Why Falguni Nayar isn't worried about Nykaa's marketing nous

Few people were privy to it in 2019. But Falguni Nayar, Founder and CEO of FSN E-Commerce Ventures, said then that the beauty and personal platform — best known as Nykaa — was ready for a public listing.

The investment banker in her whispered: Nykaa is IPO-able.

With the outbreak of the COVID-19 pandemic in 2020, Falguni understandably turned cautious.

"Circumstances were difficult," she recalled during the earnings call of the second quarter of fiscal year 2022 in mid-November. In the first half of FY 2021, Nykaa had made drastic cuts in marketing and advertising expenses.

In effect, the marketing and advertising expenses were less than Rs 170 crore in FY 2021, lower by 16 percent than the previous year.

But what nobody, including Falguni, saw coming during the first COVID-19 wave was the disproportionate increase in traffic and transactions on its digital platforms.

Pandemic-induced curbs limited Nykaa from operating its 80 stores in 40 cities, and consumer footfall in stores fell by nearly 60 percent. Almost 97 percent of its gross merchandise value (GMV) was transacted online. Still, revenue from operations grew 38 percent to Rs 2,440.9 crore in FY 2021!

Nykaa clocked 658.9 million visits on its beauty and personal care websites and mobile applications in FY 2021, up by 15 percent in a year when it cut marketing and advertising expenses from 11.4 percent of revenue to 6.9 percent of revenue.

Falguni has changed gears in the past two quarters, much to the surprise of equity analysts.

Marketing and advertisement expense as a percentage of operational revenue was 13.7 percent in the quarter ended September 2021, compared to 11.1 percent in the previous quarter.

"In a very conscious manner, we are (now) increasing our marketing spends because they were artificially depressed in the first half of FY 2021 and the period of COVID impact," Falguni Nayar, CEO of Nykaa, told equity analysts on November 15, 2021.

"Because of that fear, we had spent very little on marketing (last year)," she reflected.

Apart from the exceptional circumstances in the first half of FY 2021 which made Nykaa conserve capital, the CEO also pointed to the company's ambition to grow Nykaa Fashion which is scaling up.

The fashion GMV contribution to consolidated GMV of Nykaa increased to 27 percent in Q2 FY2022, compared to 14 percent a year before. Falguni wants to ramp up the average order value of its beauty and personal care (BPC) segment by taking the Nykaa community to its fashion offerings.

To put that in perspective, Nykaa's annual unique transacting customers in BPC grew 40 percent year-on-year to touch 7.2 million in September 2021, while its fashion division clocked 417 percent growth to touch 1.3 million annual unique transacting customers in the same month.

If there is a cause for worry, Nykaa's average order value (AOV) in BPC dipped to Rs 1,913 in Q2 FY 2022, from Rs 2,158 a year before. But, that's been somewhat offset by its fashion division AOV, which has gone up to Rs 3,257 in Q2 FY 2022, from Rs 2,207 a year ago.

Falguni is eyeing business on the fashion front. This was incepted in 2018, and will make Nykaa a formidable competitor to Myntra because of its recall. She explained the rationale of maximising effort on fashion.

"When a business is in the initial stage of scale-up, growing rapidly, and we're acquiring a lot of customers on the platform, the mix of new customers versus repeat customers is such that the overall marketing cost is high," she told equity analysts.

"That settles in at a more optimum level once we see more repeat customers."

Nykaa sure has brand recall, reinforced through its content-first approach to retailing. It has a network of 3,055 influencers, "including Generation Z trend setters, mommy bloggers, beauty, fashion and lifestyle bloggers, makeup artists and celebrities", according to its prospectus.

Its YouTube-based platform, Nykaa TV, to promote beauty and personal care has 1.2 million subscribers, as of August 31, 2021, clocking a watch time of 1.5 million hours.

The company launched 'Explore' in 2020, an in-app content aggregation hub. The 'watch and buy' feature enables a consumer to watch content and shop for the featured products in real time. The content is uploaded to its mobile app on Explore by influencers.

"Its discovery algorithms are responsive to consumer preference based on their search and engagement behaviour on the platform," according to the Nykaa prospectus.

The focus on content—beauty and fashion blogs, nearly 40,000 posts on Instagram in FY 2021, and videos—has been critical in growing the Nykaa Network, an interactive beauty forum, to 3.6 million members.

And that's why Falguni is convinced that the extra rupees spent on marketing is worth it. "All of that will be value-accretive is our promise," she said.

Over the 12 trading days, from November 10, when FSN E-Commerce Ventures got listed, its share price trajectory is an evident testimony of investors and market seeing moat in its play.

Compared to its issue price of Rs 1,125 apiece, Nykaa has been trading at a premium of 77.3 percent against its lowest price of Rs 1,994.1 on November 10. The premium exceeds 116 percent when the issue price is compared to its highest price of Rs 2,431 on November 25.