Why Nykaa, India's top online beauty retailer, focuses on physical stores

Nykaa, one of India’s top beauty e-tailers, is chasing profitability even as it invests in opening more physical stores.

Mumbai-based Nykaa said on May 14 that it has raised Rs 1,650 crore in Series D funding led by Hero Corporate Services Chairman Sunil Kant Munjal and consumer goods veteran Harsh Mariwala.

Nykaa, which started in 2012, currently sells products from more than 850 brands on its website and has 17 stores. Its turnover more than doubled to Rs 57 crore in the fiscal year ended March 31, 2018, from the previous fiscal year.

With India’s online beauty market expected to reach $1.5 billion by 2020 and $3.3 billion by 2022, Nykaa founder and CEO Falguni Nayar said the company is looking to increase the brands and categories it can offer and will open 30 more physical stores.

Nykaa conducted a survey and found that many customers wanted to experience their products in physical stores. So, this prompted the online e-commerce company to focus on the opening of offline physical stores. They believe that retail stores are an important part of the company's strategy. They have two store formats: Luxe format (for high-end beauty products) and On Trend store format, which focuses on selling the retailer's best-selling products in stores.

Talking about how relevant the online and offline convergence is, FalguniNayar said, I think omnichannel is an important part of the Indian e-commerce industry strategy. Although retail is a big business in India, its online sales currently account for less than 2%-3% of the industry. In fact, even in developed e-commerce markets, the share of online sales is less than 10%. Of course, e-commerce has its advantages, such as the wider range it offers, etc. But now, customers prefer the omnichannel model, and brands must provide them with the experience that customers want. Even in the beauty category, customers want to go to the store occasionally to experience the product.

The funds Nykaa recently raised will be used for working capital expenditure and some store capital expenditure. Falguni Nayar said, "Our store expenditure is not big. It will be less than one-third of our funds. That said, our store business model is ideal. We will not hesitate to do what needs to be done in the store to satisfy the customer, regardless of the cost. While store-level profitability is still important to us, these stores are being optimized for user experience rather than cost."

Nykaa's online sales capabilities are still very strong, and its current turnover is equal to that of hundreds of offline stores. It is completely different from the sales level. The turnover of Nykaa retail stores accounts for about 10% of its total company turnover.

Falguni Nayar said, now, we have 17 offline stores and are moving towards the goal of 55 stores by 2019. We plan to launch two stores every month, and I think it will accelerate to about three per month. This is very important for us. The location of the store is also very important. If necessary, we may even wait for six months to a year to find the right location.

We are very sure that our Luxe model and our offline stores in Tier 1 cities have achieved the success they deserve. In Tier 1 cities, we can see almost immediate profitability in addition to EBIDTA (earnings before interest, depreciation, taxes and amortization) at the store level. In some other cities, it takes us three to six months to achieve this.

Now, we are expanding to other markets like Bhubaneswar, Guwahati and Coimbatore. We are setting up futuristic stores. This is because we want to add a lot of new things to our website in the next one year.

Talking about when the company will be profitable, Falguni Nayar said, "If everything goes well, we will be profitable (at the operational level) later this year. For e-commerce, it is mainly about controlling marketing costs. I think Nykaa has a very strong marketing strategy that will help us achieve profitability."

Nykaa has been very focused on building the beauty category, and they will continue to do so. They are now increasing the company's natural product category, and are also expanding into men's clothing and luxury products. Deep growth in the beauty category is what Nykaa is working towards, which means that consumer demand will grow a lot. For example, Nykaa has just launched a web system that can provide recommendations to customers and promote customers to learn more about beauty knowledge.

The above is an analysis of why Nykaa, India’s top online beauty retailer, focuses on physical stores. If you want to know more about Nykaa, please continue to follow us!