Nykaa plans to go ‘aggressive’ with its retail store network, a vertical that contributes less than 10% to its revenue

• Nykaa will launch its three-day-long IPO this Thursday, at a price band of ₹1,085 - ₹1,125 per share.
• The company intends to spend ₹42 crore from the proceeds to set up retail stores, which contributes about 5% to Nykaa’s beauty business.
• Nykaa ecommerce seems to be the driving force behind its growth, as its revenue operating revenue increased by ₹670 crore when footfall in retail stores declined.

Nykaa’s initial public offering (IPO) is one of the most sought after events in the Indian startup ecosystem this year, after the blockbuster public listing of Zomato.

The fashion and beauty ecommerce platform will launch its three-day-long IPO this Thursday (October 28), at a price band of ₹1,085-₹1,125 per share. The company reportedly plans to raise ₹5,200 crore with this public issue.

The nine-year-old startup — launched by Falguni Nayar in 2012 — has elaborate plans on how to use these proceeds. But the most intriguing of all is Nykaa’s aim to expand its offline retail stores, even though they are not a major part of its business.

Anchit Nayar, chief executive officer (CEO) of Nykaa’s beauty ecommerce business, highlighted that retail stores currently contribute around 5% gross merchandise value (GMV) of Nykaa’s beauty business. Pre-COVID the number had spiked up to 7-10%.

The company currently has 80 stores across 40 cities.

“So even though the large majority of our business comes from our online app, we have a very large network of physical stores as well... Also it [retail stores] has allowed us to gain a reputation and also a large [set of] customers interact with the brand Nykaa in a physical way, Nayar said, adding that the omnichannel approach is an important one for them especially in the beauty space.

According to Nykaa’s red herring prospectus (RHP), the company intends to spend ₹42 crore of the money raised from public issues in setting up retail stores. Overall, the company will spend ₹54 crore for this expense.

Nykaa seems to be doing pretty well without retail store intervention

Nykaa’s operating revenue grew by ₹670 crore in the financial year 2021, even though the footfall in its retail stores declined by 55-60% in the same time frame. This indicates that Nykaa’s ecommerce platform witnessed a tailwind in the last fiscal year.

The more interesting aspect here is that the first quarter of FY2021 seems to have very little to do with Nykaa’s financial performance, as the Indian economy was undergoing a nationwide lockdown and only essential deliveries were allowed.

Source: DRHP
*India was under a lockdown between April-June 2020, delivery of only essentials were allowed.

After accessing Nykaa’s financial performance in the April to June quarter of 2021, the company decided to have a “more aggressive expansion on physical store as well as warehousing capacity,” Arvind Agarwal, group chief financial officer (CFO) of the beauty and ecommerce business said.

The company will spend another ₹42 crore from its proceeds in setting up warehouses, which act as fulfilment centres for Nykaa’s ecommerce businesses. For the beauty business specifically, Nykaa keeps the inventory of brands in these warehouses and gets them delivered to the customer directly.

In total, Nykaa has planned an investment of ₹92 crore for this expense.

Besides this, Nykaa will use the proceeds to acquire more customers, launch new verticals, acquire more brands and also expand into international markets. The company intends to launch its operations in the Middle East and United Kingdom, then move to the European market.

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