How did Falguni Nayar scale Nykaa from ZERO to a $13 billion startup?

Nykaa's origin story

A decade ago, India's beauty industry was bifurcated into 2 extreme segments.

1. You could either find proxy, low-quality products on the market streets or from local retailers
2. Or you could opt for high-end expensive products available in posh malls

The divide was real and the entire sector was largely unorganized with private players making what they could make from largely selling just kajals and lipsticks. That was the scope of the beauty market in India.

On top of that, there were more problems. At that time beauty and personal care (BPC) products were sold on marketplaces like Amazon and Flipkart. But, owing to their platform model, they could never guarantee the authenticity and quality of the products.

So, customers would at times receive proxy, expired items from these platforms.

Falguni Nayar could see these blatant problems with the BPC market in India. And, since she had lived the better part of her life overseas, she knew the true potential the beauty industry held when customer delight and satisfaction were the main agenda.

She came up with 3 solutions:

1. Long-tail business model — Falguni recognized that she would have to approach building Nykaa from a long-tail business model. Long tail business strategy involves selling low volumes of hard-to-find products to many customers.
   • So, instead of 1000 people using the same generic lip balm brand available in the local retail store, you'd target to sell 50 different lip balm brands to these 1000 people.
   • These 50 brands would have different price ranges and functionality.
   • According to spending power and need basis, the 1000 people in question would have the option to buy products from these 50 brands.
2. Leveraging the internet — Given the increasing internet penetration in India, Falguni was certain that going e-commerce was the right approach to create a standalone BPC business at a huge scale. The power of tech and logistics would be their USP.
3. Educating the Masses — Falguni was not only selling products, but they were targeting to buildd a brand new category in India. So, educating women about different products available in the market was a big part of building Nykaa and expanding its target market.

   The more women were educated about beauty and personal care, the more products they would eventually buy from Nykaa.

These bets totally paid off.

Today, Nykaa's revenue stands at INR 3803 crores ($464M) in FY22 while its GMV (gross merchandise value) rose by 71% to INR 6933 crores ($846M).^[2]

Let's explore the unique strategies that Nykaa used to grow sustainably and reach IPO in less than a decade!

How Nykaa cracked the Beauty Industry?

1. Inventory Model

Right from the bat, Nykaa was certain that to ensure the quality of their products they had to opt for the inventory model.

The inventory model basically means that a company buys a large number of products from different brands at wholesale prices and stores them in its warehouse. This is different from the usual marketplace model where different brands come and sell their products on your platform.

This brings in better margins because the cost price is lower. For example:

1. Let's say a product's cost price is INR 500 and at wholesale, the brand sells it at INR 400.
2. If the product is listed on Nykaa at INR 700.
   • Through the platform model, Nykaa only gets a share of the INR 200 profit. That is whatever the commission percentage is .
   • But, in the inventory model, Nykaa's net profit would be INR 700 - INR 400 = INR 300.
3. This ultimately improves their profit margins and allows them to offer discounts as their bandwidth is higher.

2. Omnichannel Approach

The BPC online penetration even back in 2020 was only 8%. That means 92% of the $18B BPC products in India were being bought offline.

So, Nykaa not only had the task of expanding the online penetration, which given the trends would eventually happen. For instance, in just 3 years in 2022, the penetration has increased from 8% to 12%. But, they also had to go offline to capture the mind space of the predominantly offline audience.

This hybrid online-offline approach is called the omnichannel approach. Its very user-centric approach works particularly well in BPC because:

1. Different categories of products are mostly sold online and offline.
2. For example, most users would first like to try out a foundation offline to match their exact skin tone and only then rebuy it online.

Falguni emphasises learning these patterns, so their inventory management for both offline and online channels is efficient. Today, 15% of all users buy only online, 15% only offline, and 70% are omnichannel users.^[3]

3. The Nykaa Network

In recent years, given both the emergence of social media beauty influencers and Nykaa's education efforts, a beauty community has emerged in India. Users spend hours on end each day watching beauty-related content and discussing them in detail.

To take advantage of this trend, Nykaa created Nykaa Network. It's basically a forum platform where Nykaa users can discuss and discover BPC-related content tailored to their interests and needs.

On average, Nykaa Network gets 1.5 lakh monthly visits and has a total of 250K subscribers. It also has 40,000 active users actively engage on this network every week!^[4]

4. Cracking Content Marketing

Nykaa has been extremely bullish when it comes to content!

1. Its YouTube channel has 1.34M subscribers.
2. NykaaBeauty's Instagram following stands at 1.5M people, while NykaaFashion's Instagram following stands at 1.3M people.

These are the two primary channels Nykaa uses to educate its users. They also work with beauty influencers to promote Nykaa products and get affiliate users.

5. Multi-Brand Strategy

Finally, Nykaa has also built many in-house brands of its own. And, they have also gone shopping to acquire brands like Dot&Key, Nudge Wellness, Little Black Book and more!

On the surface, Nykaa looks like a BIG retailer that is selling products online. So, what separated them from any other local retailer in your vicinity?

Well, they are very very focused on helping customers discover different brands on their platform. Instead of pushing just their in-house products to get better margins, they prioritise all brands like a true marketplace. The multi-brand approach is one of the reasons behind the scale Nykaa has managed to achieve!

Reaching Profitability and nailing the Repeat Customer Metric

Like any other e-commerce platform, Nykaa was also making losses in the beginning. But year-on-year, Falguni was laser-focused on trimming their losses.

Here's her take on sustainability, "That’s how businesses should function. Businesses have to be self-funded, right? I don’t understand the business model where you have to keep raising money to pay salaries and pay your marketing costs."

In 2021, just before its IPO, Nykaa turned profitable, with a profit of INR 75.34 Cr!

But, Nykaa is walking on a very tightrope. While they have just turned profitable, they still have a lot of pressure to reach more users and grow rapidly. With brands like Purpell, Myntra, Flipkart and Amazon doubling down their efforts on targeting the BPC market, Nykaa is also joining the race of spending money to acquire customers.

This would mean a drop in their profits, which was evident in their FY22 numbers, where their profits fell from INR 75.34 Cr and INR 47.31 Cr.^[5]

But, thanks to Nykaa's other efforts listed in the previous section, they have no doubt gained the trust of their existing customers. Looking at some of the testaments, it's clear that when it comes to beauty and skin care, customers would prefer to buy a product on Nykaa even when the same product is heavily discounted on a competitor platform like Amazon.

We know how fleeting consumers can be. But, recently Nykaa achieved a 75% retention rate. In fact, in FY22, 70% of their GMV came from repeat customers, while only 30% accounted for new customers.^[7]

They are clearly doing something right with customer retention. So, at the moment, focusing on customer acquisition seems like the right bet for Nykaa.

Next Stop: The Online Fashion Business!

Now, here's an important question — does Nykaa's BPC business alone warranty a $653 million dollar IPO size?

Well, NO! While Nykaa trusts it can grow its BPC business further, it's actually eyeing the fashion segment's large addressable market to power Nykaa's future growth.

In 2023, the fashion segment market size in India was $96.47B, with a growth rate of ~14%. On the other hand, the BPC segment's market size is $27.23B.

Given beauty and fashion are very much natural sisters, Nykaa's decision to expand into fashion makes complete sense. But, these 2 businesses are extremely different. Here's how:

1. Beauty & Personal Care
• In BPC, there is a limited number of SKUs (stock-keeping units). When people find a good face wash, lip balm or lipstick, they tend to buy them again. So, helping customers discover products and retain them is much simpler.
• Plus, in this case, it's easier to operate on the inventory model, because of the low SKU numbers.
• Since Nykaa's profitability is thanks to its inventory model and retention rate, the low SKU numbers become essential.
2. Fashion
   • On the other hand, no user buys the same top twice. So, operating on an inventory model is extremely difficult. Naturally, for the fashion segment, Nykaa had to switch to the marketplace model.
   • Given fashion is already a crowded marketplace, they started selling high-end clothing with an average order value of INR 2000. But, they soon realised that people prefer to touch and feel the fabric before buying clothing > INR 2.5K.^[6]

So, Nykaa is still in the process of figuring out how to ace the fashion game. Today, the fashion segment still only accounts for 10% of its GMV but is growing rapidly.

Falguni's daughter and Nykaa Fashion's CEO, Adwaitha Nayar, calls this the "ultimate search problem" — "I do believe that fashion is the ultimate discovery problem. Fashion has so many products, far more than beauty. So, how do you really show the right thing to the right person at the right time? And that remains a focus for us"

Our main takeaway from Nykaa's analysis is that it's still a baby business, even though it has reached the IPO stage.

Falguni Nayar is playing a long-term game and given her 30+ year investment banking background, she understands the pressure of taking risks to capture the market while staying sustainable.

Where Nykaa's lifestyle brand goes is anyone's guess at the moment. But, given how Falguni has managed to sustainably scale an e-commerce platform so far, it's safe to assume Nykaa is yet to reach its peak.

We, of course, will keep our eyes open to report any blunders or learnings from Nykaa, so stay tuned!