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    Indian BPC / Fashion market expected to reach INR2t/INR8.7t by CY25; with Nykaa benefiting: Motilal Oswal Financial Services Limited

    Published on September 28, 2021

    According to the report of Motilal Oswal Financial Services Limited (MOFSL), The Indian Beauty and Personal Care (BPC) / Fashion market is expected to reach INR2t/INR8.7t by CY25 – posting a CAGR of 12.7%/18% from CY20. The online BPC and Fashion markets are growing at an even faster pace (BPC/Fashion CAGR of 60%/25% over CY16–20). Growth would largely be driven by a) a higher propensity to shop online owing to increased internet/smartphone penetration as well as more convenient payment infrastructure (UPI), b) large Millennial and Gen-Z populations with aspirations and growing disposable incomes, c) the rising influence of social media, especially among the key demographic d) increased female participation in the workforce, and e) the migration from unorganized to organized players.

    Nykaa is estimated to control 35% of the online BPC market. While online channels account for just 8% of India’s BPC market, it is pertinent to note that 70% of the market is estimated to be unorganized. Thus, online channels are estimated to contribute ~27% to the organized space, and Nykaa is well-placed to lead the online/organized portion of this market growth with a proven business model.

    MOFSL  analyzed Nykaa’s DRHP to understand the opportunity in the BPC and Fashion segments, the company’s business model, and the competitive landscape:-

    Unique customer journey:

    The customer journey begins with a unique method of product discovery involving curated collections, specific stores within the platform (Nykaa Luxe, Nykaaman, etc.), and search based on keywords or visual looks. Customers are then able to access ratings, reviews, how-to videos, and influencer content and have the option to chat with product experts to identify products/solutions.

    Inventory-based business model:

    One of Nykaa’s key strengths lies in its inventory-led business model for the BPC segment. While it assumes the risk of obsolescence and bears an inventory cost, it allows the company to offer authentication for all its products, ensure availability, and enable efficient distribution. Its technology is geared to enable fungible inventory across online and offline channels, allowing for efficient inventory management.

    Omni-channel approach:

    As of 31st Mar’21, Nykaa has 73 physical stores across 38 cities. One of the key objectives of the issue is to raise funds to grow its physical store network. We believe physical stores serve two main purposes; they a) allow consumers to sample/experience products to ascertain their choice and b) create a more robust distribution network to allow for even hyperlocal deliveries in the future.

    Influencer network and content-first approach:

    With a network of over 1,300 influencers and 12.6m followers across leading social media platforms, Nykaa is able to drive widespread product and influencer-led education through creative and entertaining content across video and written formats. Nykaa creates and films the majority of its content in-house through the Nykaa Army.

    Foray into Fashion:

    Nykaa Fashion was launched in 2018 as a curated and managed marketplace. Currently, it houses 1,350 brands and over 1.8m SKUs with fashion products across four consumer divisions: Women, Men, Kids, and Home Merchandising – including several categories such as Apparel, Accessories, Jewelry, and Home. It identifies fashion-forward brands, vetting for style and quality within these brands. With the Online Fashion industry, estimated to be worth INR439b/USD6b, Nykaa has market share of less than 2%.

    Stacking up to competition:

    Nykaa’s competes in the Online BPC space mainly with three types of players: vertical players (Purplle, MyGlamm), domestic horizontal players (Amazon, Flipkart, AJio), and brand-owned websites. While vertical and horizontal players mostly follow a marketplace model, acting as brand aggregators, they have been unable to create a digital content-led ecosystem such as that of Nykaa. At the same time, they are unable to offer the same level of guarantees for authenticity as Nykaa. Conversely, while brandowned websites provide the comfort of genuineness, they lack the product width and distribution capabilities.

    Key risks:

    In our opinion, Nykaa’s business is susceptible to some risks, including a) a questionable right-to-win in the Fashion segment, wherein it faces stiff competition from other vertical and horizontal players, b) scaling issues with the inventory-led model, c) increased competitive intensity, with the risk of new entrants with deep pockets entering the segment once it reaches a certain scale, and d) the collective bargaining power of suppliers/brands that may be threatened by Nykaa’s strategy to scale its own brands.

    MOFSL – primary research:

    We conducted a survey with over 150 participants, focusing on Nykaa’s main demographic target audience, to get a better understanding of what drives consumer behavior in the Online BPC space.