How Nykaa captured the online beauty market in India pre IPO
On Day one (28 October), Nykaa owner FSN E-Commerce Ventures IPO was subscribed 1.55 times. The beauty e-tailer’s journey is a David vs many Goliaths battle. The company managed to create a community of loyal customers while facing competition from multi-category big tech platforms such as Flipkart and Amazon in India.
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A lot worked in favour of Nykaa. The platform, which was launched in 2012, grew on the back of multiple macro factors that led to the emergence of a new segment of online shoppers. This included low-cost internet, smartphone penetration, growth in fashion spend by youth, increasing spend on fashion from tier II cities and the rising influence of social media.
This wave brought a whole set of buyers online including women. The inflection point came around 2014-15, when most e-commerce platforms started seeing traction and conversion in terms of sales. Nykaa had an edge because it was serving an absolutely underserved market of beauty and personal care (BPC) where big platforms such as Flipkart and Amazon weren’t investing much.
Nykaa scaled in a big way, adding a wide variety of products across categories from mass market, mass premium, and premium to luxury segments. One could find HUL owned Lakmé, Maybelline, Kama Ayurveda and Estee Lauder, all in one place.
Read more: Why mutual funds found investing in Nykaa’s IPO fashionable despite stiff valuations
Taking beauty to masses
Sreedhar Prasad, internet business expert and former partner at KPMG, tells Storyboard that unlike any other category in e-commerce where quality offline alternatives were available, beauty did not have many such options for consumers. Multiple beauty options were only limited to multi-brand outlets (MBOs) which were only present in malls.
“…the offline availability of the brands that were being sold on Nykaa was extremely less. Nykaa took these brands to the masses. These could be high-end products to mid-tier brands. The concept of a platform that was selling multi-brand beauty and fragrance is the biggest powerful concept that made Nykaa the brand it is today,” he notes.
Compared to other mature e-commerce categories, beauty and personal care and fashion have lower online penetration, states a RedSeer report commissioned by Nykaa. Online channels accounted for approximately 8-10% of the overall BPC market in FY 2021 and the five months ended August 31, 2021. There is a large headroom ahead for further penetration in India, as suggested by higher penetration in the developed markets such as the United States (20-25%) and China (35-40%).
The online and offline play
So there could be room for more growth for Nykaa. In order to further strengthen customer trust and convert fence sitters, the e-commerce platform launched its first physical store in Mumbai in 2017. Currently, it operates 80 physical stores across 40 cities in India over three different store formats as of 31 August, 2021. It offers approximately 3.1 million SKUs from 4,078 national and international brands. It also operates its own private label which further adds to its profitability.
The offline presence added a huge marketing boost as it catered to the larger consumer perception that branded stores only sell authentic products in this category, explains Prasad.
“Establishing a bold offline presence was a smart move and provided the confidence to fence sitters seeking original products and that acted as a strong reinforcement.,” says Prasad. Beauty and Fragrance, as a category, has superior margins compared to fashion and electronics. “If a platform has its private label then it’s an extremely profitable business,” he adds.
High margins means high marketing budgets
Beauty and personal care (BPC) is one of the highest frequency of orders categories. Although electronics has the highest average order value (AOV), it tends to have the lowest order frequency. BPC has a high margin base.
For instance, a direct-to-consumer (D2C) player such as MyGlamm or Sugar Cosmetics usually has a gross margin of 60-65% that means the cost of product is always less than 35-40%. A significant portion of this, 60-65% margin, goes into marketing.
“…when these D2C brands go to an online beauty platform, they have the ability to pay higher commission fees to the online beauty retailer. As a result, the platform is able to invest higher in marketing activities to acquire new customers,” says Amit Nawka, partner, deals and startups at PwC India.
In terms of margin profile, amongst all the e-commerce categories, Nawka shares that BPC category is right up there with a high frequency of purchase and a decent AOV (above Rs 500).
“Therefore, it becomes an attractive category to play in,” he notes.
Leveraging content and influencer marketing
Nykaa has built its business on the back of a solid digital community comprising brands, celebrities and social media influencers.
As of August 31, 2021, Nykaa had a network of 3,055 influencers, including Generation Z trend setters, beauty, fashion and lifestyle bloggers, makeup artists and celebrities that extensively work with the platform. This army of new-age digital creators and influencers help Nykaa reach out to India’s 300-350 million average monthly active users on social media across platforms like Facebook, YouTube and Instagram.
The company’s marketing strategy heavily focused on creating awareness and interest through explainer videos, DIY (do-it-yourself) content and make-up tutorials. Nykaa Beauty has around 6 million followers while Nykaa Fashion has over one million followers across Facebook, YouTube and Instagram.
“Our marketing strategies focus on creating awareness of our platform and brand, building platform loyalty and fostering strong word of mouth reviews. Our strategies include engaging beauty creators, influencers and celebrities, maintaining a presence on social media platforms and within the peer-to-peer multimedia community,” Nykaa noted in its Red Herring Prospectus.
Influencer marketing remains one of the most effective and economical ways to engage with millennials and Gen Z consumers as compared to more conventional platforms. According to industry experts, influencers can charge anything between Rs 5-10 lakh for a video promotion, while less influential influencers could charge as low as Rs 5,000.
Nykaa uses a mix of both. Despite having actor Janhvi Kapoor as its brand ambassador, Nykaa extensively uses influencers and content creators for new brand launches as well as promotion of sales. For instance, in 2019 when Katrina Kaif launched her beauty brand Kay Beauty, in partnership with Nykaa, the beauty retailer had invited Instagram vloggers and bloggers for the launch and collaboration.
Apart from influencer marketing, Nykaa’s marketing strategy also involves digital marketing, offline marketing as well as their content platforms, including social media channels, Nykaa network, Nykaa TV, and Explore.
In 2018, Nykaa launched Nykaa Network, an interactive beauty platform where subscribers can chat with other beauty enthusiasts and exchange advice/tips. A year later, it launched its YouTube channel called Nykaa TV which hosts a variety of tutorials and product reviews. The company also launched a subscription-based platform called Explore, an app-only feature that allows customers to browse through all the content.
Its new vertical Nykaa Fashion is also largely marketed online while competing with e-commerce platforms such as Flipkart Fashion, Amazon Fashion, and Myntra.
“Nykaa is a standout brand because of their ability to create content with scale and do long term influencer partnerships,” says Harshil Karia, the founder of digital agency Schbang India. He tells Storyboard, “Nykaa’s 1.2 million YouTube subscribers and 5 million-odd Instagram followers are a result of treating their platform as ‘entertainment’, scaling content and releasing quick and failing fast and iterating.”