Customer acquisition is near term focus, and not maximising profitability: Falguni Nayar, Nykaa

Asia's Tech News Daily

#beauty, #fashion, #IPO, #Nykaa, #Startup

Meet banker turned founder Falguni Nayar, the brain behind Nykaa. (Image: Nykaa Fashion)

Beauty and fashion e-commerce company FSN E-Commerce Ventures which operates Nykaa is launching an IPO with the issue size of over Rs 5,350 crores seeking a valuation of over $7 billion. The issue opens for subscription on October 28 and closes on November 1, to be listed on November 11. Founder Falguni Nayar spoke to Moneycontrol’s Nisha Poddar on the IPO pitch and growth prospects. 

Three months back we were expecting around a $4.5 billion valuation. What has changed, to seek over a $7 billion valuation?

Nykaa has not had many transactions in the past and, as a result, journalists or anybody who wrote about it conjectured their own valuations. The current valuation has been arrived at after an in-depth process, for which we met more than 20 investors across the globe. You will see names of some of the highest-quality investors in the anchor book, and many of them had detailed conversations with us on our future prospects.

In the RHP, you have given Rs 3.5 crore as profit after tax (PAT) and 3.3% as EBITDA margins for Q1FY22, while Nykaa reported Rs 62 crores PAT and 6.6% margins in FY21. So, just taking profit and profitability into account, since that is your USP for commanding high valuations, does the run rate of Q1 make you confident of beating FY21 profits this fiscal? Do seasonality and lumpiness also play a role in your business?

There are a number of factors at play. In Q1FY21, we had a much larger loss, of close to Rs 50 crores. In spite of that, we had a full-year profit of Rs 65 crores. So, clearly there is a certain amount of seasonality to our business.

Secondly, Q1FY22 was impacted by COVID-19 but despite that we’ve had strong quarter-on-quarter growth. You can see that, at the consolidated level, the business grew with about $199 million GMV for the first quarter this year. Nykaa has also been acquiring more customers. On a trailing 12-month basis, we’ve added almost one million new customers. 

The first half of the year ended March 21 was partly impacted by COVID-19. By the second half, we started performing better, but supply-chain constraints were there. So, as we were coming out of the COVID, there was a greater thrust on customer acquisition and building a whole bunch of programmes to engage existing customers more deeply. For any ecommerce company, it’s a balance between a returning customer and acquiring a new customer. So, what we have guided is that there is a greater marketing spend in the first quarter and also the second quarter, which will mean more investment towards the future. 

Secondly, seasonality is there in our business. October to December is the strongest quarter and we build our capacities ahead of that quarter, whether through new app downloads, new customer acquisition or even building our warehouse capacity or our customer service capacity. All of these are built over quarter one and two. 

Fashion is another vertical for Nykaa, besides the beauty-products business. But, since this space is crowded, what’s your strategy and revenue mix outlook?

First and foremost, both for beauty and fashion, we are a multi-brand retailer first. Whatever we do is to build a market and a consumer offering from a multiband retailer perspective, where we are bringing together the best global brands in the country. We distribute them and we support them via marketing, because we have a great customer platform. We grow each of the brands that comes on our platform. So we are not private-label centric.

Beauty is an $18-billion market in India. In 2020, fashion was actually $54-billion market space. Beauty had about 8% online penetration while fashion was already at 12%. So, about three years ago, we decided to enter the fashion business but in a differentiated manner where we give more emphasis to premium products and on helping customers discover hidden treasures. I think that strategy is paying off. We have been able to hugely scale up in our fashion business, which now accounts for a substantial percentage of our GMV. 

We do believe that in fashion we will not be a dominant player. This is a very, very large market and there are just a couple of players… just in single digit numbers. The market is big enough for all players, with customers in different age groups and looking for different price segments from different parts of the country.  

Looking at your numbers it’s evident that marketing and advertising spend is big. When that increases, your profits take a hit and, when that is lower, the profitability improves. How will the mix look, when it is incremental growth in profit and profitability versus market share expansion? 

For all internet companies, marketing or customer acquisition is the biggest cost. But the beauty is that a lot of our business comes from the past customers acquired, who come back and buy again and we call them returning customer cohorts, and Nykaa has a good track record with that. That reflects in our mix of new and repeat customers, 30% new and 70% repeat. 

The way I look at it is that Nykaa will have enough cash flows of its own and all of them should be invested to grow further. So, we will continue to invest in future customer acquisition, so that our future is stronger and not look to maximise profitability in the short term. Acquiring the right customer with the right LTV or long-term value is important, so we will have an eye on the LTV against cost of customer acquisition ratio, to deliver high long-term value.

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