Honasa chose the road well travelled for a makeover. It’s no walk in the park.-OxBig News Network

“All of this has happened because of the direct distribution transition that we have done. Our direct distributor contribution has gone from 38% to 71%, which is what we had planned for as we ended the year,” Varun Alagh, co-founder and chief executive of Honasa, said during a post-earnings call with analysts last month. 

Mamaearth’s distribution model transition was complete, he added.

Also read | Why Mamaearth needs to review its offline distribution strategy

However, the process, which stretched for about a year, proved cumbersome for some distributors, especially those with piles of unsold products in tier-2 and tier-3 regions where stock moves slowly.

“My ties with Mamaearth ended about four months ago but the process went on for very long. We were hoping it could have happened more smoothly,” said a distributor in Maharashtra, asking not to be named.

A distributor in Gurugram, who stopped working with Honasa late last year, said the company tried to make the process as easy as possible but the scale of the shift made it difficult. “I work with large consumer companies so I know the kind of effort it takes to do something like this in offline distribution. I knew it wouldn’t be easy,” this person added.

According to industry experts, Honasa needs to continue working on its relationships with distributors, especially those reporting excessive inventory and delays in replacing damaged and expired stock.

“Offline distribution is not child’s play, especially for a consumer-facing brand,” said Satish Meena, advisor at market research firm Datum Intelligence. “To reach scale and efficiency, it’s important to develop long-term relationships with distributors, including those you no longer do business with.”

Also read | Darling to doubtful: The story of Honasa’s struggles

Honasa’s painful path

Alagh had warned of such challenges very early on. In May last year, Alagh said the company’s revenue would be impacted in the short term as it worked on improving its processes across the value chain.

Mamaearth’s earlier 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 said in May last year that dealing with super stockists had resulted in poor-quality sales and a lack of data.

So under ‘Project Neev’, Honasa shifted to a direct distribution model seeking more control. The project’s implementation, however, cost the company nearly ₹70 crore in July-September, leading to a quarterly loss of ₹18.5 crore.

On the plus side, the distribution overhaul is said to have helped Honasa scale up its younger brands.

In the March quarter, Honasa’s The Derma Co brand touched ₹100 crore in annualized revenue rate (ARR)—annual projection based on current revenues—in offline trade, which includes general and modern trade.

“This is a healthy sign that the distribution system is able to distribute more brands, as well as (that) the brand is seeing traction in offline, and that will also become one of the levers of growth for the brand in coming years,” Alagh said last month.

Also read | Honasa to cut inventory holding period for Mamaearth distributors by streamlining supply chain

Mamaearth’s products are priced lower than The Derma Co’s as these target different needs. Mamaearth’s face washes, shampoos, etc., are meant for daily use while The Derma Co focuses on special ingredients for skincare.

The Derma Co has in fact trotted ahead of Honasa’s flagship brand Mamaearth in the offline journey, creating a pipeline for its peers, including Aqualogica and Dr Sheth’s, into the general trade channel, according to Meena of Datum Intelligence.

“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. It’s a different scenario for The Derma Co, where its USP of active ingredients has created decent recall among consumers,” said Meena.

Also read | Honasa denies distributors’ claims of unsold stock, says secondary dues have been cleared

An ambitious target

The direct distribution model is followed largely by well-cemented consumer goods companies including Hindustan Unilever Ltd and ITC Ltd. Striking valuable partnerships with well-connected distributors in different regions of the country has enabled these firms to solidify their presence beyond tier-1 markets.

However, even established companies have had to realign their distribution models.

“Honasa is not the first to go through this pain. History suggests that companies do come back on track, and we are hopeful,” investment firm Jefferies said in a note in September. “In this context, it is useful to note that several large FMCG (fast-moving consumer goods) firms have gone through distribution realignment, despite decades of existence.”

Alagh said last month that Honasa aimed to add at least 50,000 outlets to its direct distribution or general trade channel, indicating a path for also scaling up Bblunt, the company’s hair care products and salon brand, and its teen-focused cosmetics range Staze.

“So we would want to see this number, which is 100,000, to get to 150,000 as we exit the next year, 12 months from now,” Alagh said.

The Honasa stock is down nearly 41% from its lifetime high of ₹547 per share reached in September. On Monday, the stock inched up 0.94% on NSE to close at ₹323.00.