NOT MAKING THIS UP

Why one of India’s top online beauty retailers chose to go brick-and-mortar

Quartz india
Quartz india

Nykaa, one of India’s top beauty e-tailers, is all set to chase profitability even as it invests in opening more brick-and-mortar stores.

On May 14, the Mumbai-headquartered company said it has raised Rs165 crore ($24.3 million) in series D funding led by Hero Corporate Service chairman Sunil Kant Munjal and consumer goods veteran Harsh Mariwala, among others.

Started in 2012, Nykaa today sells over 850 brands on its website and has 17 stores. In the financial year ended March 31, 2018, the company more than doubled its turnover to Rs570 crore from Rs214 crore in the previous fiscal.

With the online beauty market is expected to touch $1.5 billion by 2020, and double to $3.3 billion by 2022, the company is looking to increase the brands and categories it offers and open another 30 stores, founder and CEO Falguni Nayar told Quartz in an interview. Edited excerpts:

You started out as an e-commerce company, but you now have several brick-and-mortar stores. What’s prompting you to open these outlets?

We did a survey and found out that many of our customers want to experience our products in stores. So, retail stores are an important part of our strategy. We have two store formats—the Luxe format (for high-end beauty products) and the On Trend store format that curates and sells the retailer’s best-selling products in the store.

How relevant do you think is the convergence of online and offline for India?

I think omnichannel is an important part of the strategy for the Indian e-commerce industry.

While retail is a pretty big business in India, online sales account for less than 2%-3% of the sector. In fact, even in developed e-commerce markets, the share of online sales is less than 10%. Though, of course, e-commerce has its advantages—like the kind of reach it offers and the fact that it is like an endless aisle—which cannot be wished away. But now, the customers are preferring an omnichannel model and brands will have to give them the experience they want. Even in the beauty category, customers want to go to the stores and experience the products once in a while.

But these stores require investments. Will a part of the recent funding go towards adding stores?

The funding is for working capital finance and some amount of capital expenditure that will be used towards stores. But our spending on stores is not huge. It will be less than even a third of our funding. That said, our stores will be aspirational. We won’t hesitate to do the right look and feel in the stores irrespective of the costs. While store-level profitability remains important for us, these stores are being optimised for user experience rather than costs.

Do you plan to bring your offline sales at par with the online business?

No, our monthly run rate (for e-commerce) is so large that we currently do a turnover which is equal to some hundreds of stores. With 17 stores we cannot be at that same level of sales just yet. I would say our retail stores will be at 10% of our turnover.

How do store economics work out for a beauty retailer in India?

Now we are at 17 stores and are moving towards 55 stores by 2019. We are rolling out about two stores a month, and I think it will accelerate to about three a month. For us, it is all about the right location, the right mall, and the right market. So, if needed, we may even wait for a good six months to a year to find the right location.

We are very sure about the success of our Luxe model and our stores in metros. In metros, we see store-level EBIDTA (earnings before interest, depreciation, tax, and amortisation) profits almost immediately. In certain other cities, we take three to six months to scale up.

Now, we are expanding our reach in other markets like Bhubaneswar, Guwahati, and Coimbatore. We are setting up stores that are futuristic. That’s because we are looking to add a lot of new things to our website in the next one year, and we are building stores keeping that in mind.

By when are you looking at achieving profitability?

So if all goes well, we will become profitable (at an operating level) by later this year. For e-commerce, the main thing is to control the marketing cost, and I think Nykaa has a very strong marketing strategy that will enable us towards profitability.

You have spent significant time shoring up your product portfolio and adding more brands. Will that change?

No, we were always very focused on building the beauty category, and we continue to do so. Right now we are growing our natural products category, we are also expanding our men’s range and our luxury offerings. Deep growth in the beauty category is what we are working towards, and that would mean a lot of growth in content for the consumers. We have, for instance, just launched the Nykaa Network, which gives advice to our customer because we want to facilitate learning about beauty.

We also have horizontal segments like accessories, and lingerie, which are also seeing traction. We are looking at adding some more categories soon.

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