Tier 2 and lower cities contribute majority of Mamaearth’s revenue: CEO Varun Alagh

Alagh said that four years ago around 30 percent of the company’s total revenue came from tier two and lower cities, which has now seen exceptional growth post-pandemic

Mamaearth, owned by Honasa Consumer, derives more than half of its revenue from tier two and lower cities, Co-founder and CEO Varun Alagh said, at a time when online shoppers in these geographies outpace those in metro cities.

“Due to the limit in reach of products, the consumption pattern determined earlier was not correct. E-commerce’s reach and distribution is actually able to paint the correct picture of tier two and beyond’s consumption habits,” said Alagh, while speaking at a report launch by RedSeer in Mumbai on September 1.

In a panel discussion alongside Anchit Nayar, Executive Director and CEO, Nykaa Beauty, and Vivek Gambhir, Former Managing Director & CEO of Godrej Consumer Products Limited, the Mamaearth CEO added that earlier brands had not reached the consumers in these geographies. “They are equally educated and interested in consumption in the BPC (beauty and personal care) segment,” he added.

Nykaa’s Nayar also agreed that tier two and lower cities have boosted the company’s growth over the years.

On the sidelines of the discussion, Alagh told Moneycontrol that four years ago around 30 percent of the company’s total revenue came from tier two and lower cities, which has now seen exceptional growth post-pandemic. While he believes both segments to grow, Alagh said that he does not expect a massive change in the revenue mix from the two going forward.

This also comes at a time when the D2C unicorn is looking to raise about $120-150 million in a new funding round ahead of its planned IPO, which Moneycontrol reported earlier.

India’s BPC Market

The report launched by Redseer with Peak XV (formerly Sequoia India) projects the Indian BPC market at $30 billion by 2027. The market currently stands at $19 billion and makes up about 5 percent of the global market.

“The amount of focus it (BPC) is getting over the past 18 months, and we have exceeded in the last 10 years that we've been doing business in this category. So it's an exciting time for us as retailers and also consumer brands like Honasa,” Nayar said. Both Nykaa and Honasa are categorised as pure-play BPC companies.

In its report, Redseer said that in 2022 the average gross margin for major pure-play BPC companies globally was significantly higher (72 percent) than that of FMCG-led BPC companies (44 percent).

Pure-play v/s FMCG-led businesses

The report defined pure-play companies like L'Oréal, Nykaa and Honasa in the segment as brands or retailers where BPC contributes more than 70 percent of the revenues. While, FMCG-led businesses like P&G, Unilever and so on, are those players with products in multiple FMCG categories including BPC.

"If you look at the last 10 years or so, the large FMCG companies have prioritised margins over growth. If you look at the last 10 years, nominal GDP growth was about 10 percent or so, and market cap growth for the top 14-15 FMCG companies was about 10-11 percent or so,” Gambhir, who currently holds the position of chairperson of Boat lifestyle, said during the panel discussion.

According to him, larger FMCG businesses have focussed on gross margins over this 10-year period. These businesses have been under-investing in marketing, squeezing costs out, and hence, losing out on innovation, he added.

According to the report, the pure-play BPC market share has grown from 30 percent in 2019 to 33 percent last year and is expected to reach 42 percent by 2027. The average earnings before taxes stand at 12 percent for large pure-play BPC companies globally, compared to 14 percent for FMCG-led companies, the report added.

Investors have, however, been bullish on pure-play companies over their less-agile counterparts based on their ability to innovate and stay relevant in this dynamic segment. The valuation of the large pure-play BPC companies globally is approximately 1.8 times that of FMCG-led BPC companies.