The secret of Nykaa’s success

April 2020 was an uncertain period for most businesses across the world, and a certain category of e-commerce companies was among the earliest to feel the pain. A national lockdown was started in India on March 25 to contain the spread of Covid-19, and e-commerce businesses were allowed to deliver only essential commodities such as groceries, food, and medicines during the 21-day lockdown period. (The restrictions were lifted in stages.)

This had presented a problem for entrepreneurs such as Falguni Nayar, founder and CEO of beauty and fashion retailer Nykaa. Her company sells beauty, fashion, and wellness products on its platform—and none of those fell into an essential category. She knew it would take some quick pivots and strategic thinking to keep the business rolling.

And Nayar didn’t waste any time. Consider her next steps.

With operations and logistics coming to a halt, she decided to sell everyday essentials online. “Overnight we pivoted to an essentials-only online store and to handle that we utilised our 70 offline stores across the country to do hyperlocal delivery,” says the 57-year-old Nayar. The hyperlocal focus was, of course, because intra-state shipment of products was restricted during the initial phase of the lockdown.

The retailer also launched a new category of hygiene essentials under its private label. This included hand sanitisers and cleansers, masks, hand washes, personal protective equipment (PPE) suits, and thermometers.

“We would match the products ordered online with what was available at the store to deliver to the nearest pin code,” she adds.

This helped Nykaa manage its inventory better since air conditioning had been shut down in several shopping malls, and shifting the stock from stores to warehouses was crucial. Nykaa has 12 warehouses across the country for its beauty and fashion products, and these have been operating without a break, says Nayar. By June-July, the excess inventory in stores was considerably reduced.

“My employees were my frontline warriors. They have been working constantly through the lockdown to make sure that the transition is smooth without much wastage,” says Nayar, emphasising that there were no layoffs and pay cuts in her company due to the pandemic.

The Mumbai-based omni-channel retailer currently has 76 stores across three formats: Nykaa Luxe for premium brands; On-Trend for premium to masstige brands; and kiosks which sell only its private labels. Nykaa retails over 2,500 brands across beauty and fashion through its online and offline stores.

Thinking on their feet helped Nykaa revive its sales by mid-June. In fact, it touched 93% of business as usual (benchmarking against the month of February 2020) that month. The company was in the black in FY20, having generated a revenue of ₹1,983 crore; it posted a profit of ₹78 lakh as against a loss of ₹21 crore in FY19.

In parallel, between March and April last year, Nykaa managed to raise ₹166 crore as primary investment from Steadview Capital, an Asia-focussed hedge fund, at a valuation of ₹9,100 crore ($1.2 billion) that catapulted the eight-year-old venture to unicorn status—a startup worth $1 billion. “We had been following Nykaa’s journey for many years and decided to make a secondary investment of about $17 million in September 2019 followed by a primary investment of $23 million in March 2020. We loved the founder’s bold vision and strong execution trackrecord,” says Ravi Mehta, founder and CIO, Steadview Capital. “Nykaa’s focus on customer service and capital efficiency stands out in the Indian e-commerce space.”

That focus helped give Nykaa its share of silver linings, even in a largely bleak 2020.

Having started in 2012, Nykaa was a late entrant into the Indian e-commerce market, but being a specialised retailer helped it stay strongly in the game. While Amazon and Flipkart sell everything from electronics to books, Nykaa focussed on beauty products. The only other online beauty retailer is purplle.com. In 2018, the omni-channel retailer launched its fashion vertical followed by a men’s grooming platform, Nykaa Man, in 2019.

Despite operating in a highly competitive and capital intensive space, the company has refrained from raising big bucks. Nayar’s decades of experience in investment banking (prior to Nykaa, she had been managing director of investment banking at Kotak Mahindra Bank) had taught her that sustaining a business was most important. Over time, Nykaa has raised a total of over $70 million in primary funding. “We are a frugal company which has gone large scale,” says Nayar.

In November last year, Boston-based asset management firm Fidelity Management & Research Company invested an undisclosed amount in Nykaa through a secondary transaction that provided a partial exit to its early investors, while some employees also sold their ESOPs (employee stock ownership plan.) The company says that its valuation has grown more than 60x over the last eight years, and that reflects in the string of marquee investors over the past few years, including Steadview Capital, TPG Growth, and Lighthouse.

It isn’t just the business fraternity and well-established funds Nayar has managed to attract. Bollywood, too, has come calling. Actor Alia Bhatt invested an undisclosed amount in the business last year, while actor Katrina Kaif launched her cosmetics brand Kay Beauty in partnership with Nykaa in 2019 and, last year, invested an undisclosed amount in the company. “I have been a part of the entire process; be it brand building, product decisions, creative calls as well as the marketing strategy surrounding the launch of Kay Beauty and its ongoing journey. Having worked closely with Nykaa over the past few years, I became aware of its growing brand equity. Becoming an investor seemed to be the next obvious step,” Kaif tells Fortune India.

The company’s focus on authenticity and commitment to customer experience has drawn over 8 million customers, and 16 million unique visitors a month. At the same time, Nykaa’s credibility as a brand and its non-discounting policy has strengthened its relationship with global brand partners who were, initially, not too comfortable about selling their premium cosmetics products on an e-commerce platform. Rohan Vaziralli, general manager, Estée Lauder Companies, India, says, “Closely following the growth trajectory of Nykaa and understanding the full consumer experience that the platform offers, we knew we wanted to be a first-mover with them. Our partnership helped us bring our portfolio of brands to the more than 590 locales across India that Nykaa serves.”

The multi-pronged strategy of exclusive partnerships with global brands in beauty and fashion, creating private labels across categories, and having an offline presence has given it recognition in a crowded e-commerce market where customers are typically vendor-agnostic, and seek the lowest price for the product. Nayar’s son Anchit, who is the CEO of Nykaa Retail, explains that beauty as a category requires a certain degree of touch and feel, which is why Nykaa has always taken an omni-channel approach. “We think the adoption of online shopping has been accelerated, but we see stores continuing to play a critical role,” he says. “Our stores recovered to pre-Covid-19 levels by November and we expect strong growth going forward.”

While the beauty business continues to be core to Nykaa, it is also increasing its attention to its fashion vertical. The company has a five-year target towards building a fashion e-commerce platform that will contribute 40% to its overall business. “Fashion is a category where curation and the discovery experience makes all the difference. Our efforts in fashion are seeing very encouraging results as we expect to become a ₹500 crore business [in terms of revenue] in FY21,” says Nayar’s daughter Adwaita, the CEO of Nykaa Fashion.

An integral part of Nykaa’s business success has been the company’s ability to use social media platforms to establish itself as a credible voice in beauty and, now, fashion conversations.

Freya D’Souza, assistant vice president, strategy, Dentsu Webchutney, a digital advertising agency, points out that for a brand to excel on social media, community-building is key, and Nykaa has excelled at that. “Also key to success has been crafting relevant, engaging content, with a strong focus on video. Their how-to videos, along with information on beauty tips and hacks on YouTube and Instagram, are all aimed at beauty enthusiasts that create and consume content online voraciously,” she says.

Here's the other critical element to Nykaa’s growth. As was evidenced in March last year, its founder Nayar—who ranked No. 20 on the 2020 Fortune India Most Powerful Women in Business list—isn’t easily ruffled by challenges. For instance, she is cognisant of competition from larger e-commerce players such as Amazon, and Walmart-owned Flipkart and Myntra, but not worried about it. “We have built our own ecosystem and customer base. When we were a small business, I used to fear irrational competition. Someone comes in and throws a lot of money to acquire customers. But now I don’t,” says Nayar.

This mother of twins (Anchit and Adwaita) had already taken a brave leap of faith around a decade ago, when, at 50, she quit Kotak to plunge into entrepreneurship, fulfilling a long-awaited desire to build something from the ground up.

Though she has kept her entrepreneurial goals independent from the career of her husband, KKR India chairman Sanjay Nayar, she says she enjoys working with her children. Being around each other all day long has only helped strengthen the bond between them, says Nayar.

It has also strengthened the business, which has an IPO on the cards. That development, when it happens, can only add to the glow of this beauty unicorn.

(This story first appeared in Fortune India's February 2021 issue).