Nykaa to reduce reliance on discounts, focus on private labels and high-value products for growth

FSN E-Commerce, which operates online beauty and lifestyle retailer Nykaa, plans to rely less on discount sales and ramp up private labels in fashion, lay more stress on high-value beauty products, and new season merchandise to drive sales and grow faster than the industry.

New season merchandise contributed about 25 per cent of fashion gross merchandise value while 20 per cent of its sales are zero discount. The company’s management recently spoke to analysts at its annual investor day. Overall the management expects to exceed the annual industry growth of 29 per cent in beauty and personal care (BPC) and 27 per cent in fashion over the next ten years.

The company has indicated EBITDA margins in the low to mid-teens for both BPC and fashion segments. At its Superstores, margins are expected at 3-5 per cent. “BPC is expected to deliver strong and profitable growth as scale efficiencies come through,” said Nomura.

Nykaa focuses is on the high-spending customer with an average annual spend per customer in the BPC segment on its platform at $80 and $130 in fashion. This is several times what Indians normally do on average in these segments, according to Jefferies. The brokerage firm pointed out that with BPC and fashion having low penetration of 10-14 per cent online, there is considerable headroom for growth.

Customer preference is shifting from personal care to beauty products and management has indicated that the premium category will eventually have a higher share over the next five years. The company is focusing on premiumisation across its products.

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About 30-40 per cent of the company’s business for premium brands is generated offline. The management expects the online share to rise over the next five years, as the digital platform stocks 30 times more brands than its physical stores. It currently has 145 stores across 60 cities.

In fashion, the company has a 16 per cent share in the premium online segment. Its portfolio has many global brands, and plans to increase inventory depth and breadth by tying up with more brands.

The company has an eB2B business, the Superstores, in which it plans to invest more. It has onboarded 1,52,000 retailers on its platform and will target kirana stores and specialty retailers, who contribute about 60 per cent of its revenues in this vertical. The management has indicated that it must grow to 10 times the current size to achieve profitability.

• Read: MFs accumulate Nykaa shares to average acquisition cost

In FY23, Nykaa reported a net profit of ₹23 crore on revenue of ₹5,143.8 crore and EBITDA margin of 5 per cent. Close to 90 per cent of its revenue was from the BPC vertical.

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