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Nykaa Business Model: How Nykaa Makes Money

The year is 2012. It’s been five years since Flipkart started operations in India. Amazon is a year away from entering the Indian market. Internet adoption is happening at a crazy place. 

In the same year(2012), Nykaa starts as a niche online retailer focused on beauty products. Today, Nykaa’s website gets around 12 million monthly average website visits. To add to its success in the digital world, Nykaa also runs 84 offline stores across 40 cities. 

In around a decade since its founding, Nykaa has become synonymous with beauty shopping in India, pushing forward the growth of the beauty industry in the country. Nykaa is also an interesting case business study because it successfully competes with generalists like Amazon and Flipkart and beauty specialist brands like Purplle at bay, which entered the market in 2011. 

In this blog, we’ll trace Nykaa’s journey from the beginning, see how it differentiated itself from the competition and how it has evolved to become much more than a women’s beauty brand in recent years. 

Nykaa’s Founding & Growth Story

The seeds of Nykaa were sown in the brain of founder Falguni Nayar after she walked into a Sephora store abroad. A French multinational retailer, Sephora housed multiple makeup brands under one roof, giving buyers the benefit of choice. The multi-brand stores even had trusted beauty advisors and consultants to advise customers; free trials, makeovers, and a lot of talk on beauty all around the store.

However, the women in India did not have access to this kind of variety and honest guidance. Even if the local cosmetic shop had people to assist women in the buying process, they would mostly pitch products for brands they represented. Higher-end brands would be accessible in malls, but this meant choices were limited to fewer customers. 

Moving the shopping experience online would make it available to a bigger audience, one that could expand with time. So, after working with Kotak Mahindra for close to 18 years, Falguni Nayar decided to leave her job and take the entrepreneurial plunge.  

When Nykaa’s launched its website in 2012, it only sold three variants of Nykaa’s Nail Enamel Collection: pop, shimmer, and pastel. Once it saw success in nail enamels, the company also launched other products like eyeliners, highlighters, lipsticks, fragrances, concealers & more.  

Apart from launching its own branded products, Nykaa also onboarded international cosmetics brands that were reluctant to sell online. As of 2020, Nykaa hosted over 2 lakh curated products from 2000 brands, many of which only sell on Nykaa. 

Once Nykaa had established a reasonably strong foothold in the online beauty market, the company decided to open offline stores in 2015 to move to an omnichannel model.  

Explaining the rationale behind Nykaa marrying offline and online channels, Falguni Nayar said in an interview with Inc42

“We have taken the call to be an omnichannel retailer because beauty is a category where physical trial is critical. We realised that if we want to sell premium products or even affordable products in categories like blush and foundations, colour matching is very important. So we realised that in order to give our customers a really holistic beauty experience, we had to build a physical retail distribution,” said Nayar.

But offline stores are not just about customers experiencing products. One benefit of walking into a physical location is the guidance provided by Nykaa’s in-store beauty advisers. Another benefit is that if there’s a new product or brand launch, customers can be educated about them in the store, make their first purchase offline, and then repurchase online, knowing what to expect. 

As of December 2021, Nykaa was operating 84 stores across India and planned to continue expanding its offline footprint to 300 stores.

In a bid to expand its business scope and capitalize on the brand reputation among young women, Nykaa launched a fashion vertical on its website in 2018. By Aug 2020, more than 600 brands were selling on Nykaa. A year after launching the women’s fashion vertical, Nykaa launched Nykaa Man, a website dedicated to selling men’s grooming products. 

Despite the pandemic, Nykaa entered the unicorn club in May 2020 after raising 67 crores from Steadview Capital, an existing investor. 

Nykaa Business Model

How ‘Nykaa Makes Money’ is no rocket science. The company makes revenue from two major segments: Online store & Offline store. Nykaa operates using an inventory-led model, under which it purchases products directly from the manufacturers & stores them in warehouses, leading to higher margins.

Let’s have a look at how each segment, online and offline, perform in a little bit more detail.

Online Store

In 2017, Nykaa’s average cart value was Rs. 1,250-1,500 with 3.5-4 items in the cart, more than double the Rs. 350-650 ticket size of other online beauty portals. Nykaa’s customer acquisition cost also fell from Rs. 650-1000 in 2012 to Rs. 200 in 2017. 

By 2020, the average cart size had grown to Rs 1983. While I could not find the latest numbers, it would be reasonable to assume that acquisition cost must have also decreased simultaneously.

Offline Store

And as one might guess, Nykaa’s website accounts for more business relative to the offline stores. As per a November 2019 interview, offline stores accounted for only 15% of the business. But that doesn’t tell you the whole story. When compared based on the brands available offline and online, revenue share was split between both channels at 50%. If the trend were to continue, Nykaa’s offline store expansion could pay off big time in a post-pandemic world. 

Nykaa’s Revenue, Profitability & IPO

Nykaa’s revenue has been growing consistently over the years. In FY21, the company reported a total income of INR 2,452.6 Cr, up 38.10% from INR 1777.8 Cr in FY20.

Nykaa also reported a profit of Rs 61.9 Cr in FY21, making it the first profitable year for the retailer, after having reported losses of Rs 16 Cr and Rs 24 Cr reported in FY20 and FY19, respectively. 

Nykaa opened its initial public offering on 28th October 2021 with a price band of ₹1,085-1,125 per share. The IPO was oversubscribed 8.1.78 times, raising $710 million(₹5,352 crores) at a valuation of US$7.4 billion. On the opening day of its public listing, the company’s stock price rose by 89.2%, resulting in a valuation of close to $13 billion.

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Nykaa Business Model: How Nykaa Makes Money
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Nykaa Business Model: How Nykaa Makes Money
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How 'Nykaa Makes Money' is no rocket science. The company makes revenue from two major segments: Online store & Offline store. Nykaa operates using an inventory-led model, under which it purchases products directly from the manufacturers & stores them in warehouses, leading to higher margins.
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Muaaz Qadri
A Proud Computer Engineer turned Digital Marketer
Summary
Nykaa Business Model: How Nykaa Makes Money
Article Name
Nykaa Business Model: How Nykaa Makes Money
Description
How 'Nykaa Makes Money' is no rocket science. The company makes revenue from two major segments: Online store & Offline store. Nykaa operates using an inventory-led model, under which it purchases products directly from the manufacturers & stores them in warehouses, leading to higher margins.
Author
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WhatIsTheBusinessModelOf
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