Why D2C brands From TAC to Sugar are retreating from physical stores

From Mamaearth correcting its offline expansion to SUGAR Cosmetics shrinking its retail footprint, brands are discovering that wider distribution does not necessarily translate into stronger consumer demand. The problem is often not the product itself, but the cost of expanding into markets where sales volumes are insufficient to support the investment. “The simple reason is that placing a product on a shelf and making it move from a shelf are two completely different skills and most D2C brands confuse the first for the second,” Deep Bajaj, ReFounder and CEO of Sirona Hygiene, told FE.

Online, a single viral campaign can generate orders nationwide. Offline, demand must be built territory by territory, store by store, he said. Physical expansion entails distributor and retailer margins, sales teams, inventory across multiple locations and extended credit periods. Exclusive stores add rental commitments, fit-out costs and staff expenses. Unlike online advertising, which can be switched off when sales weaken, these costs are difficult to reverse once a distribution network is established.

“D2C growth relies primarily on performance marketing and variable fulfilment costs. Transitioning offline requires adapting to high fixed-cost economics,” said Nitin Agarwal, managing director and board member at Capwise Financial Services. While online inventory turns over dynamically with customer demand, physical retail locks up capital in display stock across distribution nodes, regional warehouses and storefronts, he said.

“Offline plateau is often a sign that distribution has expanded faster than underlying consumer demand,” said Anand Ramanathan, partner and consumer industry leader at Deloitte South Asia. Brands typically begin with markets where they already have consumer awareness and demand. Growth becomes harder when they move beyond these natural catchments, as each new location must generate sufficient incremental sales to justify the additional inventory and operating complexity, he said.

The consequences are becoming visible in companies’ efforts to rationalise their networks. SUGAR Cosmetics is reducing its store count from around 2,400 to about 1,000, while Honasa Consumer, the parent of Mamaearth, has worked on restructuring its distributor network. Arjun Vaidya, co-founder and investment partner at V3 Ventures, said both companies had expanded distribution ahead of consumer demand and subsequently had to correct course.

Online, marketing is a dial: if a month goes badly, you switch it off. Offline is a ratchet,” Vaidya said, pointing to trade margins, distributor credit, sales teams and inventory as costs that remain even when demand disappoints. The shift towards quick commerce and e-commerce is also changing the case for physical expansion. Some categories can now build substantial businesses through digital channels without investing heavily in stores.

However, the right approach depends on the product: premium jewellery and high-end apparel may need physical outlets to offer consumers a tactile experience, while several digital-first categories can scale online for longer. Experts say brands should consolidate existing markets, improve inventory turnover and establish demand before entering new territories. Shrinking an underperforming network, they say, is not necessarily a sign of failure.