The Anatomy of Nykaa
Startups and **** Series
Common belief says that it’s very difficult for vertical businesses to compete with horizontal ones in terms of scale and market share. However, A company X pops up in 2012, focuses on a vertical niche in a highly competitive and very nascent space of e-commerce, goes on to be a billion-dollar empire with more than 100% YoY growth and has its eyes set on an IPO later this year. The company X we are talking about is Nykaa. Nykaa’s story is phenomenal and what strikes me the most is the clarity in vision and execution, they have been spot on, be their marketing choices or omnichannel efforts to create a market from the scratch and mind you without any freebies or heavy discounts. Today, let’s take a dip into the complex beauty/cosmetics market to understand the vertical giant, its diet and what makes it so special.
Overview
Nykaa primarily is an e-Commerce platform for beauty and wellness products catering to both men and women, they have an offline presence in 20 cities and also offer comprehensive content including product reviews, beauty how-to videos, articles by experts, and an e-beauty magazine. They brand themselves authentic as they source the products directly from the brand and operate on an inventory model giving delivery as service.
As their website sums up “Derived from the Sanskrit word ‘Nayaka’ meaning actress or one in the spotlight, Nykaa is all about celebrating the star in each woman, and being her confidante and companion as she embarks on her own journey to discover her unique identity and personal style”
Market and Background
The Indian beauty market is valued at $13.191 Bn which is a fraction of the world’s beauty market despite the large population. Trends have been catching up in their favour especially with increasing growth in men’s grooming in a women-dominated market and in general due to increased purchase power, raising awareness towards body aesthetics and desire for advanced forms of luxuries. The Market is set to grow at a compounded annual growth rate (CAGR) of 16.39% and the major winners will be the online players with omnichannel brand presence.
Beauty is a complex market, it requires a lot of personalization depending on the colour, skin type, sensitivities, climate etc., this results in the need to create myriads of products to cater to myriads of customers and their myriads of choices which ends up making this market fragmented and disorganized, taking this online has been a daunting task for Nykaa, the nascent and complex market was hard to build trust in and its early customers were difficult to retain, Nykaa thus ventured into creating spaces to educate customers and helped them make the right choices. They adopted an inventory-based model to ensure quality in a market that relied on small channels.
Journey and Strategy
Nykaa is the brainchild of Ms Falguni Nayar, who before starting Nykaa served as the MD of Kotak Mahindra. She noticed that there was a huge gap in the Indian beauty line market — the demand was greater than the available mediums to buy beauty essentials in the country. This led her to launch Nykaa. Nykaa was supposed to be the answer to the woes of the disorganized beauty industry and the idea was to create a reliable channel to cater to the personalized customer needs.
Falguni Nayar once walked into a Sephora store. She was amazed by the variety of brands available at the store, The sales associates showed her the best way to use them. They recommended her best beauty products without any bias and that is when the idea of Nykaa struck her.
In its early days, the e-commerce market itself was nascent and Nykaa started by increasing its inventory product by product trying to build trust ensuring good customer experience, however, the online market was a tiny chuck, so after raising funds in 2014 Nykaa went on to open its first physical store to add physical touchpoints and invested heavily on marketing majorly content based via influencers and YouTubers creating a good word of mouth to couple with their customer experience. Beginning of the rise.
They will go on to create their own range of in-house products, add their name to awards, do beauty shows, add virtual makeover tools, beauty advice, tutorials and what not to make themselves synonymous with the beauty Industry like Amazon is for e-commerce.
Their main game has been to play on a niche vertical and dominate it with superior customer experience, omnichannel presence and right brand marketing. Today Nykaa is worth around $1.2 Bn having raised just $145.9mn and is expected to be listed on public markets by the end of the year.
Business Analysis
Unlike other e-commerce players, Nykaa operates on an Inventory based model, i.e, it buys directly from the brand and stores in its warehouses, this increases its margins to 30–50%, It has its own In-house brand which gives a margin of 40–60%, which puts the revenue on each sale at roughly 50% of the purchase price.
The average cart size of Nykaa is between Rs 1200–1500, let’s consider the average to be around Rs 1300 with a margin of 50%, now let’s subtract 20% which is the operational cost to the company that leaves us with a revenue of 30% that puts the revenue at Rs 390 per purchase and the customer acquisition cost falls roughly at 200–250/customer (you can refer to the articles of Dream 11, Byju’s to understand the calculation) with an average retention rate which is upwards of 50%. voila, Nykaa is profitable at a unit level even if the customer makes just one purchase.
Nykaa has created a space for itself and made sure it has a good omnichannel presence, the premium strategy has paid off so far and the ambitions are yet to stop here, what unfolds after the IPO is something for the time to tell, I think they will give a shot at the global markets.
Conclusion
In the end, it all boils downs to “add to cart” + “buy”
Sources: Crunchbase, Entrackt, Jungleworks, AJVC blog, Nykaa website, Inc 42!