Nykaa is going strong on physical stores as it aims for an ‘optimum offline-online mix’

• After slowing down during the pandemic, the company’s pace of adding retail space has picked up in the last two financial years.
  
• The company said that its retail business continues to be a strategic priority.
  
• Analysts cheered the company’s improvement in efficiency in the beauty and personal care segment as its fulfilment cost per order dropped.
  
• Lower discretionary spends, high competition and marketing spends are dragging down its fashion business.
  

After shopping voraciously online during the pandemic Indian consumers are inching towards a hybrid experience — and most offline retailers have been responding by increasing their online presence.

Nykaa, which has made a name in the online retailing of beauty and personal care products, as well as fashion offerings, is going the other way around. In spite of the fact that a 33% rise in expenses for Q4 tanked its profits by 72%, it’s not planning to back off on its investments in physical stores.

“We are at the end of line when it comes to warehousing investments but we will keep investing in expanding our physical retail presence. We are looking to achieve the maximum offline to online mix,” Falguni Nayar, managing director and chief executive officer of Nykaa, said on an investor conference call.

After slowing down during the pandemic, the company’s pace of adding retail space has picked up in the last two financial years. In FY22, its physical retailing space grew by 59% and by 43% in FY23 to touch 1.4 lakh square feet across 60 cities.

“Our retail business, which continues to be a strategic priority, witnessed robust growth over the last two years and has achieved profitability at a business unit level. Nykaa has doubled its own physical store count from 72 at the end of FY21 to 145 beauty stores in FY23,” said FSN E-commerce Ventures operated Nykaa, in a press release.

In FY23, the offline sales of beauty and personal care products accounted for 26.4% of total gross merchandise value (GMV) – exhibiting a 47% growth. Going forward, it expects to add another 50 stores in FY24, according to a report by JM Financial.

A report by Elara Securities also said that Nykaa showed a healthy growth in the offline segment – at 8.3% of GMV, and will aid growth prospects. The tide has been turning towards visiting physical stores after the pandemic opened, but since then consumers are also seeking more from physical stores.

Private labels to drive growth; fashion still a laggard

Most analysts are happy with the Q4 growth seen in its biggest segment – online beauty and personal care (BPC) business. “Nykaa has reported healthy growth in the online BPC segment as its GMV grew at 30.3% YoY in FY23. It has also maintained market leadership therein. It continues to have a strong recall within the premium customer base,” said Karan Taurani, analyst at Elara, in a post-results analysis.

In Q4FY23, Nykaa’s fulfilment cost per order for BPC segment was down to ₹86, due to its regional warehousing strategy. The company also expects it to sustain around these lower levels.

Its EBITDA margin for the quarter, at 5.4%, was up by 147 basis points on a year-on-year basis, but its profit margin shrunk 60 basis points to 0.2%, due to a rise in investments.

“Management highlighted margin expansion will be driven through — optimisation of marketing spends as the cohorts of repeat customers increase vs new customer and scale up of eB2B business with focus on servicing in concentric circles around fulfilment centres to drive efficiency,” said a report by ICICI Securities.

Nykaa has also been able to scale up its private label sales, which will help margins. As of Q4FY23, its own brands accounted for 12.4% of BPC’s gross merchandise value. Added to that, it accounted for 13.9% of fashion business’ GMV. Also, four of these owned brands crossed ₹100 crore in GMV.

“The management plans to focus on in-house brands as these may drive the next leg of scalable growth in the fashion segment,” said Taurani. However, most analysts have labelled its fashion business in general as a laggard, due an unexpected dip seen in the third quarter, its need to advertise and market heavily, and slower growth due to a drop in discretionary spends.

“The management suggested that it is tougher to lower marketing costs in fashion. Management also mentioned that FY23 was the peak loss year for fashion at ₹110 crore EBITDA loss – and the losses should drop going forward,” said a report by JM Financial. EBITDA stands for earnings before interest, taxes, depreciation and amortisation.

ICICI Securities also believes that success in the fashion business can be difficult given higher competition in the category. Its bread-and-butter business is also in the eye of the storm after two large business groups – Reliance and Tata – said that they would enter the segment.

“We believe that due to a relatively smaller size of the Indian online BPC market, chances of a major player investing heavily is less. However, as the BPC market grows, so will competitive intensity,” said a report by Nomura.

The jury is still out on Nykaa’s ability to sustain its growth if bigger players enter the fray, as it's still in customer acquisition mode across all its businesses – be it fashion, beauty and personal care, or the new businesses it has launched like Nykaa Man.