Why Mamaearth needs to review its offline distribution strategy

The company, also the parent of brands including Aqualogica and The Derma Co, reported a loss of ₹18.5 crore against a profit of ₹29.4 crore in the year-ago period, while revenue from operations fell to ₹461 crore from ₹496 crore a year earlier.

The recent shift in distribution strategy from super stockists to direct distributors resulted in higher-than-expected costs, Honasa co-founder Varun Alagh said during the Q2 earnings call last week. But it’s the slowdown in Mamaearth sales that has left investors wondering what would fuel the next level of growth for the country’s largest digital-first beauty and personal care brand.

Also read | Honasa to implement structural changes for Mamaearth following weak Q2 results

Brokerage firm Emkay Global cut Honasa’s target price by 50% to ₹300 on account of significant distribution challenges and waning demand in key markets. “Honasa is experiencing significant challenges, including reduced operating leverage and higher competition. We foresee a steep decline in FY25 earnings and a slow recovery trajectory into FY26," the brokerage said.

“The journey from a ₹1,000 crore brand to ₹2,000 crore brand is not easy. It never was," Satish Meena, adviser at Datum Intelligence, told Mint. “Honasa will perhaps have to become comfortable with the fact that its first and flagship brand may not be its biggest and fastest growing brand going forward."

Alagh, however, disagrees that the brand has hit a ceiling. In fact, he believes Mamaearth has the potential to be the No. 1 skincare brand in the next five to seven years, he told analysts during the company’s post-earnings call last week.

“While the pace of growth may be lower, it is sustainable growth. And from a long-term perspective, we still believe there’s a long way to go for the brand to hit a ceiling," Alagh said.

Mint analyses Mamaearth’s challenges and how Honasa can put it back on track.

Overcrowding

Mamaearth grew rapidly on the back of its onion hair care range, nearly tripling its revenues in the last two years.

The brand invested considerable resources in carefully building out its distribution strategy, bagging gross margins of about 70%, considered best-in-class among direct-to-consumer brands and in line with large fast-moving consumer goods (FMCG) makers like Hindustan Unilever Ltd (HUL) and Procter & Gamble Hygiene & Health Care Ltd.

However, the low entry barriers in the beauty and personal care category prompted an influx of a host of new brands, aiming to break through to the Indian diaspora by offering products on parity with international standards.

Moreover, the lack of proprietary formulations and abundance of contract manufacturers making me-too products has left little to no differentiation, making customer retention a tall ask, according to Datum’s Meena.

“Mamaearth is in the price range between mass and premium, which is highly competitive," Meena said. “Any category dealing with multiple income groups can be tough to crack."

In July, Mint reported that Mamaearth’s distributors had raised concerns over excessive inventory the company had dispatched to the market and delays in replacing damaged, unsold and expired stock. In an interview with Mint the following month, Honasa’s Alagh said that the company is working on bringing down the inventory holding period from 90 to 40 days with a distribution strategy shift titled ‘Project Neev’.

Mamaearth’s distribution strategy involved super stockists, a set of intermediaries who would distribute products sourced from the company to sub-stockists and select retailers. However, Alagh had said in the Q4 FY24 earnings call that dealing with super stockists resulted in poor-quality sales and lack of data. So under ‘Project Neev’, the company shifted to a direct distribution model seeking more control.

Also read | Mamaearth parent expects distribution strategy change to impact revenue in FY25

However, the implementation of Project Neev cost the company nearly ₹70 crore in the September quarter, further denting its performance and leading to a loss during the quarter. With much of the transition completed, Honasa expects the momentum in Mamaearth to gradually recover over the coming quarters, Alagh told analysts last week.

The offline channel accounts for more than 35% of Honasa’s overall sales.

“Mamaearth is banking on its offline strategy, but it’s not going to be easy. For offline to work well, distributors and retailers also need to push the product and sell to the customer," Datum’s Meena said. “Plus, Mamaearth needs to be the top-of-mind product for customers, which isn’t necessarily the case, especially with so many brands already operating in the same category at the same or lower price point."

Investment bank JPMorgan had said in a September report that Mamaearth’s growth prospects were being challenged by increased competition in third-party marketplaces and a soft demand environment. “The new brands are driving growth though their offline channel acceptance is yet to be proven, which is crucial for margin expansion. Valuations are demanding, in our view, amidst downside risk to revenue/earnings," the report said.

Evolving brands

Honasa now plans to make significant adjustments to its product lineup, marketing approach and investment allocation across categories to revive growth for Mamaearth.

“The model we were trying to execute was similar to what has worked in the past. We have realized that we need to make strong tweaks in the product mix and be sharper on investment allocation where we think we have gone too wide. We need to narrow our focus to a few categories and go deep within the hero SKUs (stockkeeping units)," Alagh said.

Alagh emphasized the company’s commitment to course correction, with a focus on piloting regional and category-specific strategies to “bring Mamaearth back to a strong growth path."

To be sure, the slowdown in urban consumption has impacted numerous consumer brands, including sector giants HUL and Nestlé India Ltd, both of which saw their Q2 revenue growth stagnate and profits dip.

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Honasa’s focus on gaining and sustaining market share in categories rather than brands could help the company grow, according to Datum’s Meena. “Some categories like active ingredients are high in demand and offer growth opportunities. This may not necessarily come from Mamaearth, but from other emerging portfolio brands like The Derma Co and Dr Sheth’s. The idea is to capture mindshare. That’s the only thing that can build sustainable growth," he added.

Analysts at investment bank Jefferies agree. “We too are disappointed with the outcome and have taken down estimates sharply. The shares are likely to sell off next week, not giving holders an easy option to exit, given low liquidity," they said in a report on Friday. “Given our positive view on founders, who we think are committed to getting the business back on track, we do not think there is a case to turn negative on the business, after the stock gaps down. We retain Buy with a lower PT (price target) of ₹425."

“Honasa is not the first to go through this pain. History suggests that companies do come back on track, and we are hopeful," Jefferies report said. “In this context, it is useful to note that several large FMCG firms have gone through distribution realignment, despite decades of existence."