Marketing expenses are back to pre-Covid levels: Nykaa's Anchit Nayar

In a Q&A, the CEO of the firm's beauty e-commerce segment dwells on the factors leading to a drop in profit, goal for its fast-growing fashion segment and physical retail foray

E-commerce company Nykaa saw its profit in the December quarter (Q3) drop 59 per cent to Rs 28 crore compared to the year-ago period even as revenue rose 36 per cent to Rs 1,098 crore. Anchit Nayar, CEO of the beauty e-commerce segment at Nykaa, spoke with Deepsekhar Choudhury about the factors leading to a drop in profit, goal for its fast-growing fashion segment and foray into physical retail. Edited excerpts:

What has led to a massive 59 per cent drop in net profit compared to Q3 last year?

Our EBITDA is up 300 basis points sequentially on the back of very strong topline growth as well as strong gross margin expansion. But on a year-on-year basis, a bit of context is required about the Q3 of FY21 which was a very special quarter. There was a confluence of various factors – the major one being that marketing expenses were artificially low across the industry. 

The spending on both digital and non-digital marketing was muted across the spectrum, and Nykaa was no different. On top of that there was very low demand in Q1 and Q2 – after which demand came back with a vengeance in Q3 and people got into a revenge buying mode. These things led to a very favourable profit number. Fast forward 12 months to Q3 of FY22 – and marketing expenses are back to pre-Covid levels.

The e-commerce industry was saying last year customer acquisition costs (CACs) have dropped due to rapid digital adoption. Are you saying that is not the case anymore?

Marketing expense is not just CACs, but yes it is a large part of it. So, CAC has also gone back to previous levels across the industry and competition is very high. And that is impacting all the companies to some degree. However, we are very lucky as a large part of our traffic is organic and the reason is because Nykaa is now synonymous with beauty.

Can demand keep up with higher marketing costs?

There is now a lot of marketing spend in both digital and non-digital both by public and private companies, including our industry. As a company, Nykaa has decided that we will spend for future growth and so we have been investing heavily in both brand building and customer acquisition. Demand has already returned partially to pre-Covid levels and we expect that it will surge as the third wave passes. 

Your fashion vertical is smaller than the beauty and personal care vertical, but it is growing faster and has substantially larger average order values. Should we expect a shift in focus?

We don’t want to give a forward looking guidance on what we expect our fashion segment’s size to be in the future. Without talking about what the mix will be, we can say the fashion vertical will continue to grow very fast. We don’t break down the gross margins in terms of segments and so it won’t be possible to differentiate on that front. I would say both have similar margins, but fashion tends to be a bit higher for us as we cater to a more premium segment.

Although we are the market leader in beauty, fashion is a much larger market which gives us a massive headroom to grow. In fashion, our goal is not to become the biggest player as we are focussed on a niche segment where we can offer premium and differentiated products. When you take positioning, you can never aspire to be the market leader. The beauty of the fashion market is that it is large enough for several big players to co-exist. 

You are expanding your physical store network in line with your IPO objectives. How much does physical contribute to your business vis-à-vis digital?

We don’t breakdown physical retail versus e-commerce, but we opened 12 new stores last quarter i.e. Q3 and now we are at 96 stores, just shy of the 100-mark. I think we have made it very clear the goal is to build many, many more stores. 

We saw a good return to physical retail in Q3 – both in our own stores and general trade & modern trade stores. It was a good quarter for offline retail and that gives us confidence that as Covid recedes, we believe there will be a return to physical retail and we are positioned to benefit from that.

There has not been any update on the international expansion and inorganic growth fronts. What is the latest you can share?

We won’t comment on future acquisitions, but we do want to build a house of brands and we will evaluate any opportunities as they come our way. There is no hard and fast rule or set targets on that front. On the international expansion front, we are already retailing in Mauritius and we could soon be doing exports to the middle east where there is a large Indian expat community.

Your peers in the internet commerce sector who listed last year are seeing widening losses. Are you making a conscious effort to stand out on profitability?

We are probably one of the few profitable e-commerce companies across the globe. In that sense, we are unique. I think that is in our DNA – this company was built to keep both profit and growth in mind. That will not change irrespective of being private or public. The focus is on building a sustainable business for the future and to that end profitability is important. 

We are a very frugal company, but the reality is growth is equally – if not slightly more - important in the current moment of our journey. Every quarter you will see us striking a balance between the two. India is a very important market and we do not want to lose our edge in the segment. You will see continuing investments in marketing and customer acquisition.