Can Nykaa’s house-of-brands strategy be its next growth driver?

Shortly before Nykaa listed on the bourses in November 2021, founder and chief executive Falguni Nayar expressed her intention to make the beauty and fashion marketplace a “house of brands”, rather than just a multi-brand retailer.

Nearly three years later, Nykaa continues to be driven by this proposition for both the beauty and the fashion segments, investing and carefully building out its strategy hoping that it will compound over time.

The progress is interesting. The e-commerce firm, during its fourth-quarter earnings call last month, said it is seeing good traction for a few brands, including Dot & Key, Nykaa Cosmetics, and Nykd by Nykaa.

The beauty segment’s gross merchandise value rose nearly 40% in 2023-24. On the other hand, Nykaa Fashion’s house of brands, which includes Twenty Dresses and Gajra Gang, grew at a more modest 25%. 

“We’re feeling very excited about this portfolio of brands and we do feel that we want to lean into some of the ones that have already hit scale and really accelerate over the next couple of quarters,” Adwaita Nayar, CEO of Nykaa Fashion, said during the investors’ call in May.

Building a house of brands is a good way to widen margins and create a diversified revenue pool, said a seasoned e-commerce executive, requesting anonymity. “For Nykaa, it supplements its marketplace business by creating an entire ecosystem of beauty and fashion products.”

However, building a successful house of brands is far from easy.

Nykaa, owned by Fsn E-Commerce Ventures Ltd, started as a marketplace for beauty and personal care products in 2012. It launched its first set of cosmetics under the Nykaa Cosmetics brand three years later. Another three years later, in 2018, it expanded into fashion, and subsequently rolled out its own brands.

While the beauty portfolio appears to be faring better than fashion, the larger picture shows sluggish progress in both segments.

Nykaa did not reply to Mint’s queries.

GMV war

Gross merchandise value, or GMV, is the total value of all the goods sold on a platform, not including discounts and other expenses. It serves as a key metric in retail as it provides an indication of consumer sentiment and market trends.

The GMV of Nykaa's owned brands in the beauty and personal care segment was ₹1,095 crore, while in Fashion it was ₹415 crore, in FY24.

Nykaa’s beauty labels—which include skincare brand Dot & Key, cosmetics brands Kay Beauty, and Nykaa Cosmetics—contributed about 13% to the overall beauty and personal care segment’s GMV across online and offline channels in FY24. In FY23, the GMV contribution stood at nearly 12%.

Also read | Myntra is selling lipstick and blush. Should Nykaa be worried?

In fashion, the contribution of Nykaa’s brands to the segment’s GMV contracted to 12.7% in FY24 from 12.9% in FY23.

While it’s tough to ascertain an ideal figure, the slow growth in GMV contribution shows there’s a long way to go, said Satish Meena, adviser at Datum Intelligence. 

For context, Amazon India receives only a single-digit contribution from its in-house or private labels to its overall revenue, showing that the private label category is a challenge across the industry.

Tough economics

The concept of roll-up or the house of brands model was inspired by US-based e-commerce aggregator firm Thrasio, which raised big cheques at a valuation of $10 billion during the pandemic.

In India, backed by immense investor interest, the segment became increasingly crowded with a bunch of firms emerging with the hope to break through the market, including well-capitalised ones such as Mensa Brands, The Good Glamm Group, and Globalbees. 

The sector attracted upwards of $800 million during the funding rush in 2021.

However, India ended up being a rather tricky market for consumer brands, proving that capital alone cannot solve problems of scale.

At present, Nykaa’s beauty house of brands boost is pinned on the growth of one standout brand, Dot & Key, which is said to have achieved a GMV run rate of ₹600 crore, according to the company.

“It’s akin to Honasa Consumer (Mamaearth’s parent company), whose portfolio is being driven by the success of skincare brand The Derma Co. Eventually, Nykaa will have to find a way to scale all of its eight brands in order to make the most of its investment and effort,” said Karan Taurani, an analyst at Elara Capital. 

Owning a range of brands with only a few making money will impact the firm’s bottom line over time, he added.

Also read | Mamaearth’s IPO had lessons for investors

Moreover, Nykaa will require a clear positioning to stand out in fashion, according to Datum’s Meena. Nykaa has 14 owned brands in Nykaa Fashion (including accessories and apparel) and 13 in the beauty and personal care segment. 

Nykaa introduced its house of brands to fix its fashion portfolio, which was growing slowly and facing the heat of rising competition from other marketplaces such as Reliance Retail’s Ajio and Flipkart-backed Myntra. 

Last year, Flipkart, Myntra, and Meesho secured the top three positions in terms of market share in the lifestyle category (comprising apparel, accessories and footwear), while Nykaa’s fashion business holds a single-digit share, according to data by Datum Intelligence.

“The future for Nykaa Fashion is not in its house of brands but its bouquet of offerings through the marketplace,” said Datum’s Meena. “There too, it must cut the clutter and focus on profitable categories without too much discounting.”