Demystifying Nykaa: The Rise of the Pink

All the ladies put your hands up in the air, presenting before you, your Nykaa.

Have you ever wondered how was Nykaa able to make it even after Flipkart and Amazon? Because it doesn’t compete with Amazon or Flipkart. Nykaa’s constant focus on beauty and wellness made it a winner in the niche market. Nykaa commands a 33% market share in the online beauty market with a topline of INR 1,159.32 Cr in 2019. The company has nearly half a million customers with 1500+ curated brands to appeal to the ladies.

The company was started by an ex-Investment Banker from Kotak securities Falguni Nayar who left the high paying job and embarked on her entrepreneurial journey. When Nykaa was started in 2012, the online beauty market had a few players like Purplle and Urbantouch.

Despite starting late, how was Nykaa able to acquire such a large customer base and customer loyalty? In this article, we demystify how Nykaa runs as a differentiated business.

How is Nykaa different?

Nykaa is one of the few eCommerce retailers who work the inventory based model. This is how an inventory-based model works:

(a) Nykaa purchases the products from the manufacturers and stores it in their warehouses located in Delhi, Mumbai, and Bengaluru.

(b) Products are sold both online and offline in formats of Nykaa Luxe, Nykaa On Trend and Nykaa Kiosks.

This business model allows Nykaa to better control the quality of the product, give a better customer experience, and have higher margins on each transaction. However, the inventory-based model comes with higher costs due to inventory management and logistics challenges.

Another reason why Nykaa was able to pull off in such an elegant manner due to its omnichannel content and guided selling strategy. Nykaa understood very well that customer experience is a key component of a robust customer retention strategy. The company invested large sums of money to build 360 degrees of coordinated marketing and content strategy to instill confidence.

Nykaa doesn’t directly sell products to its customer, rather it uses a guided selling technique for customers to make an informed purchase. The company’s main focus is to educate its customers and make a personalized platform that could guide different sets of customers to make a better purchase.

What about the numbers?

Nykaa has reached a breakeven point and is able to fund its expansion plans through the cash flow generated from the existing business. The company has reported a revenue of Rs. 1,159.32 Cr in the year March 2019 from a revenue of Rs. 555 Cr in March 2018. The company turned profitable in FY 19, with net profits of Rs. 2.3 Cr.

The net profits don’t look large enough but when we consider the fact that the company had losses back in FY 18 of Rs. 17 Cr, it is indeed a great achievement. The company gets to keep a margin of 10-20% for the established brands and a margin of 40-60% for its in-house brands. These high margins have led the company to build a sustainable business model.

The company earned the prestigious title of “Unicorn” for being valued at USD 1.2 Bn after the INR 100 Cr funding from the previous investor Steadview Capital.

Expansion in their cards

The interesting part to watch is Nykaa’s expansion plans into various categories. It has forayed into creating its own brands in beauty and cosmetics, retail outlets, and lately into apparel eCommerce. Nykaa also launched NykaaMan, an eCommerce platform for men’s personal care products in hair care, skincare, wellness, and sports nutrition.

The overall expansion plans look strong for Nykaa due to the fact that the company is profitable. Thus, giving it much room to expand by reinvesting their own money and also trying out new segments in apparel and cosmetics. Company diversifying into apparel makes sense as apparel is a bigger market than cosmetics.

With 3 million monthly active users the company can well capitalize on the opportunity to become a household brand for cosmetics, apparel, and fashion in general. The introduction of private labels will also help the company to maintain margins and build a sustainable business model.

Nykaa has a huge potential in the cosmetics and apparel business in India- as a large part of the market is still fragmented and not organized. Just to give you a data point for online eCommerce, the online eCommerce is only 1.6% of total retail sales in India, versus over 15% for China and 14% globally. The number might be 3% due to the pandemic but still, it is very low if compared to developed countries.

India has a lot of potential in the online retail space and Nykaa is thus leveraging its brand and data of customers to expand into different verticals and build moats around its business. Nykaa’s powerful execution and business sustainability might make Nykaa the winner in the Indian apparel and cosmetics market. So, sit tight and watch Nykaa play the retail game.

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