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    Being fashion forward: Nykaa will diversify, but does Falguni Nayar have enough ammunition to make it big?

    Synopsis

    The seven-year-old specialised online beauty retail venture has added fashion to their forte.

    Nykaa
    Founder of Nykaa.com, Falguni Nayar (C), and daughter Adwaita Nayar (L), along with her twin brother Anchit, have a new business strategy. (Photo: BHARAT CHANDA)

    First, you get a woman hooked on to Huda. Or grab her attention with Aveeno and then leave the rest to Bobbi Brown. Soon she starts coming to you repeatedly; you’re the only one who can add gloss to her beauty.

    After all, wasn’t it the iconic French Yves Saint Laurent who claimed, the most beautiful makeup of a woman is passion. But cosmetics are easier to buy?

    So now that you have her attention fully, save time with quicker deliveries and seal the deal with hefty discounts. Then wow her further with the latest pret lines. So says Falguni Nayar, investment banker-turned-3rd generation ecommerce entrepreneur and founder of Nykaa.com, explaining her latest business moves.

    “Fashion has a wider appeal (than beauty). We don’t have the first mover advantage like we had in beauty, but we wanted to offer fashion and our customers were ready to accept it from us.”

    Sounds like she knows what she’s talking about. But for Falguni and her twins, Adwaita and Anchit, fashion, their latest attempts to diversify could well be a very expensive distraction.

    Nykaa, a seven-year-old specialised online beauty retail venture and ‘soonicorn’ (it’s getting there), has added fashion to its forte, but the move has split outsiders as well as insiders down the middle. “The consensus view is that fashion is a digression and a tough category,” says Abhay Pandey, general partner at venture capital fund A91 Partners. “But Falguni and Nykaa have proven investors wrong before. I am certain they will take small, careful steps in this category before stepping on the accelerator.”

    A circumspect Falguni agrees, “We may get very good at fashion, very soon. But there are problems to crack.”

    Nykaa’s objective should be to target one segment and focus on it.Agencies
    Nykaa’s objective should be to target one segment and focus on it.

    Nykaa’s own year-long research suggested a category of women who aren’t attracted to the beauty app and instead prefer to shop online for fashion only.
    However, the big question for the company really wasn’t whether they should get into this space or not, but whether it needed to hang on to the coattails of a successful beauty business to achieve the next leg of growth.

    Nykaa has stabilised, with projected revenues of Rs 1,200 crore for FY19 and a new investor, TPG Growth, coming in at Rs 5,000 crore valuation. “We are on the path to profitability and want to be profitable very soon. As soon as we lower our customer acquisition target, we can become profitable. But we all want to invest in the customer of the future,” says Falguni. For now, fashion seems to be that formula.

    “There are problems to crack in fashion but I think the key question is what we show customers first,” she says.

    PROJECT RUNWAY
    After a B-school stint in the US, Adwaita is back to help with the heavy lifting. She’s right at home amid the buzz of their young, vivacious office — open design with concrete ceilings and glass walls that look straight out of a midtown Manhattan design studio. Chief executive of the fashion vertical, Adwaita rattles off a list of 250-odd labels that have already come on board.

    “It has to be affordable, yet high fashion and a premium aspirational website,” she explains. “If you see the brand mix, we have a lot of top designers like a Masaba, Ritu Kumar and an Anita Dongre but we will also have their pret lines or their slightly cheaper offerings like AND and Global Desi as well.”

    The play will be predominantly premium (Rs 2000-Rs 20,000 range) and curated to break the general clutter. And that’s where the recently acquired 20Dresses fits in — to create a high-margin private label. “The vision is to have quite a few private brands in the space of apparel, lingerie, ath-leisure, accessories and more. The 20Dresses team will help us achieve that,” says Adwaita. In fashion, as in beauty, the aim is to have a strong, multi-brand ecommerce platform first, before branching out into physical stores.

    Besides, Nykaa fashion will be distinct from the beauty business, including the app and website. “We want people to think about the two differently. And in the long term, who knows, we may just combine them to make one brand. But we won’t put fashion in the beauty stores or the beauty and fashion stores next to each other,” Adwaita says.

    The Nayar women rarely follow the beaten path.Agencies
    The Nayar women rarely follow the beaten path.

    She also wants to focus on female clientele for now, and may contemplate a smaller male fashion category later. However, the head of an investment banking advisory says their product Nykaa Man and its fashion vertical don’t resonate with the rest of the brand. “The concern now is them getting into the non-women, non-personal category. Will it work?" asks the person, who did not wish to be quoted.

    THE LOOSE THREADS
    There’s good traction for western wear, emerging brands and unique labels that are hard to find elsewhere. It is early days, and growth is 30% month-on-month. But this category of fashion is complex, especially tough for new businesses. Distribution challenges are an added disadvantage.

    In the ecommerce space, it is tempting for a lot of companies to get into apparel, says one consultant. But their (Nykaa’s) objective should be to target one segment and focus on it. “If they want to build on offline beauty retail, they should open 200-250 stores and drive that as main growth rather than starting to get into apparel. That business might be challenging since theft and loss is very high,” says the consultant.

    Myntra, Ajio and Jabong run on similar formats — selling a range of Indian and western wear across categories. In FY18 though, Flipkart-owned Myntra’s revenue shrunk by 80% to Rs 427 crore, but its sales increased 87% to Rs 2,038 crore, from Rs 1,068 crore in FY17.

    The inventory for clothes is very different from that of cosmetics. “The biggest challenge will be obsolence. The trends change faster than the seasons,” quips a rival retailer who did not wish to be quoted. “So even at around $2 billion sales bigger players like Myntra or Jabong have been burning cash.”

    The consensus – if they get distracted with new supply chain, discounts – they may end up losing their core proposition. Or else stay small or niche like Nicobar.
    Falguni, though, mentions better numbers. “We used to say we were similar to third generation ecommerce firms such as FirstCry and Lenskart,” she says. “But we have had almost three years of 100% growth on a big scale. And that’s allowed us to get to a very different size and scale, and capability of growth. Our turnover is more than, or even double of, what some of these companies have had.”

    Adwaita Nayar rattles off a list of 250-odd labels that have already come on board.Agencies
    Adwaita Nayar rattles off a list of 250-odd fashion labels that have already come on board.

    Critics ask if simply having great recall value with beauty customer in tier-I cities will be enough for Nykaa to sustain a whole new business.

    On the other hand, basing its fashion venture on a comfortably-established customer base makes sense, keeping in mind that 85% of their customers are women. Studies show that compared to seven of 10 women consuming fashion online, only two or three consume beauty. Nykaa will further concentrate on the premium customer who spends Rs 2,000-20,000. It would make the company relevant across a variety of lifestyle decisions.

    This scaled play with multiple touchpoints is what gets investors like TPG excited. “High involvement products can be distributed at scale, effectively through vertical e-commerce platforms because it's more than just a price purchase, argues Shailesh Rao, India Head of TPG Growth Fund that deployed Rs 100 crore into the company in March. “I think in the personal care space, in the cosmetic space, there's a dearth of domestic brands or access. And as people start to think about accessing those brands, not only for the utility that they provide but the form of self expression that they provide, you see this organic growth that's coming with the changing attitudes and interests of the population at large.”

    Nykaa’s decision to branch out into fashion in just seven years of being has raised several eyebrows, even as it had new investors, private equity firm TPG Growth Capital. After three years of breakthrough growth, the omnichannel beauty retailer was facing an existential question that founders often grapple with — diversify or go deep?

    Of course, the Nayar women rarely follow the beaten path.

    The “long tail” nature of the beauty business has always been a pain point for brick and mortar retailers since a vast variety of products need to be stocked to cater to varied preferences. The Nayars have turned the space upside down. E-commerce allows a retailer like Nykaa to stock a wider range of products, and get wider access to consumers or what Falguni likes to call, “the endless aisle”.

    Top 5 cosmetics cos in the world in 2018 in revenueAgencies
    Top 5 cosmetics cos in the world in 2018 in revenue

    That means big business too --- Deloitte India estimates the overall growth from 2010-17 has been 13% CAGR and it will grow from Rs 50,000 crore and to Rs 1,40,000 crore till 2025. That means a rise of about $20 billion from $7 billion a year. Categories like eye make up, face make up, skin and body care will grow.

    Today, Nykaa offers over 1000 beauty and wellness brands and attracts 50 million visitors a month in its website and app, 60% of which are repeats.

    WELL-DEFINED OUTLINES
    “Nykaa was unique story when it began,” says Pinakiranjan Mishra, national leader, retail and consumer products, EY. The company had a head start in 2011, he feels, when it was focused on beauty. “It started as an online business and then became an omnichannel retailer. After that, it built allied services such as healthcare and its own product line to improve margins.”

    “But in the offline space,” says Mishra, “established beauty retailers such as Sephora and Shoppers Stop already dominate the scene.”
    Falguni disagrees. “When you go to a Sabyasachi store, he will first show you clothes and then he’ll take you to jewellery. But we don’t always want fashion to be an afterthought. So, we have a separate website,” she explains.

    Adwaita adds, “There is no point piggybacking on the beauty website and then having the customer think, ‘They’re so good at beauty but not very good at fashion.’”
    What has potentially contributed to Nykaa’s success so far has been that the gatekeeper of makeup, Sephora, has been a very late entrant into the Indian market, around 2015. But today, Nykaa plans to don a very different avatar. It intends to have a strong offline presence too, with over 75 stores expected by 2020, a side of the business that Anchit, 28, is leading.

    There is a lot of headroom for growth in the beauty sector.Agencies
    There is a lot of headroom for growth in the cosmetics and beauty sector.

    THE BEAUTY OF RETAIL
    “Nykaa isn’t just selling beauty by forcing customers to buy products with discounts. Offline too, the business needs to make money and for that, we have our luxe stores that are a big part of the business — just that it is online,” he says. Anchit says under 10% of total sales currently come from offline retail. And so, five years from now and 200 stores in, it will only contribute 15-20% of total sales.

    Arvind Singhal, chairman of management consultancy Technopak Advisors, says the category (online beauty) doesn’t really have a lot of organised competition. “Their makeup store expansion vision shouldn’t be considered a lot. They are small stores of 500-600 square feet, have a much smaller footprint and so may do well,” he says.

    The retail business head of a top venture capital firm says the company has no choice but to expand offline aggressively and maintain an offline presence so as not to become vulnerable online. “What’s odd is that the company has forayed into fashion. But she (Falguni) probably believes she can sell different categories of products to the same customer,” says the person.

    Devangshu Dutta, chief executive of Third Eyesight, a consulting firm focused on retail and consumer products, says Nykaa’s online-offline mix has worked well for it so far. “Consumers are connecting with brands across different channels in the beauty and selfcare market. Any company that is only looking at just one channel is missing a trick,” he says. Dutta adds that there is a lot of headroom for growth in the sector and it will come from not just tier 1 but tier II cities as well.

    Nykaa’s foray into fashion is perhaps as hotly debatable as the eternal natural beauty versus makeup argument. But be it off the ramp or on the face, it all boils down to what women want.

    It's basics really. So first, you get a woman hooked — Huda, Kiko Milano, The Face Shop…


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