Daybreak - Nykaa gambled on fashion. Was it worth the risk?

Episode Date: April 13, 2023

After its listing, investors were almost bullish about Nykaa shares. And for good reason. The company has been a pioneer in normalising buying beauty and cosmetic products online. It showed profitability that the other listed tech companies were nowhere close to.So in 2018, it decided to venture into fashion.But things have been a bit shaky since last year. A week ago, Nykaa gave its investors a “revenue update” for the last quarter and it did not paint a very pretty picture. The company blamed the pullback in discretionary spending for the subdued growth in its fashion business.This, however, is not the first time fashion has been the source of concern for the beauty and personal care e-commerce giant.Was Nykaa's foray into fashion worth the risk?Tune in to find out. 

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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From the moment that it went public in 2021, Nike became the investor's favorite. It listed at an 80% premium to its issue price, and it did better than Zumato and Ptm even. And for good reason. From the time that it launched to the time it got listed, Nike proved its metal. It became the largest beauty and cosmetics retailer in the country.

What really stands out about Nica's story is that beauty and cosmetics has historically been a more of a try it before you buy it kind of a segment. And how Nica, an e-commerce platform, came in and turned that around, is really quite extraordinary. After all, buying clothes that turn out to be knock-offs is very different from ending up buying fake beauty and cosmetic products, right? Now, Nica's business model is based on inventory management. It buys products directly from brands or distributors, and then it sells them to customers on its platform. If you've shopped on NICA, then you'll remember that each product comes with an authenticity certificate. So it was stuff like this that was among the key reasons for NICA's success. By 2018, the road to profitability was quite clear for the company.

It was still on a dream run. so it decided to launch its fashion vertical. And it does make sense, right? Beauty and fashion, after all, do go hand in hand. For me personally, focusing on the fashion business is incredibly exciting. I think it's a bold bet we took about two and a half years ago. It's already showing incredible momentum. But I'm very convinced that this is going to be a very, very sizable business

in a very large market. And we can see that, you know, in the next couple of years, you know, the bold bet to enter fashion, though it was a competitive space, would really pay off. So overall, feeling extremely bullish on passion, and I think, you know, moving from being just a pure beauty retailer to being beauty plus fashion was the right move we took a couple years ago. That was from an India today interview of Adwaita Nair, the daughter of Nica's founder, Falguni Nair, who heads the company's fashion vertical. Now, you would expect, since its inventory model saw so much success in the beauty and personal care segment, it would follow the same for fashion, right? but Nica decided to pick the marketplace model instead.

But the important question to ask is, was fashion a risk for Nica? Probably. Was it worth taking? Okay. So Nica released its revenue update for its investors last week for the last financial quarter. And it left shareholders quite disappointed. And guess the culprit. You got it.

It was fashion. Unfortunately, this is not even. even the first time. If you're a regular daybreak listener, then you will remember that I did an episode on Nica sometime in January. It was essentially about how Nica's post-listing glory days might be over. Even then, one of the main reasons Sita Raman, the deputy editor at the Ken, had pointed out, was fashion.

So today, let's take a closer look at what's going on with it. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Das Sharma, and I don't you. chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Friday the 13th of April. Let's begin with why NICA chose the marketplace over the inventory model that it already brought it so much success. You see, it is not that Nica does not hold inventory at all in fashion,

but it has chosen to be marketplace first in this category. My colleague Sita Raman explained it quite well. Naika's inventory-led business in fashion is driven by private labels. If you just go by the sheer number of brands available, fashion far outruns personal care. And because of this, it is hard to do justice to fashion as an inventory-led player. Also for cosmetics, Naika had to come up with a playbook all on its own. But for fashion, it could turn to Mintra and Amazon to understand why it's, made sense to follow the marketplace model.

And another important reason in fashion is this. There are higher number of returns and cancellations compared to personal care, which is why the inventory model is not the most suitable. So so far so good, right? So why then is Nica's bet on fashion letting it down? Stay tuned to find out. There was already a lot of skepticism surrounding Nica's foray into fashion.

But even if it was only for a short period of time, in the last quarter of last year, the fashion vertical did manage to bring back some of its old charm. It left Nica's BPC or beauty and personal care segment in terms of order and revenue growth. Nica's fashion revenue rose by 43% from the previous year. This was much higher than the 26% in BPC. As of March 2020, Nica offered 4.3 million stockkeeping units or SKUs in the 5%. fashion category. Now, this is nearly 15 times more than what it offers in the beauty and personal care segment. Plus, NICA chose to focus on the premium end of the fashion market, and it has

managed to increase its average order value or AOV by 20% to a little over $3,800. But on the other hand, the AOV in its main BPC segment declined marginally to around $1,800. While this has helped improve the economics of the fashion business, e-commerce is still a tough nut to crack, especially for clothes priced above $2,000. Sita Raman spoke to Shubrata Siddhanta, a former senior executive at apparel retailers such as Trent and shopper stop. He told him, and I'm quoting,

it works on touch and feel. That is why 65 to 70% of apparel sold online is priced less than $1,000. End quote. The unique monthly average visitors for fashion grew at a slower pace than for BPC in the six months that ended in September 2020. As a comparatively new player in the fashion e-commerce game, Nike has to take on Mintra, Amazon and AGO. To do this, it has to spend a considerable amount to attract new customers. The chunk Nica spent on promoting its fashion vertical in the year that ended in March 2020, was over 50% of what it spent on beauty and personal care.

This was despite its fashion business revenue being one-tenth of its beauty business. So what then does the future look like for Nica? Coming up next. Just because of its basic nature, fashion is a very difficult challenge for Nica. Adwaita Naya, the chief executive of Nica fashion, told the Ken, and I'm quoting, I do believe fashion is the ultimate discovery problem. Fashion has so many products far more than beauty. So how do you really show the right thing to the right person at the right time?

And that remains a focus for us. End quote. Another factor to really think about is the seasonality of fashion. It is very different from beauty and personal care. Trends come and go in the wink of an eye. The market for fast fashion is cheap and is only growing. There are already a bunch of popular fast fashion retailers like Trent Studio.

So it seems that there are little to no chances of Nike pulling off in fashion what it did in the beauty and personal care segment. At least not any time in the near future. In fact, right now, even to manage consistent growth in the fashion segment is a far-away dream for Nica. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Sintas Sharma your host and today's episode was edited by my colleague Rajiv Sien.