Daybreak - Why Mamaearth is stuck with dead stock and mounting losses

Episode Date: November 25, 2024

In the June quarter of 2024, Honasa Consumer, the maker of Mamaearth, decided to launch this new project called Project Neev. The idea was to bring about a foundational change in the way the company operates, especially distribution.For context, Mamaearth hit the bourses in October last year when everyone else who had IPO plans had decided to hold them off for a bit. But Varun Alagh, the CEO and co-founder of Mamaearth, was of the firm opinion that the timing was perfectly ripe.Things seemed to be going alright until this month when Honasa Consumer reported its first loss ever since it went public. Everything points to the massive change in the company’s distribution strategy. It decided to dump all its super-stockists or distributors for an in-house sales team that would take care of it. Basically, all the middlemen were kicked out.The company estimated a one-time hit of Rs 50 crore in inventory losses because of this shift. But Alagh himself admitted in an interview  with The Economic Times that the real damage was closer to Rs 70 crore. And former distributors allege that the real picture is much worse. They estimate that there are stocks worth Rs 300 crores lying unsold and unclaimed.In today’s episode, we’ll delve deeper into what this change in distribution strategy has led to for Mamaearth and its former stockists. Daybreak is now on WhatsApp at [phone]. Text us and tell us what you thought of the episode!Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

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In the June quarter of this year, Hunasa, which is the maker of the skincare brand, Mama Earth, decided to launch this new project called Project Neve. Now, Neve in Hindi means foundation. And what this project wants to do is bring about a foundational change in the way that the company operates. I'll come back to this in a bit, but first some context. If you remember, the company went public last year in October when everybody else who had IPO plans had decided to hold them off for a bit. And for good reason, the public market had been pretty hostile. Investors were specially staying away from digital companies and startups. And yet, Varun Alak, the CEO and co-founder of Mama Earth, was of the firm opinion that the timing was

perfectly ripe for the company's public offering. But it took almost a year for the real troubles to hit home. This month, Honasa reported its first loss ever since it went public, 15 crore rupees. And you know what the culprit was? Project Neve. The project was basically a massive change in the company's distribution strategy. It decided to dump all of its super stockists or distributors for an in-house sales team that would take care of it. Basically, all the middlemen were kicked out. Now, because of this shift, the company estimated a one-time hit of 50 crore rupees in inventory losses. But that was optimistic. The real damage was closer to 70 crore rupees.

Alag himself admitted this in an interview with The Economic Times. But former distributors allege that the real picture is much worse. They estimate that there is almost 300 crore rupees worth of stocks lying unsold and unclaimed. And what was the result of all this? In a day's time, Hunasa's shares plunged 20%, which is the maximum allowed in a single day. They fell well below its IPO price,

and ultimately, the company lost three to three thousand five hundred crore rupees from its market cap. So in today's episode, we will delve deeper into what this change in distribution strategy has led to for Mama Earth and its former stock is. Welcome to Daybreak, a business podcast from the Kent. I'm your host, Nick Da Sharma, and I don't chase the new cycle. Instead, every day of the week, my colleague Rahal Philipos and I

will come to you with one business story that is worth understanding and worth your time. Today is Tuesday, the 26th of November. Kumar is a 40-year-old middleman in the beauty and personal care market. He's built his entire livelihood by bringing big brands and the Kiranhas, which are mom and pop stores together. And as we know, most of India's retail economy, so far at least, is powered by these partnerships. This year, though, something unexpected happened.

You see, Kumar is one of the many distributors of Mama Earth that the company decided to do away with in favor of an in-house team. The idea was that it would increase efficiency. But in reality, chaos ensued. The impact was quick. and, well, painful for someone like Kumar. He was left with an unsold inventory of shampoes, creams and face washes worth lakhs of rupees.

And he's just one of many. Turns out there is a growing group of distributors from Maharashtra and Delhi who are stuck with Mama Earth's stock that they could not move. My colleague, the Kenrapporter Akriti Bhala, spoke to at least four distributors who confirmed the scale of their losses and the lack of recourse to us.

And if you think Mama Earth has gotten away with this, that is actually not true. In a November analyst call, CEO Alag acknowledged that Honasa, which is the parent company of Mama Earth, was able to build a $1,000 crore-rupy brand with its online strategy. But he said that replicating the same playbook in offline channels to hit $2,000 crore rupees of revenue did not work. And right after that, the company saw its first loss this month after going public. It's also seen a dip in its sales and, worst of all, its share price fell and it saw its market cap reduced by 3,500 crore rupees. But the ones who were hit the worst by all of this are Kumar and other distributors like him. Even Sumit Agarwal of the National FMCG Distributors' body noted that stock worth crores of rupees lies with small distributors and superstockists across the country.

He also mentioned that these people have not been given any assurances that the company will take back the unsold stock anytime soon. And now expiry dates are looming and unsettled credit notes add to the mess. In a press note, the distributor's body estimated unsold stock at 300 crore rupees and unresolved credit notes at another 50 crores. More on this in the next segment, so stay tuned. Distributors that Akriti spoke to said that the real problem started months ahead of Hunasa's IPO. So what Mama Earth needed at the time before it went public was to boost its sales figures, right? So it began flooding the market with its stock. The idea was simple.

They thought these products will fly off the shells in no time. But that didn't really happen. And by that time, there was also a general slowdown in consumption. Even FMCT giants like Hindustan, even deliver, Nestle, they were all feeling the pinch, you know. Now, before we get into the lows, it is only fair to remember that Mama Earth did see some good days before the IPO. It turned profitable for two quarters in a row before it went public. It also revamped its identity from a D2C label and began aggressively expanding into the offline retail space. You could see Mama Earth products sharing shelf space next to legacy company products,

like Marico and Procter & Gamble. And even now, offline sales still account for 35% of Mama Earth's revenue. Unfortunately though, you can't just say you're in the big leagues just because you're sharing shelf space with legacy brands. About a year ago, when Kumar and other distributors like him came into the picture, they were told that they had nothing to worry about. Like Mama Earth's products would be selling like hot cakes from Okirana or Mormonpop store. The plan was to push buy one, get one,

or buy two get one free offers to help create some initial buzz. Now, just to make it clear, Kumar's role in all of this is acting like the intermediary between Mama Earth and the Kirana store. They would buy Mama Earth stock up front, usually in cash, and extend credit to the Kiranhas, usually for around 20 to 30 days. But for Mama Earth, who was the new kid on the block, these distributors were extending 45-day credit periods. Basically, they were taking.

on the risk, so they were really counting on higher margins. At the peak of this inventory build-up, small distributors sat on stocks worth 10 to 15-lac rupees and the bigger players held on to as much as 40 to 45-lac rupees worth of products. Agarwal from the FMCG distributor body told us that this was far more than their average monthly sales could justify. Honasa, or Mama Earth, on its part, took full advantage of this enthusiasm amongst its distributors. But here is what it didn't understand. Sanjeev Shriwastava, an independent FMCG consultant, explained it to us. He said Honasa did not focus on the basics of offline distribution. Instead, the company focused too much on primary billings, which is getting stocked to distributors

without creating actual demand at the retail level. Analysts and distributors told us that the company just started discounting and moving products into the market and it counted sales to distributors as real sales. The other thing MamaR did was to launch new products at breakneck speed. And while it has some advantages, there are problems with this strategy. For example, the more it launches, the harder it is for consumers to latch on to any one hero product. Analysts who spoke with again said that the company needs to focus on a few standout products,

advertise them well according to the channel and push them in smaller pack sizes. Thankfully, Mama Earth does have some products designed specifically for Kirana channels and also for pushing through direct distribution, like the Vitamin C face wash and Upton face wash, which are priced at below 100 rupees. But one thing is for sure, and we've spoken about this many times on daybreak. The skincare market is saturated, and brands that are doing well are the ones that have done away with the middleman. Thanks to quick commerce, they can even consider that option.

So, for the likes of Kumar, the future looks dismal. He predicts that in the next few years, he may be forced to shut down his distribution business or maybe narrow his focus down from over 100 grants to just five. He sighed and told Akriti, I've burnt my fingers enough. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-undi offerings.

A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. To subscribe, head to the ken.com and click on the red subscribe button on top of the Ken website. Today's episode was hosted by Snigda Sharma and edited by Rajiv Siyah.