Mamaearth: Impact of distribution changes higher than expected; taking steps to bring growth back to Mamaearth: CEO Varun Alagh

Beauty and personal care company Honasa Consumer, which runs brands like Mamaearth, reported a decline in its operating revenue for the July-September period as it slipped into losses for the second quarter of the current fiscal. The company was hit by a restructuring exercise in its distribution and supply chain wherein it is moving away from a super-stockist model to appointing direct distributors. The Gurgaon-based company’s growth was not in line with its expectations, the company’s cofounder and CEO Varun Alagh told ET in an interaction. Edited excerpts:

You had mentioned in the previous quarter that the company will see an impact on revenue and profitability… has it been in line with what you envisaged?

The impact (of the restructuring) was higher than what we had planned and expected… we initially had certain assumptions in place, which were based on a certain level of inventory but as we reached the execution stage, it turned out to be relatively higher.
We had imagined it to be a Rs 50 crore inventory impact but it turned out to be a Rs 70 crore impact. That has led to scale reduction, provisions in expiry and damages of the returns stock, which has led to the impact on ebitda as well, which was higher than what we had expected. (ebitda or earnings before interest, taxes, depreciation and amortisation measures a company’s core operating profitability by revealing its earnings before financial and tax obligations.)

Looking ahead, have you recorded the full hit of this exercise or could there be more in the coming few quarters?

I don’t think in the following quarters we foresee any impact from (inventory) returns. All of that has been transitioned and taken into account. The buildout from here onwards is going to be slightly gradual. In 70% of the areas, we have been able to appoint the right kind of distributors but the balance is yet to be covered, which will happen over the next few quarters and that should help us get to the original levels. Overall growth has been hit as well?

Beyond that, even if you adjust for it, the overall growth has been lower than our expectations and it’s largely because of Mamaearth not growing in line with what we had imagined it to… offline is one reason but we have also recognised a few other reasons, which we are structurally trying to address. [These include] investment allocation across categories… where we clearly realised we were underfunding some of the focus categories because we were dividing our investments too wide. Also, in terms of messaging and hero product buildout, which is required to win offline… we had realisations there that we would implement.

When you say you need to fix the underfunding of some of the categories… what does it mean for Mamaearth as your flagship brand?

What we’ve realised is that there are certain categories which we have chosen to focus on… and the objective at all points has to be that we gain share in all those categories as Honasa. Mamaearth continues to be the largest brand in our portfolio and we continue to take all steps to get it back to the growth path.

What about the other brands?

As for the other brands – the categories they participate in, they will get their due level of investments. When I talked about investments, I was talking about allocation within Mamaearth. Instead of optimally allocating [resources] in five categories, we ended up sub-optimally allocating investments across ten categories.

Over the past few quarters, you have highlighted certain weaknesses such as low presence in winter care categories… so does this mean going ahead you would enter new segments?

Our focus is going to be on strengthening existing categories… there are a few clearly defined ones where we have a right to win, and our market share is high such as in face wash. The opportunity to gain within them is very high. We will first think about them before expanding further into new categories.