The D2C Math Is Breaking: West Asia War Forces Brands Into Repricing Mode
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In the last few years, the world has adapted to new waves of uncertainty. From Covid to various economic slowdowns to the recent West Asia crisis, every time global supply chains were disrupted, a new reality had to set in.
Same goes for the D2C and new-age retail brands today. As oil prices go to record highs, supply of key items has been disrupted. As it is markets have panicked, with foreign investors pulling out of India, and there could be a real crisis on hand if livelihoods remain at stake for too long.
As the war in West Asia continues unabated, the impact is rippling through industries. Indian retail and D2C brands are increasingly feeling the pressure on their unit economics, as cost of key ingredients have risen and fuel prices have also contributed to a hike in logistics costs.
Even before the most recent fuel price hikes, the situation was strained due to the paucity of workers at manufacturing units in the early days of the conflict. Inc42 spoke to multiple D2C founders trying to assess the fallout of the crisis just one month into the West Asia conflict. At the time, most brands were absorbing the rising costs internally, delaying the impact on consumer prices.
Today, however, those pressures are beginning to show up clearly in terms of the margins, bottomline and pricing.
While some brands are inclined towards implementing direct price rise, others are trying to find a middle path, looking at new packaging to mitigate the slowdown in import of packaging materials. Others are still figuring out how to balance the cost such that their market share does not see a major impact.
All in all, the D2C ecosystem is in repricing mode right now.
“Costs across packaging, freight, and select raw materials have moved up meaningfully over the past few months. Demand is stable – the real pressure currently is on backend economics,” said skincare startup Plum founder and CEO Shankar Prasad.
Due to heavy dependence on packaging and wide distribution network, India’s beauty, personal care and packaged food industry are the most severely hit segments. In the aftermath of the West Asia crisis, a new D2C math is now beginning to unfold — one stage of the supply chain at a time.
As we break down the parts of the supply chain hit hardest by the global crisis, it becomes clear that the pressure on brands is emerging from multiple backend cost centres simultaneously.
D2C Supply Funnel Breaks Down
From rise in operational costs at factories to shortage of labour due to high LPG prices displaching workers, there is a lot that has hit homegrown D2C brands in recent months. The supply chain disruption has hiked costs at both sides of the retail chain. Input prices have made manufacturing more expensive and distribution costs are about to skyrocket as the Indian government hikes fuel prices in metros.
Packaging: The Deepest Cut
WOW Skin Science founder Manish Chowdhary revealed that the beauty and personal care startup has seen around 40% input cost jump in the past few months. He attributed this cost rise to supply crunch in packaging materials. The price for packaging materials has almost doubled in price, while raw materials are up around 35%.
Beauty packaging in particular is deeply linked to petrochemical supply chains for making bottles, pumps, caps, and dispensers, Plum founder Prasad told us.
These goods are manufactured using crude oil derivatives, making the segment highly sensitive to oil price fluctuations.
As is well established by now, India imports a significant portion of its crude oil requirements from West Asian countries such as Saudi Arabia, Iraq, and United Arab Emirates. As tensions in the region disrupt energy markets and shipping routes, petrochemical-linked packaging costs also come under pressure for D2C beauty brands.
On the other hand, packaged food brands are also witnessing a similar hit with laminate costs (the plastic films used to seal and wrap products) going up by 30-35%, said Indian treats and sweets startup GoDesi founder Vinay Kothari.
The Raw Material Import Obstacle
Depending on the product and ingredients, naturally raw material import stands as a huge obstacle for multiple brands. For instance, India’s dry fruit supply which includes dates, cashews, pistachios, almonds is heavily dependent on Middle East markets. With vessel movement and trade through the Strait of Hormuz hampered for months, prices for these goods have moved up sharply.
As per GoDesi’s Kothari, prices for raw material in the dry fruits category in particular have risen by almost 50% from January prices. “Oil prices may eventually stabilise if production increases, but shortages of certain raw materials are likely to persist for some time. So even if fuel costs ease, supply-side pressures across the value chain may continue,” he added
Similarly, the BPC segment is also facing the heat of the West Asia war, as India heavily depends on the affected regions for import of components like speciality chemicals, surfactants, fertilisers, and more.
The Logistics Lag
When we spoke to many of the D2C brands, the prices of fuel in India were relatively more stable than the rest of the globe. No startup specifically mentioned concerns around distribution, but the situation is rapidly changing. Diesel and petrol prices have already moved up, and brands with solo manufacturing units face a structural disadvantage compared to larger players with distributed manufacturing. The latter are able to optimise their freight networks.
On the other hand, quick commerce platforms are likely to face the hit as fuel prices hit gig workers. Last week, the Gig & Platform Service Workers Union (GIPSWU) called for a nationwide five-hour shutdown of app-based services, seeking higher per-kilometre payouts from digital platforms and government intervention after the recent increase in petrol, diesel, and LPG prices.
“We haven’t seen a major direct impact yet, but transportation costs are expected to rise as diesel prices continue increasing. Large distributed companies may still be able to absorb some of that pressure, but newer brands operating with a single manufacturing facility will feel the impact more sharply,” confectionery brand GoDesi founder told Inc42.
The New Cost Reality
When multiple cost points move simultaneously, brands feel the pressure to reflect, optimise and decide. Fluctuations on multiple layers of the supply chain have shuffled the unit economics for BPC and packaged food brands.
As petroleum prices are not subsidised for commercial laminates (packaging), the 30-35% increase in its cost is a direct hit on D2C brands as their margins are already thin. How much does packaging contribute to the cost of making a product, one might ask.
At companies like GoDesi, packaging accounts for as much as 25% to 40% of the total manufacturing cost of a product, depending on the SKU. Packaging cost is largely fixed for each size SKU, regardless of the flavour or seasonal variation in the products. In fact, packaging costs are higher for smaller size SKUs with a low retail price, as they typically have thinner margins.
According to Genext Labs, a private label skincare manufacturer, packaging accounts for the largest share of costs for BPC brands at around 30-40% of the total product cost. Raw materials typically contribute 15-25%, while R&D, manufacturing & labour, and distribution each make up another 10-20%.
With packaging and raw materials for products both being affected, the market is expecting price hikes of around 30-50%. The overall production cost has jumped up, and this will be passed down unless brands can absorb the margin hit. Not all will be capable of doing so.
“Margins are shrinking. Demand itself is volatile right now. Marketplaces and modern trade are in the middle of resetting their stock levels, panic buying hasn’t set in yet, so we’re navigating a tricky middle ground,” added WOW Skin Science’s Chowdhary.
Who Bears The Cost?
D2C brands in the beauty, skincare, packaged food and even lifestyle categories stand at a crossroad. How much of this cost hike can be realistically passed on to the end consumer. This is especially true for non-discretionary categories like beauty.
Notably, most of the D2C brands are thus far absorbing the cost hike in their margins. But as the war spirals, companies are now planning to pass on some of the costs to the consumer in a way that doesn’t hurt their customer base or market share. This is the tricky repricing exercise and most business and category managers are working day and night to get the math right.
Chowdhary told Inc42 that WOW Skin Science has responded with a measured 6–7% price increase across categories and pulled back on discounting with a deliberate attempt to not inflate prices at a higher rate. Citing high competition in the BPC market, the founder added that the brand can’t move dramatically on this and doesn’t want to burden the end consumer much.
“Our approach is roughly 50-50 to absorb what we can internally, pass on the rest cautiously. There will be a bottom line hit this year. That’s the reality we’re planning around,” he added.
On the other hand, Kothari added that while GoDesi was absorbing most of the burn till now, it will start to pass it on to the consumers in the next 15-20 days with the new packaging cycle. The company plans to cut down on the grammage of the final product.
He further added that the brand expects to absorb around 30-40% of the impact through operational efficiencies, while another 30-40% is likely to reflect on its P&L. The remaining 20% could eventually be passed on to consumers.
What remains unclear is whether these hikes will end up denting the growth prospects for D2C brands, which were just emerging from another similar price-change exercise due to the rationalisation of GST for many categories last year. At the time, the new lower prices were expected to drive growth, but the current crunch has soured the mood of the ecosystem.
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