Why Mamaearth needs to revisit its offline distribution strategy

The company, which is also the parent of brands including Aqualogica and The Derma Co, reported a loss $18.5 Crores with profit of Rs. $294 million in the same period last year, while operating income fell to $461 Crores Rs. $4.96 billion a year ago.

Honasa co-founder Varun Alagh said on a second-quarter earnings call last week that the recent shift in distribution strategy from super stockists to direct distributors has resulted in higher-than-expected costs. But Mamaearth’s sales slowdown has investors wondering what will drive the next phase of growth for the country’s largest digital-first beauty and personal care brand.

ALSO READ | Honasa to implement structural changes at Mamaearth following weak second quarter results

Brokerage firm Emkay Global cuts Honasa price target by 50% to $300 due to significant distribution challenges and lower demand in key markets. “Honasa is facing significant challenges, including declining operating leverage and rising competition. We expect earnings to decline sharply in FY25 and a slow recovery trajectory in FY26,” the brokerage said.

“The journey begins with a $Rs 1,000 Crore Brand $A Rs 2,000-crore brand is not easy. It never was,” said Satish Meena, consultant at Datum Intelligence. Mint. “Honasa may have to accept the fact that its first flagship brand may not be its largest and fastest-growing brand.”

However, Aragh disagrees that the brand has hit a ceiling. In fact, he told analysts on the company’s earnings call last week that he believes Mamaearth has the potential to become the No. 1 skin-care brand within the next five to seven years.

“While the growth rate may slow down, it is sustainable growth. In the long term, we still believe the brand has a long way to go to reach the ceiling,” Alag said.

Mint Analyze the challenges Mamaearth faced and how Honasa got it back on track.

overcrowding

Mamaearth has grown rapidly on the back of its Onion hair care range, which has seen its revenue almost triple in the past two years.

The brand invests significant resources in carefully crafting its distribution strategy and has a gross margin of approximately 70%, considered best-in-class among direct-to-consumer brands and in line with large fast-moving consumer goods (FMCG) manufacturers such as Hindustan Unilever Ltd. (HUL) and P&G Healthcare Ltd.

However, low barriers to entry in the beauty and personal care categories have prompted an influx of new brands aiming to tap into the Indian expatriate market by offering products at par with international standards.

Additionally, the lack of proprietary formulas and contract manufacturers churning out generic products offer little differentiation, making customer retention a tall order, according to Datum’s Meena.

“Mamaearth is priced between mass and premium, and competition is fierce,” says Meena. “Any category that spans multiple income groups can be difficult to crack.”

July, Mint Mamaearth dealers have expressed concerns about the company sending too much stock to the market and delays in replacing damaged, unsold and expired stock, the report said. during an interview Mint The following month, Honasa’s Alagh said the company was working to reduce inventory holding periods from 90 days to 40 days and implement a shift in distribution strategy called “Project Neev.”

Mamaearth’s distribution strategy involves super stockists, a group of middlemen who distribute products sourced from the company to secondary stockists and select retailers. However, dealing with super stockists resulted in poor sales quality and a lack of data, Alagh said during the fiscal 2024 fourth-quarter earnings call. So, under Project Neev, the company moved to a direct distribution model, seeking more control.

ALSO READ | Mamaearth parent company expects changes in distribution strategy to impact revenue in fiscal 2025

However, the implementation of Project Neev cost the company nearly $Revenue in the September quarter was Rs 70 crore, further denting its performance and leading to a loss in the quarter. Alagh told analysts last week that Honasa expects Mamaearth’s momentum to gradually return in the coming quarters as most of the transition work is completed.

Offline channels account for more than 35% of Honasa’s overall sales.

“Mamaearth is banking on its offline strategy, but it will not be easy. For offline operations to work well, distributors and retailers also need to promote products and sell to customers,” said Datum’s Meena. “Furthermore, Mamaearth needs to be the first thing customers think of, but that’s not the case, especially with so many brands already operating in the same category at the same or lower prices.”

Investment bank JPMorgan said in a September report that Mamaearth’s growth prospects are being challenged by increased competition in third-party markets and a weak demand environment. “While offline channel acceptance of new brands is yet to be proven, they are driving growth, which is critical for margin expansion. We believe valuations are higher amid downside risks to revenue/earnings.”

A growing brand

Honasa now plans to make major changes to its product lineup, marketing approach and investment allocation across categories to revive Mamaearth’s growth.

“The model we are trying to execute is similar to past models. We have recognized that we need to make strong adjustments to the product portfolio and be more sharp in investment allocations that we believe are too broad. We need to narrow our focus to a few categories , and drill down into the hero SKUs (stock keeping units),” Alagh said.

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

To be sure, the slowdown in urban consumption has affected numerous consumer brands, including industry giants HUL and Nestlé India Ltd., which saw revenue growth stall and profits fall in the second quarter.

ALSO READ | Fashion is going green, but it’s slow

Datum’s Meena said Honasa’s focus on gaining and maintaining market share in categories rather than brands could help the company grow. “Certain categories such as active ingredients are in high demand and offer opportunities for growth. This may not necessarily come from Mamaearth but from other emerging brand portfolios such as The Derma Co and Dr Sheth’s. The idea is to capture mindshare. This is the only thing that can lead to sustainable growth,” he added.

Analysts at investment bank Jefferies agree. “We are also disappointed with the results and have significantly lowered our expectations. The stocks are likely to sell off next week given lower liquidity, so holders will not be able to exit easily,” they said in a note on Friday. We are positive on the founders and we think they are committed to reviving the business. We do not think the business is in danger of turning negative after the share price gapped down and we retain a Buy rating with a lower PT (price target) ). $425. “

“Honassa is not the first to experience this pain. History shows that businesses do get back on track, and we are hopeful,” Jefferies’ report said. “Against this backdrop, it is noteworthy that several large FMCG companies have undergone distribution restructuring despite being around for decades.”