores and they'll come to the discount retail shop. So, therefore, there is a pyramid, like a peak at the top. There's a big box in the middle, which is India Two, which has the money, which has the confidence, again, to spend, confidence to borrow, and is willing to spend. 

Let's say the path is 100 million of $10,000. What you're saying is 30 million effective households. Now, as you look ahead, both in the context of premiumisation and now the trajectory, what is likely to change versus what has changed in the last seven or eight years that you've been observing and writing about this sort of new consumer and the new power consumer. 

So I think at the top, the numbers will stay small. The malls will come up for them. They are paying, let's say, Rs 800 for a movie ticket. They are paying Rs 350 for popcorn. That market is there. It's high frequency. 

You're saying the percentage will remain the same or the numbers will remain the same? 

I sense that the percentage will remain the same. My numbers may grow, but not marginally. The middle is going to bloat. So the 6-7% of the population, give or take, 6-7% of the population lives this affluent lifestyle, we will all pander to their wishes. I call them, they are assisted living at 20. I mean, they don't want to get out of their couches. They press buttons to get everything they want. Everything is available to them. And whether it's a global product or an Indian product lands up in their hands in about 8 minutes. So that audience is small, they'll continue to spend and they will trickle down. They'll earn money from the work that the rest do as well. 

So my sense at the top is about one and a half trillion dollar economy, not small. The size is big. So it's one and a half trillion on the top, one and a half trillion in the middle, and maybe very little left at the bottom, if you look at it, if you separate them as countries. The middle is where you see a lot of signs of entrepreneurs doing well. See, earlier, before GST, you had a number one, do well. Number two, do well. Number three, companies would let's say, suffer or just barely make money, and the rest of the companies would lose money or compete with unorganised guys. The unorganised market is getting wiped out. So that formalisation benefits are coming to the middle India. So formalisation, the logistics improvements that are happening because of GST, the lending that's happening to them, secured lending also. They're the ones who are buying the houses or building homes. 

So the India Two level is where we can see massive growth. And hopefully, we will even give them more credit to make sure that they can generate demand. 

So let's touch upon technology again, an aspect or a lens you use a lot. So how is technology? Of course, technology is already. And when I say technology, I include, let's say, payments and speed of payments, which you also touched upon. How is that going to change or likely to change this trajectory as we are looking at it? 

See, I think one of the biggest things we end up talking and lamenting about is the participation of women in India and that our economy will only transform when that happens. One of the things that technology has done is empowering the women in the house. I don't think we see that as something that shows up in a metric anyway. But the housewife who's supporting the rest of the household, again, I said per capita is not the thing per household. That household is thriving and surviving and is growing because she now is empowered because of technology. She can learn things on YouTube. She's seeing what's happening in the world. She knows how to dress, how to cook, how to manage money, probably. 

So there is this big wave of the homemakers who have been empowered by technology, who can run their household much better because they're well informed, they're putting their kids through better schools. They're paying more attention to what the kids are studying in school. They have the confidence to do a parent-teacher meeting. That aspect of empowerment of women and becoming productive in that sense, I mean, their productivity is hidden, but they hold the whole household together, is not being seen. 

So I think there are other aspects to technology that all of us have talked about that it democratised everything. It's changed grooming. By the way, if you look at the market, the riders who come deliver to you probably have got better haircuts than you and me. They groom better. So you're seeing the salons and spas come up everywhere. And that's a function of how, as economies grow, personal grooming becomes a big market. And you're seeing many players. 

You sound like you're investing in something in that space. 

No. What I'm saying is that some of these are the signals of large-scale economic growth that people start spending on themselves, how they look and feel, and how they appear. You're seeing all that play out. But I thought, therefore, that's a function of technology. You see well-dressed people, you want to look like them. So that's one. 

But the role of the woman in the house and how the phone has allowed her to see and open her eyes and then use those learnings back in the home to either make decisions or participate more in decisions is lost. It's not showing up anywhere. 

So when we talked about premiumisation, companies that we've seen, or at least I have seen, are existing companies who perhaps do not have premium brands, but have now moved into that space or are now increasingly, whether it's service-products or product products. Others, I'm assuming, would try to enter at that level. Now, if you were to put a slightly more marketeer's lens rather than the producer's lens, do you think it's that easy to even crack this space? 

Another challenge that we've seen, and we'll see a lot of destruction in D2C (direct-to-consumer) brands. What happens is technology is like a drug you can access. I can send a WhatsApp, and if I put a clever enough, message it can reach 300 million people next five minutes. People can circulate it and can go everywhere. The unfortunate part of it is that it's very expensive to reach them, and the gatekeepers are sitting between Google and Facebook. They take a chunk of money out of the system. So, what is clear now is that you cannot virtually launch a D2C brand for the middle Indian market, because if your gross margins are not strong enough, you'll not be able to afford the rent that these platforms charge including Amazon, including Flipkart. All of these marketplaces have a 30%-50% fee, and they're designed by the algorithms to knock the number one off and give the place to somebody else who's willing to pay more. So we are like lemmings, in a sense, and I've written about that. We are like lemmings. The next guy is willing to pay more. Even on Swiggy, Zomato, the new restaurant, if he's willing to play a higher charge, will get shown up in the algorithm higher. So in that sense, it's very difficult to survive in that market. 

But the cost of acquisition of a customer is high, which is why you see duopolies forming actually in each of these segments, that these are companies that got well funded earlier. Of course, they've done a great execution job. But today, you can't imagine a third food delivery company, for example. Or you can't imagine a third. I mean, people are trying with some mobility, but these are difficult markets to get into. So the same challenge is there that if you think digital is the way to grow, and that looks very enticing, and then we've raised billions of dollars of VC (venture capital) money, it's a very tough market. And therefore, because you need good gross margins, you'll end up addressing India One. India One is too small. 

So, the unfortunate part of the Goldman Sachs story tells you two things. It says that we are a great market, right? But it also tells you why we are a small market. Just 60 million homes or 100 million people is a small market actually for what India has. We have one and a half billion people. But also tells you the potential of the market is massive because one and a half billion people are waiting to join these 100 million actually at some point. So it's tougher to reach these people only through technology. 

So will people or should people then be thinking of offline? And how are the economics comparing today versus, let's say, a few years ago? 

One of the things I call the digital medium is it's a handicapped medium. You just see an image, a few pixels, and you have to make a series of decisions based on the pixels you see in front of you. Offline has touch and feel, the kind of conversion rate. So imagine you, 100 people walk into a store, probably 25-30 of them buy a product, 100 people walk into a website, 0.5% convert. So, I mean, that's the reality. Because the rest of the signals of the product, the sensory signals, are missing online. Right. Therefore, offline is a much better place to be. But again, there are challenges there. 

The cost of setting up the offline networks is because they're such old traditional networks. There are no modern companies that have been built in that space. Most of them have failed. It would be a bad thing for me to say, but or are going to fail because the networks that the stores have and the wholesale networks, the distribution networks, are very expensive to build. And the entry barriers have been set by the incumbents. 

I mean, look at Nestle, and Unilever. Their distribution reach and control and the ability to put a big cost on a new entrant is extremely high. 

So you're saying that a brand that wants to challenge, even on the slightly more premium side in, let's say, the food space, will find it difficult, both offline as well as online?

See, the issue is that if you calibrate your expectations that I will reach 200 million people in the market and then spend accordingly, you'll find it's a disaster. So I think which country you want to operate in has to be very clear to you. Where you win and then where you take footsteps slowly to get in is the way to think about it. I think you have to be very humble. Indian market is tough.

I think it's very simple. Just because you make a nice PowerPoint, just because a trend has worked in the west does not mean anything here. Of course, unfortunately, money has been flowing in and that's a big let's say shift. I mean, again, we'll have the same exuberance 8-10 years later. So it's a cycle. But I think at this moment, being humble and realising that online is difficult, probably less difficult than offline, but offline itself is also very difficult. So I think that calibration needs to happen. Therefore, some companies are selling. 

Companies have realized that if I build a great product, create a great following, create word of mouth, and fantastic equity with India One, when I need to go to India Two, I probably need to sell to a larger player who is not willing to, doesn't want either have the attention or the energy to be able to launch in a small segment. And we've seen Tatas, for example, buying Soulful or Yoga Bar, selling out to ITC or some of these companies will have to do that. 

So again, therefore, you have to design your company to have the structural margins of a bigger player, feel that when they put sales and distribution, they will get growth. If your structural margins are negative or not so good, the bigger player also is not interested. 

If you look ahead on the same trajectory, maybe a year or two, what are the one or two things that you feel are going great and therefore very positive? And similarly, what are the one or two things that you feel we need to be careful or wary about? 

So I sense that on the positive side, I think there is unlocking of the consumer's mind on buying new things. Therefore, I think there is a market, in India that is severely underbranded. So I think that is an opportunity that if you calibrate your expectations well, brands will have extreme success because they'll be able to serve a certain set of target consumers. So I think that's a big market opportunity. 

And therefore, people who design their businesses around that experience as well. I think Indian consumers are desperately hungry for experiences. We live in cities that have very little places to go. So I think people who craft or merge products with experiences are going to make good headway. 

On the downside, I think we are continuing to face this unemployment, unengaged, massive young labour force. And I know we are trying many things. China Plus One is helping. The PLIs are helping. But I think a solid initiative is needed to make sure that that's the only hump left in us truly becoming where we need to go. So I think simplifying the laws. I think the ease of doing business, and we are doing many things on that front, but I think step jumps. Can the income tax code be no longer than 200 pages? 

Can we simply rewrite the code as opposed to keep it? 

Rewrite the code and make sure that the system of contracts and the way you get justice, look at how much assets are locked because of cases in the courts. So that the whole thing is lying unlocked. 

And then my sense is you'll find that the investment demand, which I think we're spending a lot of infrastructure on infrastructure, but till private enterprises set up to create capacity across the board, we won't be able to employ all these people. So I thought of two things. If we can, let's say for example, travel and tourism, again, instead of trying to do incremental things, can we decide to have 5x the number of tourists to India in let's say three years? Suddenly that will generate a huge employment opportunity. And for that the country itself is vibrant and every tourist in the world has India on its bucket list. But can we ease their coming here? Can we ease how they stay, what it costs them, how much fraud happens, and all that? Therefore the opportunities are very clear. We just need to remove friction from our systems and that will solve a lot of our issues. 

As an investor, what are you looking at nowadays in 2024, if there is a theme?

I thought of multiple themes in that sense, I think technological changes that are happening. I sense that we will find several traditional businesses will find a way to modernise. So I think some companies are using technology to get ahead. So it could be in any segment. So it doesn't have to be a new business. So can we do an old business in a new way? I think that's one, let's say because the market is established, so nobody's trying to sell 

A car dealership, for example.

Or the second-hand car business, I mean, invested in Spinny. And you see how they've worked their experience out very differently. So it's an old business being done in a new way. And the other trend I see is the consumption pattern shift as you can see in the food, for example, food business I'm excited about, I think we want to see a complete change in how we eat, what we eat and how we consume and how much we spend on food. And that's a multi-year trend. I mean, we no longer want the dal-roti. We will have probably meals that are partly prepared when we get home. So there is a whole change in how we consume, let's say food. So that's another trend I carefully look at. 

But largely, I think this is a low time for startup investment, so one is being more careful.