Mumbai: Falguni Nayar, a former investment banker, has built a market for beauty and personal care-focused e-commerce portals in India. The founder of Nykaa.com continues to woo large international brands to give the Indian market a shot, and has been able to prove that Indian customers from large and small towns are willing to spend money online on expensive cosmetics if they trust the retailer selling the products. Edited excerpts from an interview:

You have made news for two things: being the go-to online store for cosmetics, and for staying away from foreign funds.

To be able to legally, legitimately do the inventory model, we stayed away from foreign money and we raised only domestic funding. We have a very differentiated business model and we truly believe in it. In beauty you need to be inventory-led. You need to make sure you have genuine products sourced directly from the brands, fresh products from your warehouse, and when customers buy you should be able to sell them. Also beauty as a category is very on-trend. I’d rather sell the right colour of a lipstick to a customer at the right price than sell the wrong colour at a discounted price. I believe that discounting doesn’t work so much in beauty. We do give special prices but they are always for brands that want to give discounts. So our entire sales strategy is brand-supported.

Why start with luxury first?

We wanted to be a destination store. We didn’t want to be the neighbourhood store. We don’t want to be like Health & Glow or New U. We wanted to be like Sephora. So then you need luxury brands. And initially luxury brands say that we won’t sit next to brands like L’Oreal; they want only luxury brands in the store. But now we’ve been able to convince them on a new format where we will have a mix like we have in our e-commerce store. So in e-commerce also we had to give them a special thing : Luxe. When you go to ‘Skin’, for example, they don’t want Estee Lauder to be next to Pond’s face wash. Digitally it was easier to do, because you can only get luxury brands with this tab. Soon they began wanting to have all luxury brands within Luxe.

How are you planning your physical Nykaa stores?

We have already said that we will have 30 Luxe stores by 2020. But now we’re considering... we believe that in India you cannot support more than 30 Luxe stores. Because at the end of the day, that price point—Rs3,000 for a foundation—not many people will buy it. The catchment area is limited. Now we’re coming up with a new format which will sell a product mix very similar to that of our online store. If it is successful, we may set up a hundred stores. I say we are like Sephora, but Sephora never sells Neutrogena, or Nivea, but we don’t want to give up on that; we want to sell that because in India those things are important.

So do you have a lot of customer engagement in terms of what they do when they’re on the website?

Yeah, we have become a unique website. We have a very unique customer who really loves our brand and that goodwill is now extending to the Nykaa private label. Building a brand is everyone’s desire, but when you finally build one, it feels good, you know. And that is what is unique to our business model compared to other e-commerce where I don’t think they succeeded in creating a brand destination.

How do you keep customers coming back?

We have a lot of repeat customers. But repeat and new is a growth strategy. We now have more than 10 million visitors a month, and we try to ensure that at least 50% of those customers are new. See, I can choose to be 100% repeat today especially since every new customer costs you money and a repeat customer doesn’t cost you as much money. But we believe that 2 million people have bought on Nykaa, and we believe that number should be bigger over time. We should be at 10-15 million, so we will continue to acquire more customers.

What is your customer acquisition cost?

It has slowly and steadily come down to sub-Rs200 levels. The industry is somewhere between Rs650-2,000. When we started, our costs were obviously much higher—at around Rs650-1,000.

Are you largely doing your communication online?

Mostly online, yes. I would say 80-90%. We have the Nykaa Femina awards and we do some magazine ads, but mostly online.

What is the average purchase on Nykaa.com?

In the beauty category, in a market like India, our average ticket size is Rs1,250-1,500, the same as the US. In India most other e-commerce websites in the beauty category do as little as Rs350-650, which is the price at which personal care products sell. So average ticket size can be Rs2,000 for Flipkart and others, but it is thanks to all the appliances and electronics that they sell. Most customers put 3.5-4 items in a cart at Nykaa. And that has stayed constant for the last three years.

Of your total expenditure, how much goes into technology and inventory management?

Technology is big, we have an 80-person team on tech. These businesses are all about tech. We have 350 people and the tech team is 80. However, the tech team’s salary cost is 65% of total salary cost. They’re more expensive; many are from IIT (Indian Institute of Technology) Delhi, some from IIT Bombay and other institutes.

With both private label and luxury brands, how are you growing Nykaa?

My whole starting point was that you have to give consumers what they want. The customer is using a lot of brands. I think a lot of e-commerce companies have gone wrong. From multi-brand they have become private label because they think margins are high in that business. But pricing and being a good retailer come first. We want to be a good retailer, we want to be a multi-brand retailer, we want to be the best beauty destination. Now if you look at the experience of similar companies in the world like Sephora or Boots, they all have private labels. When a consumer is willing to trust a retailer, she is also willing to trust the retailer’s own brand. I used to buy at Sephora and they never pushed their brand. Still I ended up buying them. If I go looking for a Laura Mercier foundation or a Tarte foundation, I would buy. But when I am less certain, I may buy Sephora also, because I know Sephora as a brand.

What are your fund-raising plans?

We are adequately funded for the next one year. And we are saying we will be EBITDA (earnings before interest, tax, depreciation and amortisation))-positive so, if you can say “aapke muh mein ghee shakkar" then we won’t need to raise money. But yes, physical stores, we definitely need to spend Rs30 lakh per store to do them up. Then we need deposits and we need inventory for them. So you need working capital; it’s a very working capital-intensive business.

And what about your plans to take Nykaa public?

I am building Nykaa to have a life of its own. I have also taken other people’s money, so I have to give them exits, right? IPO (initial public offering) is a plan, but next year IPO, no. It’s too early. I have done more IPOs than anyone else. I was in investment banking and my speciality was IPOs. So, I believe that companies should have a net profit of at least Rs100 crore before they do an IPO, with a Rs200 crore gross profit.

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