French designer Yves Saint Laurent once said, "The most beautiful makeup of a woman is passion. But cosmetics are easier to buy." Probably inspired by that, Nykaa founder and CEO Falguni Nayar, who took her cosmetic store online in 2012, has not looked back.

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It was a relatively new and an untested space for Nayar, who at the time wanted to create a premium destination for beauty and wellness products in India. Here perseverance and passion paid off, and today her brand is aspiring to hit the Indian stock market at a valuation of $4.5 billion.

Nykaa's secret sauce to success

When the 50-year-old investment banker-turned-entrepreneur launched Nykaa in 2012, the e-commerce marketplace was still dominated by the likes of Amazon and Flipkart.

But what was unique about this emerging new platform was that instead of just selling everything, it brought makeup, beauty and skincare brands onto one platform – Nykaa.com.

Falguni Nayar

Although Nykaa was a late entrant in the e-commerce space, being a specialised retailer helped it stay strong in the game.

"We are very dominant in the beauty category in India. Especially online, we are the largest in the country," Anchit Nayar, CEO-Retail, Nykaa told CNBC-TV18 in 2020.

While the brand grew online, Nayar understood the need to ensure a physical touch-point for the products Nykaa was retailing. Adopting an omni-channel approach, Nykaa launched stores nation-wide in 2015. Today, the company has 73 stores across the country.

Nykaa disrupted the industry by bringing international makeup and beauty brands to India minus the hefty shipping cost. Nykaa operates stores in three formats - Luxe, On Trend, and Kiosks. With On Trend catering trending and fashionable brands, the Luxe stores feature premium and luxury brands such as Estee Lauder, Dior, Huda Beauty, and M.A.C Cosmetics.

“Customers have embraced luxury products and the percentage share of our luxury products has grown by a third,” Nykaa founder Falguni Nayar had said in an interview to CNBC-TV18 in 2020.

It’s bandwidth to provide an array of products have totally enamoured the young, urban, and beauty-conscious shoppers.

“Nykaa is my go to website for all my beauty essentials. It has everything a girl who loves her skin can ask for,” said Tanu Kapoor, a working professional from Uttar Pradesh’s Bareilly district.

While the beauty business continues to be core to Nykaa, it has expanded into the high margin fashion segment. The company launched its fashion vertical in 2018, followed by Nykaa Man, a men’s grooming platform. According to Falguni Nayar, their fashion business grew six and a half times between 2019-2020.

The company’s focus on authenticity and commitment to customer experience has drawn over 17 million customers and over 1.5 million orders per month.

Fast-forward to 2021, the unicorn is not just a leading e-commerce marketplace with an inventory-led model that is not discount-driven but has also set the ball rolling for a Rs 525 crore IPO.

Nykaa is now the poster-girl for India’s Direct-to-consumer (D2C) gold rush!

D2c model, a game-changer for many brands

India currently has over 80 D2C brands across beauty, personal care, cosmetics, and men’s grooming segments. Some of the beauty & personal care brands that have gained popularity over the last few years include - Nykaa, Sugar, Mamaearth, Wow Skin Science, JustHerbs, The ManCompany, MyGlamm, Skinkraft, Plum and Beardo

As the D2C playbook evolved, so did the kind of companies going D2C. Beauty, makeup and personal care turned out to be the largest segment in the market and drove maximum interest.

“The beautiful thing about beauty and personal category is that it’s very vast. It’s makeup but it is also skincare, fragrances, personal care and hygiene,” said Anchit Nayar, CEO-Retail, Nykaa.

These D2C businesses depend on a massive network of influencers and smart content strategies to reach their target audience. Celebrity endorsements are another big draw to stand out from the crowd. Katrina Kaif launched Kay Beauty, a line of kajal and lipsticks with Nykaa and Janhvi Kapoor as the face of the make-up line under its private label Nykaa Cosmetics. While Sara Ali Khan is the face of Purplle, MyGlamm, recently roped in actor Shraddha Kapoor as its brand ambassador and investor.

Darpan Sanghvi who is the CEO and founder of MyGlamm said that Kapoor’s investment is “priceless” as the startup can “connect to millions of youth and followers through the actor”.

While speaking to CNBC-TV18, Kapoor said “People want to be able to afford what they aspire to own. They don’t want heavy price tags on products. The most amazing thing about MyGlamm is that they offer affordable products in addition to being a cruelty free brand.”

Product differentiation is becoming key in this crowded market. In addition to the affordable prices, clean beauty and sustainability are important checkboxes for increasingly conscious customers.

Varun Algah, founder of Mamaeath, the toxin-free personal care brand told CNBC-TV18 that “Mamaearth was innately a brand which was built around safety and natural ingredients as credentials, which became something people suddenly started looking for. So, in terms of online shift, the brand’s DNA really resonated well with the consumers.”

The global beauty and personal care market is expected to touch $725 billion by 2025, according to a report by Avendus. India has added 80 million online shoppers in the last three years alone to reach 130 million.

As per the Avendus report, estimated Beauty and Personal Care market size in India is expected to reach $28 billion in 2025.

Pandemic and the growth of the D2C market

While ecommerce penetration, technology awareness, internet expansion, diverse offerings, and reasonable product cost are some of the major reasons behind the success of D2C brands, the Covid-19 pandemic gave the ultimate push.

The pandemic triggered a dramatic shift in shopping behaviour -instead of hopping to multiple stores in search of that perfect red lipstick or that aqua eyeshadow or the perfect serum for a flawless skin, now everything is available at the click of a button!

“Customers are not keen on going out to shop and there’s a clear shift to e-commerce,” Falguni Nayar, Founder of Nykaa told CNBC-TV18 in September of 2020.

While browsing through her mobile, Sanyogita Singh, a UPSC aspirant from Delhi added, “Initially, I moved to online purchases because of the pandemic-induced lockdown, but later realised, the brick and mortar stores usually don't keep all the variants that are available online.”

As per an IAMAI-Kantar Cube report, internet users grew by 4 percent in urban India -- reaching 323 million users in 2020. And the D2C brands found the perfect opportunity to capitalise on the wave.

“We grew by 100% in February this year, which means today we are operating at 2x of our pre-covid numbers,” said Manisha Taneja, Co-founder and CEO in March. Purplle lists over 1000 brands and has nearly 50,000 products on its platform.

“Brand websites have witnessed 88% order volume growth as compared to 32% order volume growth on marketplaces,” according to a Unicommerce report titled ‘E-commerce Trends Report 2020’.

These new-age digital platforms are now focusing all attention on cities beyond the metropolitan cities.

As per Unicommerce, Tier II and beyond cities contribute around 66% of the total online consumer demand in India currently, and this share is expected to rise in the coming years. Whereas, Tier III and beyond cities witnessed 53% growth, making it the fastest-growing region.

“We focus more on the masstige consumers who buy products between 200-400 rupees each. We focus on consumers who form the belly of India – the middle class,” said Manisha Taneja, Co-founder and CEO – Purplle.

“75% of our revenues and orders come from consumers in Tier II, III, IV and beyond,” Taneja added.

In fact, beauty brands that were not focused on ‘Bharat’ are now fast making inroads into this very aspirational market.

MyGlamm has increased its presence in Tier II and Tier III markets and is expanding its network from 500 to 1000 points of sale in these regions. The company now stocks its products at chemists and kirana stores.

“The expansion happened during the first wave of Covid-19. Our distribution, sales and customer base went dramatically high. Even during the lockdown imposed in 2021, our revenues were at a high Rs 200 crore in March, as chemists and grocery stores were still open even though the malls were shut. This allowed us to reach out to new customers,” said Darpan Sanghvi, Founder & CEO, MyGlamm. The company is also looking to increase their direct-to-consumer base to 5 million by year end.

Betting on beauty: D2C brands become a darling of venture capitalists

These homegrown direct-to-consumer or D2C beauty and personal care brands are fast becoming a darling of investors in India.

According to a recent report by Praxis Global Alliance (PGA) Labs and Knowledge Capital, between 2014 and 2020, investors pumped in $1.4 billion into D2C brands, of which 54% went into the beauty and fashion segment.

This trend has continued into 2021 as well. Wipro Ventures and Amazon invested $71 million in MyGlamm in July 2021, while in March ChrysCapital put $50 million into Wow Skin Science and Sequoia Capital India led a $45 million round in Purplle - the largest fund raises in the space since 2018.

“These digital first millennial focused brands are picking up. We have seen some mega trends emerging in the last several years where one side we have these young millennial consumers looking for more brands and more choices and the digital infrastructure is shaping in a way where you can build a very large and efficient brands,” said Kanwaljit singh, founder & managing partner, Fireside ventures, which funds digital-first consumer brands, has invested in D2C startups like Mamaearth, boAt & Bombay Shaving Company among others.

So, what’s driving the investors? As per the Avendus report, product margins in the beauty and personal care category is one of the highest – about 70%, making these D2C startups an obvious choice for investors.

Flush with capital in a ripe market, these brands are now open to buy smaller brands to power the next leg of growth or be acquired by larger FMCG peers.

FMCG major Marico acquired a 100 percent stake in the grooming startup Beardo in 2020 to connect with millennials and Gen Z. MyGlamm also acquired POPxo, an online community startup for women, in August 2020. Whereas Nykaa in April this year announced the acquisition of online jewellery brand Pipa Bella to capture the growing market for contemporary fashion jewellery in India.

In July, Marico also acquired a 60% stake in Apcos Naturals Private Limited, which owns the Ayurvedic beauty brand ‘Just Herbs’ for an undisclosed amount. Meanwhile, fast moving consumer goods company Emami bought a strategic stake of 45.96 percent in Helios Lifestyle (The Man Company) in August this year.

A new horizon for the D2C space?

As the market matures, D2C space is now ready to test the waters of Dalal Street with Nykaa’s IPO.

Interestingly, Nykaa is not just the only profitable venture in the list of IPO-bound startups, it is also the only one to be led by a woman founder-CEO and is now set to change the landscape of the D2C space!

(Edited by : Jerome Anthony)