“The best way to predict your future is to create it.” Peter F. Drucker
We continue our series of articles on Exponential Organizations in the FMCG/ Consumer industry. After The Hut Group (article here) and OYO (article here), in this article we look at NYKAA, the now famous omni-channel Indian beauty platform and we try to answer a critical question: when and where FMCG companies must own brand agnostic platforms. Here are our thoughts.
1) Beauty in India: a significant growth opportunity that will be mostly unlocked by Online, Organized Trade and New Retail
When it comes to Beauty, if India is far from being comparable to the US or even China (BPC spend per inhabitant in India is on average a meager $7 vs. $33 in China and $247 in the US), it is nonetheless an increasingly strategic country that is undergoing considerable change in terms of growth (9% CAGR expected over 2018-22), categories (Beauty categories – cosmetic, skin care, fragrance – outpacing Personal Care categories – Bath, Hair…) and channels. Specifically, we see the rapid rise of e-commerce and specialty stores as key drivers to not only increase the penetration of the core Beauty categories (cosmetic, skin care, fragrances) but also to premiumize the entire market.
2) Nykaa: an exponential Beauty platform with already a yearly revenue >$160m and a valuation >$700m that is leading India beauty premiumization
Nykaa is the brainchild of an investment banker turned entrepreneur Falguni Nayar who quit her job at the age of 50. She saw a massive gap in the Indian beauty market because of
And her conviction to address these key barriers with an online model led to the incorporation of Nykaa in 2012, an online beauty platform. After 7 years and $96m raised from well-established investors (TPG, Lighthouse…), Nykaa records already ~$160m yearly revenue, owns 33% market share of the online beauty market with 3 million active users and is valued at more than $700m. Premium and luxury segments account for 60% of its revenue; and color cosmetic and skin care for 75% of its total revenue
3) Nykaa: Moving from a beauty platform to a complete consumer-centric omni-channel ecosystem
Nykaa has considerably evolved over the last 7 years:
4) Multiple scenarios ahead
All those efforts to acquire and monetize traffic seem to pay-off as Nykaa’s profitability evolution suggests (expected to break-even by 2020). The next step is the IPO scheduled to take place in 2020 but it is also possible it ends up being acquired before considering:
i) the fierce rivalry on e-commerce/ New Retail between Amazon, Flipkart, Reliance and Alibaba
ii) how complementary would be Nykaa (and Beauty) for those players
iii) the existence of established beauty retailers (Sephora, AS Watson) with strategic intent in India
iv) the scarcity of e-commerce assets to acquire
If the above companies seem to have the highest value creation case, FMCG companies should not be disregarded. Traditionally, FMCG companies have hesitated to invest into brand agnostic platforms for obvious reasons:
i) Other brands sold on the platform could pull-back and hit the platform attractiveness (e.g. Kering pulled back from Net-A-Porter when Richemont fully acquired it last year)
ii) Consumers could be skeptical about a brand agnostic platform owned by a FMCG company
iii) A direct route-to-market at scale could create channel conflict with established partners
iv) The financial case can be seen as challenging if only assessed under the light of the incremental profit generated on its own brands
v) Running successfully this type of business model requires a different skillset
We see a case for FMCG companies to review the acquisition of brand agnostic platforms only when the following conditions are met:
i) A compelling holistic value creation case (high cost of not acting and/ or opportunity of doing): The acquisition price needs to be commensurate to the acquirer cost of not acting and to the holistic value creation case (consumer data, adjacent products, services…). It implies having an aligned future-back understanding of the acquirer’s SWOT that is not trapped into a fixed/ static strategic framework
ii) Possible to develop a right-to-win vs. current/ expected competitors
iii) The right timing: The targeted platform needs to be already important enough for all competitors not to pull back because of the absence of alternatives. But at the same time, the targeted platform should not already be too big which will make difficult a positive value creation case
iv) Be ready and capable to act as a brand agnostic platform: The acquirer has signaled its clear intent to engage into a full brand agnostic/ consumer driven category management with all its competitors. It is committed to acquire the capabilities to become a retailer
v) A fragmented trade: The more fragmented the trade environment is, the lower is the risk of a channel conflict
vi) No significant consumer mistrust towards large brands/ FMCGs
For all those reasons, Beauty in India may well just be one of the best place for FMCG companies to become a brand agnostic platform but it is unclear if they would have the highest value creation case. Hyper-scale players (Amazon, Alibaba, Flipkart, Reliance) or even established beauty retailers (Sephora, AS Watson) may well be in a position to create more value out of this asset… unless Nykaa really ends up moving ahead with its IPO and remains an independent company, it seems to have the capabilities and the balance sheet for it.
What is sure is the FMCG industry will change more in India over the next 10 years than over the last 50 years. New Retail networks will emerge challenging at scale the distribution of profit in the value chain. In this emerging new world, time has come for all players to understand the source of future competitive advantages and to address exponential growth opportunities. Exciting times ahead
“The best way to predict your future is to create it.” Peter F. Drucker
Frederic, Tripti, Bartek, Nikhil and Akhil
For the ones willing to continue the conversation, we will organize an Exclusive FMCG Senior Executive round-table on June 21st 2019 in our Zurich office from 11 am to 3 pm (lunch will be served), The theme will be: ‘Which strategy to win now in a fragmented world while future-proofing our business to win tomorrow’. It will be our unique conference in 2019. As usual, the attendance is strictly limited to 12 FMCG leaders. Please contact lea@fredericfernandezassociates.com to RSVP before April 21st 2019
To follow Frederic, please click Here, To contact him, email at: frederic@fredericfernandezassociates.com
Frederic Fernandez does not own any stocks or financial instruments of any FMCG companies or companies mentioned in the above article. All the above information are public information.
About the author:
Frederic Fernandez is an expert and thought leader in the FMCG industry. He is the Managing Director and Partner of Frederic Fernandez & Associates a global bespoke Strategy Consulting Firm exclusively focused on the FMCG industry. Its purpose is to co-create the future of the FMCG industry, one client at a time. The Firm helps the CEOs and the Boards of the world’s largest FMCG companies on selected areas: Growth and Profit turnaround, Exponential Growth strategy (New Retail, Omnichannel, DTC, Ecommerce, Business Model Innovation), Disruption Hedging/Leapfrog and M&A strategy. The Firm’s head office is located in Zurich, Switzerland. The Firm’s team intervenes all across the globe. To know more about the Firm, please visit its website: www.fredericfernandezassociates.com