Opinion
Nykaa should double down on digital rather than foray into physical
Summary
- The company has been looking to increase its offline presence of late but could struggle to compete with giants such as Reliance and Tata in capex-heavy physical retail
The name ‘FSN E-commerce Ventures’ suggests the company is online-only, and Nykaa’s parent firm was indeed conceived as such. But Nykaa – as the company is popularly known – is doing its best to become an omnichannel (that is, online and offline) one-stop shop for fashion, and beauty & personal care. It’s not alone in this endeavour either. Other retail startups such as Lenskart, UrbanLadder and many of Myntra’s fashion brands are also trying to expand offline.
This strategic change of direction has perhaps been forced on the company by the increased competition in this space. The fashion and beauty & personal care segments are expected to grow at more than 20% for the next several years, perhaps even the next decade.
But everybody knows that, and big traditional players such as Reliance’s Tira are muscling into the online space, offering discounts on products to grab marketshare. It’s a given that Tira – which is already competing aggressively, with nearly 20% discounts on products that have never before been offered at less than full price – will go omnichannel.
Meanwhile Nykaa, Myntra and other online retailers and e-commerce firms are now trying to build a physical presence to corner a bigger marketshare. This means the survivors in the fashion and beauty & personal care markets will probably omnichannel outfits.
Building a chain of physical stores is an expensive, asset-heavy process, and offline marketing is very different from online. The change in strategy alters the operational dynamics and affects the financials. Moreover, Nykaa has always focussed on premium products and continues to do so. That means it needs premium locations for its stores as well, so the increase in overheads are substantial. The capex needed for offline expansion, higher rentals, and higher employee-related expenses will hurt the company's financials and profit margins could be slim going forward.
In Q4 FY23, Nykaa’s revenues grew 33% year-on-year (YoY) to around ₹1,302 crore. The operating margin (EBITDA to sales) was around 5.5% (EDITDA was ₹70 crore or 83% higher YoY but lower than the ₹78 crore it clocked in the previous quarter). Profits after tax came in at ₹2.4 crore, down 90% from ₹27.7 crore in Q4 FY22.
The growth rate in beauty & personal care continued to moderate – it was down to 32.5% YoY in FY23 after compounding at 45% over the previous four years (FY19-22). Growth in fashion was 38%. Nykaa needs that segment to work because the margins in fashion are much higher than in beauty & personal care. Ideally its own fashion brands will gain traction down the road, but the company took an operating loss of ₹110 crore in the fashion segment in FY23.
Demand may be levelling off, given there were just four lakh net customer additions in beauty & personal care and a 7.4% decline in order volume. Store and warehouse area increased by 43% and 79 per cent, respectively, in FY23. Additional hires, including tech hires, meant that employee expenses rose by 50% while other expenses jumped 76%. The management is targeting another 50 physical stores in FY24 but believes warehousing will not need much expansion. The company currently has 145 physical stores across 60 cities.
Nykaa will have to burn a lot of cash to chase growth in the face of increased competition. Store rollout will continue to require capex. Apart from the omnichannel rollout, Nykaa is betting big on success in the fashion business, including much deeper penetration for its own brands.
The company faces macroeconomic headwinds as well. Thus far, Nykaa has claimed it is immune to GDP growth trends since it is focussed on high-income customers. Indeed the company’s growth through the covid years bears this out, and offers yet another data point suggesting a K-shaped economic recovery. It has exploited this well through its strong digital presence, its ability to control overall costs and deliver goods at low costs. The regional warehousing rollout should help with the latter as well.
However, the flattening of new customer acquisitions and the dip in order volumes suggests that discretionary demand may now be slowing in the premium category. Fashion – especially in the premium category – is not a commodity game. Neither is the beauty & personal care. Nykaa will have to fight to retain its marketshare and increase it in the face of competition from heavyweights.
Nykaa, with its thin margins, should try and double down on what made it such a valuable startup — its digital chops. Going asset-heavy and omnichannel could result in a battle of attrition it might not be able to afford.
