“For our consumer base tier-2, tier-3 markets tend to be growing faster than the metros and Nykaa has become a household name for many consumers across the country,” says Anchit Nayar, CEO- Beauty Ecommerce, Nykaa.
Inflation actually does not appear to have much of an impact on your overall revenue and GMV growth in Q1. How should one look at the impact going ahead? Would it be by the incremental new customers and also are we seeing a change in customer preferences in terms of what kind of products they are buying given the current environment that you are in?
I think it is a good question. Everyone is concerned about inflation and as you mentioned, there has been some pressure on the consumers but despite that Nykaa has delivered incredibly strong results with the consolidating GMV growing at 47% year over year. The numbers are telling us that till now, we have not seen an impact of the inflation on our consumer base that might be affecting other parts of the economy.
. Now does that mean that we are not expecting it? I think it is tough to say we do not know how things will play out. We do not if there is a chance there could be some slight impact but till date, we have not seen it and we are also highly optimistic because now we are getting into the festive half of the year – July-August-September and the October-November-December quarters tend to be seasonally better quarters for us. So we remain cautiously optimistic for the rest of the year.
Talk to us about the fashion business. It is 21% of the GMV but active users have remained flat. What is driving growth in this segment and what do you anticipate will drive the growth going forward?
Yes for us, fashion has also grown very well. In fact, it has grown faster than beauty having delivered almost a 59% growth in GMV year over year. That business continues to grow and also gain traction.
Yes, it is a younger business of ours. We have been retailing multi-brand beauty for almost 9-10 years whereas fashion has been hardly a couple of years, maybe three years or so. So fashion is a relatively young business with lots of headroom for us to grow and that business is delivering strong top line growth.
Now with regards to transacting customers, fashion’s unique transacting customer base has grown almost 100% year over year to almost 2 million customers today. We are seeing strong traction on the unique transacting customer side as well now. What I mean to say is like everything we do, Nykaa is looking to build the fashion business and we are looking to build it in such a way that it does not impact profitability.
So given that the team is focussed on driving quality traffic and not just the quantity of traffic, that is reflecting in the fact that our conversion numbers have also improved on the fashion side. What you can say is strong top line growth coupled with very thoughtful high quality traffic that is improving the quality of the customer base and therefore hopefully the future performance of the fashion business.
Let us talk about the volumes in the non metro cities. We know what inflation is doing with the consumers. Could you tell us about the volumes in the non metro cities and also are you seeing customers holding back on discretionary purchases now?
We have not and I think this will be reflected in our numbers. Our consumers in metro cities as well as in tier-2, tier-3 cities are showing very strong demand and we have always said that consumer behaviour in the smaller cities in India is incredibly aspirational and it is very similar to the kind of behaviour we see in the metros. So for our consumer base, the trend continues. Tier-2, tier-3 markets tend to be growing faster than the metros and Nykaa has become a household name for many consumers across the country.
So, we are seeing very strong demand from tier-2, tier-3 cities. Rural might be another story but again rural is beyond tier-3 cities and not a huge amount of demand comes from the rural markets. I cannot comment on whether there has been a change in consumer spending in the rural side of things.
The owned brands have started contributing now at 12%, but when we look at the fashion gross margin on a sequential basis, it appears to have dipped from 47% to 45.7%. What is the reason behind that dip in margins?
I would say that on both the fashion and the beauty side, we are a multi brand retailer. We work with 3,000 plus brands on the beauty side and over 1,500 brands on the fashion side. We will continue to push the focus on delivering growth for all of our brand partners.
Now that being said, from time to time, we do find gaps in the market which allows us to come up with a consumer proposition that we think is unique and that is what drives our house of brands strategy. There has been an improvement in its market share but still it is not that large. 90% of our business comes from third party brands but our house brand is doing well. It is getting traction and obviously in the longer term, that should have a positive impact on gross margins.
Nykaa has announced the acquisition of Little Black Book (LBB). What are the synergies that are expected and any more inorganic growth strategy or growth plans ahead for your company? Also what will be the capital allocation strategy for the company?
LBB is a fantastic content platform that the founders have built and they are creating incredibly unique and high quality content that our consumers find traction with and they enjoy interacting and engaging with that content. We saw a lot of benefit in having a content platform as part of the Nykaa family and as we always said, content is a key strategy driving education and awareness and Nykaa looks at content as a great way to drive commerce.
We are a platform that is now focussed on liquidation and discounting out of our pocket so we want to drive the right type of demand in the market and content is a great way to do that. LBB being a fantastic digital content first platform, is going to be a very beneficial platform to both our beauty and fashion business. That being said, LBB continues to standalone and operate and will be able to service all their partners, not just Nykaa.
What has stood your company in good stead is the fact that you are profitable when a lot of the other new-age companies are not. But I think the Street will look at the company’s path to higher profitability. What is that path?
Nykaa is a profitable e-commerce company which is obviously rare in the ecosystem. Today EBITDA has grown 4% of sales, up 17 basis points year over year and our profit after tax (PAT) is almost Rs 5 crore which is again a 40% plus growth year over year.
We remain very committed to our value of driving both top line growth but also ensuring that we are doing this in a sustainable way and that we are able to deliver profitability because we understand the importance of building a profitable firm is what will make this company sustainable in the long run and that remains a commitment.
That being said, any dip in profitability that you might have seen in the previous quarters was due to our investment in new businesses. The core business of beauty remains profitable and it is our investment in our B2B business as well as our NykaaMan business that we see as future drivers of growth. That might have slightly brought profitability down.