India D2C Brands Face Major Challenges: Supply Chain & Costs

D2C Brands Grapple with Manufacturing Disruptions and Rising Costs

India’s burgeoning Direct-to-Consumer (D2C) sector is currently navigating its most challenging period, as a complex web of global and domestic issues exerts immense pressure on manufacturing facilities and established supplier relationships. The ongoing conflict in West Asia has become a significant catalyst, triggering an exodus of workers and leading to considerable labor shortages across India. This disruption is profoundly impacting retail manufacturing operations, with dwindling fuel supplies in the grey market exacerbating the situation. Workers are returning from urban centers, and factories in key manufacturing hubs like Gujarat’s Morbi and Surat, Ferozabad in Uttar Pradesh, and Haryana’s Bahadurgarh are facing shutdowns. This widespread stress on manufacturing disproportionately affects D2C brands, particularly those in the beauty and personal care, apparel, and home decor segments.

A critical factor contributing to the current crisis is the substantial increase in the price of commercial LPG cylinders in India, which has risen to ₹1,303. While petrol and diesel prices have seen relative stability due to absorption by oil companies, there are growing concerns that this subsidization may not be sustainable long-term. These supply chain issues have not only escalated packaging costs for D2C brands but have also disrupted contract manufacturing operations. Furthermore, relentless fluctuations in commodity prices are fostering an environment of uncertainty and fear among manufacturing unit workers, leading to strikes and protests, as evidenced by the mass demonstrations in Uttar Pradesh in April. These challenges are forcing brands to renegotiate terms with their manufacturing partners, with many manufacturers reporting a 15-20% increase in overall costs due to these interconnected issues, a burden that is largely being passed on to the brands.

Manufacturing Contracts Under Intense Scrutiny

The current economic climate is compelling brands and manufacturers to reassess their contractual agreements. Ritish Garg, co-founder and CEO of home appliance startup Longway, highlights that while renegotiating terms might be manageable for established relationships, it poses a significant challenge when seeking new vendors or replacing suppliers whose factories have closed. Brands are now expected to possess a deep understanding of their product lines, raw material compositions, and current market prices to prevent manufacturers from exploiting the situation to their advantage. Consequently, founders of larger brands are increasingly taking a hands-on approach, personally vetting multiple suppliers instead of relying on procurement agents, a strategy that may prove difficult for smaller, newer brands.

Manufacturers are shifting towards a ‘cash and carry’ model, moving away from the previous 45-60 day credit lines. Many now require upfront payments or a combination of partial upfront payment and the balance upon delivery. This transition is creating significant cash flow and working capital management challenges for brands operating on thin margins, as they rely on sales revenue to meet vendor payments. Jasdeep Chadha, founder and CEO of Sage Apothecary, a contract manufacturer for beauty and personal care brands, notes that while established clients may receive some flexibility, newer clients might face more stringent payment terms. Manufacturers are absorbing only a portion of the escalating operational and procurement costs, passing the remainder to clients. Varun Vohra, co-founder of home decor marketplace Vaaree, points out that plastic raw material costs have surged by 40-50%, impacting packaging material expenses, necessitating close collaboration with manufacturing partners to mitigate this impact.

Core Issues Plagueing D2C Manufacturing Landscape

The primary challenge for manufacturers lies in the procurement of raw materials, characterized by both shortages and volatile pricing. The Indian Rupee has reached a fresh all-time low against the US dollar, while global oil prices have surpassed $120 per barrel, significantly increasing the cost of imported raw materials. This is particularly acute for beauty and personal care brands that rely on imported ingredients from Europe and the Middle East. Freight costs have also seen a substantial increase, with container shipments from Dubai now costing four times more than before. For the apparel sector, cotton yarn prices are escalating as global supply route disruptions redirect Chinese mill demand to Indian suppliers, tightening domestic cotton availability. Petroleum byproducts like plastic polymers, essential for manufacturing and packaging, are especially vulnerable due to their dollar-denominated pricing and global trading on spot markets.

Udit Birla, promoter of Swara Baby Products, an OEM for the babycare industry, emphasizes that the core issue is price volatility and a lack of clarity, rather than structural cost increases. However, operations are undeniably impacted. Rishheb Wassan, director of Stella Industries, a manufacturer of grooming and toiletries products, notes that the price of LPG, a government-controlled commodity, has drastically changed, impacting industries that rely on it for processes like paint curing, drying, molding, dyeing, and textile processing. Packaging also heavily utilizes LPG for processes such as plastic shrinkage and bottle molding. While some of these processes can be converted to electric power, efficiency is hampered by frequent power outages. Manufacturers are currently receiving only about 60% of their LPG allocation from previous months, insufficient to meet operational needs, especially during colder months when utilization is typically lower.

Manufacturing Operations Face Halt Amidst Rising Costs and Shortages

Thousands of Micro, Small, and Medium Enterprises (MSMEs) in manufacturing hubs across India have temporarily ceased operations due to supply shortages and prohibitive costs. A potential increase in oil prices could further exacerbate shortages as businesses may resort to hoarding, leading to production stoppages. Energy fluctuations are common in Indian factories, which often rely on diesel-powered generators for backup power. The logistics sector is expected to be severely affected, with both inbound and outbound shipments facing significant disruptions. Labor costs have also risen by approximately 15% due to various factors, including worker protests over low wages, long working hours, and poor working conditions in manufacturing hubs like Noida and Gujarat, which have led to temporary halts in production and increased employer costs.

These protests followed a minimum wage hike in Haryana, prompting similar demands in neighboring states at a particularly inopportune time. This is compounded by an ongoing exodus of workers from manufacturing centers due to the rising cost of cooking gas in the grey market. Periodic events like elections, and agricultural seasons such as harvesting, further contribute to labor shortages and drive up wage demands. Many workers have departed in recent months, leading to extreme inconsistency in working hours. Those remaining are now demanding salary increases due to their increased cost of living, further escalating operational expenses for manufacturers.

Strategies for Mitigation: Absorbing or Passing On Costs

Manufacturers and retail brands are employing various strategies to navigate the volatile commodity price environment. These include attempting to lock in raw material volumes when prices are lower or placing smaller orders during price surges to avoid bulk purchases at inflated rates. This has led to practices like hoarding and hedging, prompting many vendors to quote prices on a daily basis to protect their own profit margins. While consumer purchasing patterns have largely remained stable, as prices have not yet significantly impacted end consumers, brands are focusing on bolstering inventories to maintain service levels and secure better margins before price increases become inevitable.

Some D2C brands have subtly increased prices through hidden markups before discounts, a common practice in the sector. Others are maintaining existing retail prices while reducing discounts by 5-10% to offset margin pressures without alerting consumers. Optimization efforts also include seeking alternative, domestically available ingredients that are less susceptible to price fluctuations. D2C businesses are also building financial buffers by cutting budgets in other departments, particularly marketing, to achieve cost savings. Despite these mitigation efforts by brands and manufacturers, it is widely acknowledged that the current situation is only sustainable for a limited period. The consensus is that once commodity prices, such as those for gas and petroleum byproducts, rise, they rarely return to their previous levels. Consequently, businesses can only absorb the financial impact on their balance sheets for so long before being compelled to pass on the escalating costs to consumers. This wait-and-watch approach is expected to continue for another quarter, or until legacy FMCG brands begin price adjustments, after which D2C brands will likely be forced to follow suit, irrespective of the geopolitical situation’s resolution.