And then, many employees at FSN E-Commerce Ventures Ltd started receiving job enquiries from the Mukesh Ambani-led conglomerate.

FSN is the parent of Nykaa, the popular beauty and personal care retailer credited with building the online beauty products business in India. The going was good for the company that sells everything from lipsticks and kajal to creams and face brushes.

In November 2021, its share price almost doubled upon listing. That catapulted founder Falguni Nayar into a league few female entrepreneurs can boast of. Back then, her stake, and that of her family’s, was worth over $6.5 billion. Nykaa also became the most obvious place to headhunt, particularly for talent related to the beauty business.

Interviews took place; job offers were made. Reliance was willing to pay a 20-25% hike on salaries to build its talent pool, people in the know said. While not all conversations materialized, a handful of hirings were made.

Many months later, in March 2023, Reliance announced its online and offline beauty debut, under the Tira brand.

Over the last many years, Nykaa has successfully shielded itself from competition—from bigger e-commerce marketplaces such as Flipkart and Amazon. But the beauty and personal care business is increasingly becoming a high stakes battle with the market estimated at $17-18 billion currently. Over the next four years, it could be worth $28-30 billion, financial services company Avendus Capital estimated.

Reliance is eyeing a piece of this pie and could pose the biggest challenge yet for Nykaa.

“Nykaa has had the first-mover advantage and a free run. It could raise money and do a public listing at the right time. But if Reliance is aggressive, then what is the differentiator that Nykaa will offer?” asked Harminder Sahni, founder and managing director of Wazir Advisors, a management consulting firm.

Rising competition is not Nykaa’s only worry. A cocktail of lukewarm consumer sentiment, concerns around its fashion foray, the implication on margins, and a hammering of its stock price appear to have created the perfect storm for the company. The question is whether Nykaa can protect its turf and stay ahead.

The sale reports

What does the company’s income statements suggest?

It is, sort of, a mixed bag.

Nykaa remains a rare startup that is profitable. Nonetheless, its parent, FSN reported a 71% slump in net profit to ₹8.5 crore during the third quarter of 2022-23 (December quarter) compared to the year-ago period. Investment in lease rentals for stores, office space and warehouses ate up its margins. Compared to the September quarter, profit encouragingly rose 63%.

The company’s revenue, meanwhile, is steady. It surged 33% to ₹1,463 crore in the December quarter compared to the year-ago period.

Nykaa, primarily, has three revenue streams. The beauty and personal care business is its largest bucket and contributed ₹1,263 crore to the December kitty. The company also runs a fashion business, where it sells western and Indian wear. This generated only ₹128 crore. The third revenue stream is bucketed as ‘Others’ and includes its eB2B platform, a wholesale business for retailers. By the December quarter of 2022, the Nykaa SuperStore, as it is called, had thousands of transacting retailers.

Investors, today, are mostly concerned about Nykaa’s fashion business, headed by Adwaita Nayar, Falguni Nayar’s daughter. It launched in 2018 but is yet to take off in a way that makes investors happy.

In a revenue update for the fourth quarter of 2022-23 (the company is yet to announce results), Nykaa stated that while its beauty and personal care vertical witnessed strong demand, its business in the fashion category faced some impact due to the consumer pullback in discretionary spending.

“Nykaa has a poor recall in the online fashion business which has strong competition from market leader Myntra followed by Amazon, Ajio and Flipkart,” brokerage Elara Capital stated in a recent report. It estimated Nykaa Fashion’s EBIDTA losses could continue over the next two years. EBIDTA is earnings before interest, taxes, depreciation, and amortization.

In March this year, brokerage firm Macquarie initiated coverage on FSN with an ‘underperform’ rating. The brokerage doubted the company’s ability to profitably grow in the fashion business.

“We are a profitable business. So, to that extent, the market context of the funding winter hasn’t impacted our operations as we consistently churn out profits from our beauty and personal care business. We are investing in our fashion business and the eB2B business as we believe these will be our engines of the future,” Nykaa stated in an email response to Mint. “We have a clear focus on profitability, with a view on timelines to break-even and then make healthy operating margins in both businesses that we are incubating at present,” the company added.

New age of discounts

Around the time Reliance announced Tira, Anchit Nayar, the chief executive of Beauty E-commerce at Nykaa, was visiting London and Paris, meeting the global heads of iconic brands such as L’Oréal and Estée Lauder. With increasing competition, Anchit (Adwaita and Anchit are siblings) was on a brand building mission.

“Brand relationships are paramount and it’s where we spend a lot of our time. Our approach to servicing our clients, globally, and in India, is almost like management consultants or investment bankers. They realize that Nykaa is playing the long-term game here,” Nayar said in an interview.

Many market watchers believe even Reliance is in for the long haul. The company’s first Tira store, 4,300 sq ft large, opened at the Jio World Drive Mall in Mumbai’s Bandra Kurla Complex showcasing international brands such as Mac, Clinique and Anastasia Beverly Hills. The company can potentially scale up the Tira store format across 100 cities and the format of the stores itself can change according to the locations, people familiar with the retailer’s plan said.

Nonetheless, as of now, Nykaa has better variety, app user experience, and faster delivery compared to Tira, some shoppers said. But then, Tira is just a few weeks old and Reliance has a track record of disruption.

“Quality and customer experience are very important in the beauty category. It’s a much more personal category unlike, say, grocery. So, it won’t be an easy product category for Reliance,” said Satish Meena, an independent consultant.

Reliance Retail, though, already has a strong offline retail presence. “How aggressively Tira expands and how they price the products will determine a lot of things, going forward,” added Meena.

Besides Tira, Nykaa faces competition from Shoppers Stop and the Flipkart group. For instance, fashion portal Myntra, a Flipkart company, is expanding offerings under its beauty portfolio, adding over 50 international brands. In March, Shiseido Asia Pacific Pte. Ltd, signed a strategic distribution partnership agreement with SS Beauty Brands Ltd, a subsidiary of Shoppers Stop, to launch its global make-up brand, Nars Cosmetics, later this year.

Growing competition in the beauty sector is great for consumers—the quantum of discounts needed to drive traffic is likely to go up—in short, stuff like ‘crazy category deals’. But it could be margin dilutive for the retailers in the short to medium term.

Nitin Passi, chairman and managing director of Lotus Herbals, a beauty products company, said that strong beauty brands were never dependent on a single platform or retailer. “Large beauty brands are channel and channel player agnostic and are available wherever their target consumer is shopping from. More players coming into retail will definitely put short-term pressure on existing players’ margins,” he said.

“Nykaa is the one that’s going to be under pressure. The company had the best margins and it could command it initially. The entry of new platforms is set to benefit brands giving them more avenue for sale,” said an executive at a consumer goods company who did not want to be identified. “Now, everybody (the brands) is going back to Nykaa and negotiating, saying you need to reduce the margin structure. The dependence on Nykaa is reducing a bit,” the person added.

Anchit Nayar, meanwhile, remains confident. It’s good if serious players are willing to invest in the category, which Nykaa started to single-handedly build 10 years ago, he believes.

“I think you have to give credit to Nykaa where it’s due,” he said.

People matters

Startups are known for their aggressive work culture. Is Nykaa any different?

Several employees Mint spoke to mentioned the pressure that comes with working at the company.

“Nykaa is very, very focused on profits. If you’re delivering value, then you’re in. If you’re not, then no one has patience for you,” said an employee who did not want to be identified. “The pressure has amplified post the company’s initial public offering because now, there is pressure to deliver every quarter,” the person added.

The recent resignations of top executives have raised eyebrows. Five leaders resigned this year—Manoj Gandhi, the former chief commercial operations officer; Gopal Asthana, the former chief business officer of the fashion division; Vikas Gupta, the former CEO of the wholesale business; Shuchi Pandya, the former vice president of fashion division; and Lalit Pruthi, who was the vice president of finance at the fashion unit. These resignations followed the departure of Nykaa’s chief financial officer, Arvind Agarwal, in November last year.

Nykaa stated that a few exits at different levels are part of the usual churn any growing company witnesses. The vacancies have been filled through a combination of new hires and internal talent who were promoted.

On Monday, 24 April, the company announced that several senior executives have joined the company’s leadership team of over 50 members. The hires have been made across technology, finance, business, and marketing to “spearhead the next phase of growth.”

P Ganesh, who was earlier with the TAFE Group, Pidilite Industries, Godrej Group, and Glenmark Pharmaceuticals, has joined as the new CFO; Rajesh Uppalapati, who had worked at Amazon for two decades, has joined as the chief technology officer.

“We have a solid team and leadership function in place that is well-poised to drive growth for our next phase,” Anchit Nayar said.

A magnet for brands?

India’s per capita spending on beauty and personal care business is only about $12 today, one of the lowest globally. In comparison, the US, Europe, or even South-east Asia, spends between $30-35. All Indian companies, therefore, have enough headroom to grow.

India, today, is where China was in 2006-07, when there was a shift from consumer staples to consumer discretionary, from personal care to beauty and from mass to premium, said Anchit Nayar.

Nykaa has its strengths, and its strategy appears to be two-fold—sign up more brands and press ahead with the omni channel approach. Many customers demand physical stores since they want to experience the beauty products before they buy.

The company had around 135 offline stores catering to its beauty business as of December 2022. The offline beauty retail market, which is fragmented and is roughly sized at $5 billion, has a potential to grow to $9 billion by 2027, and Nykaa sees an opportunity to more than double its current footprint within the medium term. This does mean continued investments in physical stores and like we have mentioned earlier, Reliance Retail does have an advantage here.

The company, meanwhile, is also investing in the online channel, technology and product teams. Apart from Rajesh Uppalapati, Monday’s hiring announcement named five more senior technology leaders who would “take on key roles in product and engineering, helping to drive innovation and growth across the company’s digital platforms”.

While there are sceptics, some analysts are also optimistic on the company’s prospects. Nykaa has built its brand over 10 years and that’s difficult to replicate in a hurry.

A report from HSBC Global Research, in April, stated that the company’s pan-India store network, positioning through beauty events, and its proposition for retailers through its e-B2B SuperStore, will help in its long-term evolution as a brand owner. The research house expects Nykaa’s revenue to double every two-three years for the next five years. Its loyal consumer base is a magnet for new brands looking to enter India, the report added.