Beauty startups struggle to scale up business amid drying funds

Around 11 startups in the segment have been acquired by bigger brands within a year's time

In a little over a year, around 11 startups in the beauty and wellness space have been acquired, with five changing hands in 2017. That's because startups in this segment have struggled to scale up and crack their unit economics. As funding dried, the founders began looking for exits.

For instance, Vanity Cube was acquired by fitness major VLCC, while Vymo was bought by Naturals, a South India-based salon chain. Belita, a pioneer in the at-home beauty service in Mumbai, was acquired by city salon chain Enrich. Some of the weaker players were acquired by Quikr, Little and others, say insiders.

There are two segments here: The go-to salon market that includes branded entities, and single stores and at-home players like MyGlam, UrbanClap, Quikr, Housejoy or Vymo. The beauty and wellness market in India was estimated at $3 billion in 2013. Currently, it is pegged at $7 bn (Rs 45,000 crore) and is likely to stand at $12 billion by 2018. These include products and services sold through salons, spas, fitness centres and cosmetic clinics. The first segment includes aggregators such as Zooty, Just Dial, Nearby, and Little.

Consider the nuances. Unlike in restaurants, where customers go looking for variety, customers here invariably go to the same saloons or parlours, seeking the same stylist for anchor services like haircuts. ''Customers don't change salons often. There's no discovery problem the start-ups are solving (unlike in air travel or hotels). The only game left to play is the discount one,'' says the founder of a start-up in this space.

Many salons offer membership cards to drive loyalty. Typically, around 70-80 per cent of customers for a salon are loyal ones, while only 20-30 per cent are walk-in customers, lured with bundled services at deeply discounted rates. Another characteristic is that it is a weekend business, when a salon may operate at 120 per cent of its capacity and only 30-40 per cent on weekdays.

''In the past 10 years, no one has made money. Aggregators don't have a problem to solve, besides offering discounts. They don't have a strong value proposition,'' says Saurav Dey, the founder of Gurugram-based Stylofie, acquired by local services aggregator Little.

The salon and spa sector is also fragmented and unorganised in India. ''Around 95 per cent of these venues are managed by people with little or no knowledge of online management systems. They use paper and pen to manage their appointments. There is no existing PoS (point of sale) systems,'' says Pasanjeet Roy, co-founder of Fabogo, which raised $2.5 million last week.

Experts say that the at-home beauty service is genuinely a habit-forming behaviour. Many tech-savvy and upwardly mobile people in Gurugram and Bengaluru, for instance, use apps like Big Basket or Milk Basket. This, in turn, could disrupt the salon industry. Many women find it convenient to use these for maintenance services like waxing, facials or threading.

But, at-home services have limitations - chemical services like rebounding or smoothening can't be done at home - and the model is expensive. The average ticket size is Rs 1,500 and the transport costs are high, as startups use a couple of hubs to service a city (one each in Gurugram and South Delhi). ''If you add manpower and product costs, you are barely left with any money. Unit economics don't work out,'' says Dey.

''It's also a very people-intensive business. An at-home stylist is able to do one or two bookings a day, and generate Rs 50,000 a month. If you want to earn around Rs 8-10 crore in revenue per month, you will need 1,600 people, which is like a facilities management firm. How do you scale to that level?'' asks Manish Taneja, founder and chief executive, Purplle.

Yet, insiders says Urban Clap makes good revenue from beauty services, while Quikr is trying to catch up. MyGlamm, run by a sector veteran, has an interesting franchisee model. ''If someone is going to make money, it is the branded salons, which will have much lower costs than an UrbanClap. Once the market is created, they will start serving the market,'' says a founder.