Fsn E-Commerce Ventures Ltd

NSE:NYKAA

Earnings Call Transcript 2024-Q1

[Sunita Sachdev, executive]

Good evening, everyone. Welcome to the Q1 FY '24 Earnings Call of FSN E-commerce Limited. I'm Sunita Sachdev. I'm the Investor Relations and Strategy at FSN. I welcome all analysts and institutional investors for the call today. On the call with me today from FSN E-commerce is Mrs. Falguni Nayar, Executive Chairperson, MD and CEO; Mr. Anchit Nayar, Executive Director and CEO of Beauty E-commerce; Mr. Adwaita Nayar, Executive Director and Co-Founder, CEO, Fashion; Mr. Vishal Gupta, CEO Nykaa eB2B and the EVP Private Label; Mr. Suyash Saraf, the Co-Founder of Dot & Key; Mr. P. Ganesh, our Chief Financial Officer.

For abundant caution, I would like to draw your attention to our safe harbor statement and our disclaimer on Page #2. With that, over to you, to Falguni for opening remarks.

[Falguni Nayar, executive]

Thank you, Sunita. Good evening, everyone, and thank you for joining us on the call, and it's always a pleasure to interact with all of you. I wanted to start with our Slide 4, 5, which summarizes our results. Just wanted to share that we are happy to announce that our gross merchandise value for the quarter is at around INR 26.7 billion, which is a 24% year-on-year growth. Revenues have grown at a similar rate of a healthy 24% year-on-year and now stand at INR 14.2 billion. Our gross profit grew at 21% year-on-year and stand at INR 6.2 billion for the first quarter.

And our EBITDA has come out at INR 735 million, which is a 60% year-on-year growth for the quarter. Our profit before tax stands at INR 97 million, and our profit after tax is at INR 54 million, both are showing positive growth on a year-on-year basis.

Moving on to the next slide. Our beauty GMV grew at 24% for the quarter on a year-on-year basis and our fashion GMV grew at about 12% on a year-on-year basis. Both the GMV on a 2-year CAGR basis stands at 32% for beauty and 34% for fashion. Overall, on a consolidated basis, Nykaa's GMV has grown at 24% on a year-on-year basis. We believe that we have delivered on the growth while keeping our focus on customers and costs and consistently invest in sustainable growth. I would like to say that we found during the quarter, our growth in fashion to be a little bit below our long-term expectation. I think it was -- I mean, throughout the industry, everybody is talking about it that it was a particularly tough quarter for fashion, very surprisingly and the industry is hoping for a revival in that. And Nykaa also feels confident that we should be able to move back to our long-term trend line growth in fashion.

In fact, moving forward, I would like to say that in July, we had a good sales season and saw some green shoots of recovery in the month of July, which brought us back to our, what we call as our on-trend year-on-year growth in fashion. So we remain cautiously optimistic for the quarter 2, though I want to say with abundant caution that July is just 1 month in the quarter.

On Slide 7, what I'd like to talk about is that we continue to grow new businesses. Our incubation business, which is the other segment has also scaled up significantly and now contributes about 6.1% of our GMV compared to 3.9% in a year ago quarter -- similar quarter a year ago. In Beauty, and Fashion. Our annual transacting customer base has been growing. You can see that in Beauty now we are at about 9.7 million annual transacting customers, 2.6 million in Fashion, 0.6 million in our physical retail business. And in the other category, which includes Nykaa Man as well as our B2B business, we have about 0.5 million annual transacting customers.

With that, I want to hand over to Anchit to walk you through our BPC performance for the quarter.

I think, I will take those slides for now. We have here been talking about this for a long time. This is the industry sizing as given by Redseer on the left and the expectation that the BPC growth is growing at about 10%. And within that, the online BPC is growing at 29%. Online BPC penetration is -- stood at about 15% or around $3 billion U.S. market in 2022. And this is expected to be about 1/3 of the overall BPC market and grow to about $10 billion by 2027.

Keeping this -- key to our understanding is that the realization of this growth should take the premium component of the BPC consumption from 45% currently to 55% by 2027. There has been a premiumization of the market, which we've been talking about on a regular basis. This growth should come through per capita consumption in the segment doubling over the next 4 to 5 years.

At Nykaa, we already have our consumer spending at about $80 per capita, which is 5x that of the industry average. The average beauty shopper is spending about $15, whereas the Nykaa customer is spending about $80. And we currently have about 18 million customer base. So we do believe that there -- I mean, sorry, there is $18 million customers in that price point. So we do believe that there is headroom for growth, and we can expand our customer base in the ensuring years.

On the GMV front, we want to say that in the BPC segment, our GMV for this quarter came in at 24% year-on-year growth. With a 79% of GMV in quarter 1 was from our existing customers. This is a testament to the quality of our customer traffic that we attract. But it is also important to note that our focus on being an omnichannel retailer has enabled this growth as offline retail grew ahead at 27% year-on-year.

Physical stores now account for 8.2% of Nykaa's BPC GMV. It's also good to see that our investment in own brands are resonating with consumers as our GMV grew. GMV of our own brands has grown at 39% year-on-year. Of this growth, majority of the growth has come through both 3P platforms, off-line distribution growth as well as online growth. Our retail business grew at about 43% year-on-year, and we now stand at about 152 stores, delivering on a very robust GMV per square foot per month of INR 3,346. Our same-store growth also came out healthy at 6% year-on-year. This needs to be seen in the context of the base quarter being relatively a buoyant one.

Moving on to the Slide 11, which gives some of our important duty KPIs. Most of these are self-explainatory, you can go through it themselves because there are a lot of numbers. But important thing to note here is that the orders grew at about 17% year-on-year to 9.5 million with an AOV continuing to be at 1,849 in the first quarter of '24. We delivered on a consistent order to visit conversion of 3.7% in the first quarter.

Moving on to the Slide 12. Our own brands grew 39% year-on-year, now accounting for 12.5% of our BPC GMV, up from 11.2% in a quarter year ago -- in the same quarter a year ago. Importantly, 90% of GMV of our own brand comes from other channels also, and this represented in the chart to the right. I think, I've given the wrong number. I'll come back on that. Our own brands have been able to win the trust of our customers, allowing them to grow at a healthy pace, to add more color on our method. We have found a co -- We have been finding good investments that we can make and Dot & Key was 1 such example, and we can talk about that later.

On Slide 13, sorry, I'll just take 2 more minutes on the previous slide. So I just wanted to show that we have been able to grow our own brands like Nykaa Cosmetics, which is now at about almost a INR 300 crore brand on an annualized GMV basis. Key Beauty, which is our joint venture celebrity brand, which is at about INR 130 crore annualized GMV. And Dot & Key, which was an acquisition we made about 2 years ago, which now stands at about INR 300 crores GMV. And the channel mix here is about 54% is online. And you can see that there's offline of about 14%, and there is almost 1/3 of the GMV is coming from -- is coming from 3P business, which has grown very healthy that has shown a very healthy growth over the last year. And this has been a conscious strategy to take our brand wider beyond our platform. So it's not that it is not indicative of what the platform can deliver, but it is indicative of the investment that we are making and taking our brands wider.

On Slide 13, I just want to say that we have always maintained deep and symbiotic relationship with our brand partners. As of June 30, we had 3,400 brands retailing on our platform. As you will see, our spread of global, Lux, domestic, FMCG and D2C brand is quite wide, which makes our platform derisked from any individual brand perspective. We also continue to launch a varied list of brands on our platform and some of the key ones that are being listed are shown on the right-hand side. We saw the launch of Elemis, which is U.K.'s #1 skincare brand, Virtue, a very unique brand. Let's go back to the previous slide, I'm still talking on it. And then a couple of other brands that many of the other brands that we launched. And we continue to be the partner for exclusive luxury launches.

Moving on to the next slide. I wanted to talk a little bit about Elemis. I just alluded to in the previous slide. But it is U.K.'s #1 screen care brand, and it has launched exclusively on Nykaa Global store. And we are very excited and proud to be the partners of this brand in India. Our launch campaigns and our education content on the brand, along with social media outreach and off-line presence provided a good 360-degree marketing for this brand, which is unmatched in the market.

Similarly, we also -- I want to talk next about an important initiative that we did. We pioneered a very unique Indian engagement with our customers. We created an Indian skin care regime, which is called CSMS and this includes cleansing, serum, moisturizing and sunscreen use. We were aware that there were a number of routines like the Korean routine or Japanese routine, which we consider very much very demanding by Indian consumers, and the need of the hour was to come up with a short routine that Indian consumers would be able to follow. So with this kind of a program, which was developed along with dermatologists and with the reach that Nykaa can provide in terms of social media and 360-degree marketing reach, and we also launched it in all our stores, 81 Nykaa stores. With this, we were able to take this very, very deep and the success of this campaign was very evident in terms of the kind of engagement and kind of click-through rates it provided leading to a superior growth of skin care category on our platform for that at the time of the launch and beyond that.

Coming to Slide 16. We did similar effort in terms of focusing on beauty from the east, which was an edit that where we brought our Korean as well as Japanese and many other East Asian skin care brands to the consumer in an event that was omnichannel. It went beyond physical event into digital world and this also was a very well-loved and very engaging event. In fact, it had a reach of almost 11 million on social media and more than 60-plus influencers participated in this.

Moving on to the next slide. As you are aware, that we tend to have a large sale once in a quarter and our pink summer sale, which was an important event, went very well. It delivered 35% year-on-year omnichannel growth with more than 2,000 brands participating. We have been introducing additional features into our sales process through massive influencer outreach with more than 255 million impressions and also introducing gaming into the -- our playbook.

Next. So also creating further consumer -- customer web experiences through our online finders, like the lipstick finder creating game-changing content, both on our social media and on the platform. Like you can see here were some of the other trends that we embrace towards our, engaging our customers and continuing that what we call as Art of Beauty Retailing.

Moving on to the next slide. We also have had front and center towards our tech efforts and our stream feature got upgraded with intent-driven navigation on the app and that has seen a much better engagement. Homepage personalization, where the recommendation widgets are completely driven from the browsing and shopping history of the customer as well as buy again and wishlist nudges that have been introduced on the card page are just some of the small changes we keep making towards our overall experience enhancement of the consumer experience on the app. And with that, I would like to now hand over to Adwaita to take us through the fashion business performance.

[Adwaita Nayar, executive]

Yes. Thank you very much. So I'm excited to take you through the fashion business performance for Q1. To begin with, we remain excited by the size of the fashion market. The fashion industry is 4x larger than the beauty industry, as we've said before. And as you can see from the industry sizing numbers on the left, there's an expectation that the online component of fashion is expected to grow at a much faster rate of a CAGR of about 27% over the next couple of years. So the online penetration, which today is at about 19% will end up being at about 33%, equating to about $50 billion in top line by 2027.

On the right-hand side, we're double-clicking on what we consider as the premium component of this online fashion market. So of that $15 million that has been transacted online, we believe 10% to 15% is what we consider premium, i.e., average order values of 1,500 and above. So we feel this is a space that Nykaa Fashion plays in. And today, this is about $1.5 billion to $2 billion in size. It's growing much faster than the rest of the buy, and it's the sliver of the market that we want to focus on over the next couple of years.

Going on to Slide 22. This quarter, overall, the fashion market, [ FN ] referred to this, overall, the industry has seen a slightly slower quarter, and we've heard that anecdotally. And I'm sure a lot of you have seen other results also coming out. And so in that context, we do believe Nykaa Fashion has outperformed the market, and we have taken some amount of market share, delivering a 12% year-on-year GMV growth. This has taken our GMV to about INR 653 crores. And I'd like to highlight that the 2-year CAGR for this business remains 34%. In terms of repeat behavior still on the left-hand side chart, we can see that 44% of fashion's GMV has come from the existing customer and this is up from 30% a year ago. And this signifies better customer retention, a metric that I've spoken about last year as well. And it's this metric that is giving us confidence and comfort that we are continuing to find strong product market fit with the customer.

Generally, the cohorts that we are seeing is -- are giving us a lot of confidence as this business shapes up. On the right-hand side, you can see the split of fashion GMV across our core fashion.com business as well as our owned brands, which again, I've spoken a lot about, and I will speak about it further as we go on. So you can see that about 80% of our business comes from our platform, which is our multi-brand, predominantly app experience and 14% comes from our owned brand business. What is noteworthy here is that our own brands business is growing at 30% year-on-year, and our platform business is growing at about 12% year-on-year.

In terms of offline, and again, we'll touch upon this in the next couple of slides. We're today at 10 stores, of which 4 are Nykaa fashion multi-brand stores and 6 are actually for 1 of our brands, Nykd, which again, you might have heard of, which is our lingerie brand. And so that's sort of the split. And further on the offline strategy, I'll elaborate as we proceed.

Slide 23 gives us a quick snapshot of our metrics. This will be UID available listed online so you can take a look at this. But just the highlights, our visits are growing at about 7%, orders have grown at about 12%, implying a conversion improvement. Average order value is holding up at about INR 4,400. So we're feeling pretty good about being able to hold up our average order value as well. Moving on, annual unique transacting consumers is at 2.6 million. So this is up 30% year-on-year. And so we are continue to do a pretty good job in terms of acquiring customers as well as retaining. And yes, I think the other thing I'll highlight is the [ NSP ]. So the NSP, which is sort of net of discounts, net of returns, what is truly delivered to the customer is at about INR 197 crores for the quarter and this is up 14% year-on-year. It's higher than the growth that the GMV is seeing, and that's because we made a lot of efforts this year to reduce things like RTOs, returns and actually just increase the quality of the business we're doing and being able to deliver more to the customer.

Moving on, talking about our assortment topic that is close to my heart. We have over 3,000 brands on our platform as of the end of this quarter. This is up from 1,800 brands a year ago. There's been significant onboarding in the last 12 months. And sometimes, I have to remind myself, my team that fashion is still a pretty young business. So there is still a lot of onboarding that just happened in the last 12 months. And you can see that from 1,800 brands going to 3,000. We're feeling really good about being able to present more choice to the customer. And more importantly, despite being this platform business, we continue to have a high-end curation. So there's a constant delisting of SKUs that is constantly happening.

The 3 next buckets that we talk about this every time. We continue to focus on global store, hidden gems and first in fashion. Each is going very well. The global store business, which is now 650 brands contributes 20% of the Western wear, GMV. Hidden gems, which is over 300 local emerging designers contributes about 17% of the Indian various sort -- wear business. So both are really meaningful. And we hear from our customers that they like to come back to us for these sort of unique assortments that we are building that are hard to find and they are not listed widely on other competitor platforms.

Moving on. In this past quarter, we also saw the pink summer sale event, and we have now been conducting sale events in the manner such that beauty and fashion coincide in the same date. So we take advantage of the rub-off effect and we gain from marketing costs and are able to leverage across both platforms. Moving on to Slide 26, our owned brands business. In Q1 of FY '24, our own brands GMV stood at INR 916 million, which was a 30% year-on-year growth. The own brands GMV contributed 14% overall fashion GMV. And actually, if you look at these metrics on NSE, they're even higher, closer to 17%, and that's up from 12% a year ago. Our 2 major brands, Twenty Dresses and Nykd have both crossed the 100 crore mark and we really do believe that by building these into stand-alone brands, that includes being able to re-list them on third-party marketplaces as well as physical stores. So yes, we remain really focused that some of these brands have to be built out as real stand-alone brands with a lot of brand love and equity. And so that is why we distribute them far and wide.

Nykd, our lingerie brand, which, as you all know, I'm personally really bullish on. Love how the brand is shaping up. For example, this brand has massive distribution outside of Nykaa and Nykaa Fashion. It has over 1,000 select doors in GT/MT. It has 6 of its own EBOs, and we are accelerating on this strategy as well. Before we move on from the own brand section, I'd like to emphasize that we see our own brands business as a real moat. These brands are superior in terms of profitability profile when we compared to the third-party brands that we retail. And also, as we develop into real brands with a lot of consumer love, they make our platform an interesting place to shop as well. So I really think it's a win-win situation if we're able to build these brands out beautifully.

Moving on to Slide 27, just a quick glimpse of the brands across segments. So we are sort of systematically trying to approach and sort of address all the segments out there on the women's side. And then moving on. You can see that we've also done some interesting collaborations for our own brands, whether it's with Pipa Bella, Rhea Kapoor or with Mahima Mahajan, who's a great designer for one of our Indian wear brands.

Moving on to the omnichannel side. We do believe in exploring omnichannel to some degree. So we have, apart from our website and our multi-brand play, we have 4 Nykaa Fashion MBOs, which again, I have mentioned in the past and 6 Nykd EBOs as well as selling Nykd across 1,000 selective doors. As I mentioned last time, at the moment, we don't have plans to scale our Nykaa Fashion MBO business. So that's the first thing I referred to. We'd like to continue to nail our proposition there before we move and accelerate in any manner. But on the other hand, Nykd, those EBOs we are feeling confident about and we will be accelerating there. And similarly, placing some of our private brands in MBOs is something we feel confident.

So just to recap because I know often questions come on this. There are no plans at the moment to accelerate our Nykaa Fashion multi-brand business. But as and where offline works for our own brands, we are sensibly progressing in that direction.

Moving on, we're always really focused on education and creating the right content. So that continues to be done. That is always going to be the Nykaa playbook as you can see here. Moving on. We do believe that the long deal nature of fashion merits strong discovery. And so really the ultimate question I keep asking myself and my teams ask how do you show the right product to the right person at the right time because you have millions of SKUs and so we made some progress this quarter, which I'm really proud of, and we've launched hyper-personalized experiences across the site. We've also launched a new feed called MyNykaa, which is a completely unique feed to every person who engages with the app. So feeling really excited about the personalization that we managed to launch this quarter. It's showing great promising results with very good click-through rates. So I feel like it's highly addressing that ultimate discovery problem that exists in fashion.

And finally, on the right-hand side, I want to highlight that we've also enabled our website to ship internationally, and so we're now available in 12 countries for over 100 designer labels. And it's still really early days here, but personally I'm excited about now having the ability to tap into the NRI market. And so with that, thank you, and I'd like to request Vishal to take us through our eB2B business.

[Vishal Gupta, executive]

Thanks, Adwaita. Good evening, everyone. We remain very excited about our eB2B superstore business. And the reason is simple. It's a very large addressable market and where we can make 3% to 5% EBITDA at scale. It's a large addressable market because the unorganized off-line retail stands at INR 12 billion, and it's traditional, it's ripe for technology disruption, and we know that Indians are, by and large, quite comfortable in adopting technology. If you see all the mobile penetration, et cetera. So -- and given the level of unserviced in the Indian market, and technology adoption. So we feel confident that we can disrupt this market and achieve 10% to 15%, which means INR 1 billion to 2 billion addressable market and given Nykaa's expertise in technology, as well as beauty and well-being vertical, we can be at the forefront of this disruption. So large addressable market with 3% to 5% EBITDA at scale. Next slide.

And we are well on our way to -- on our path to profitable scale and very happy to report that previous quarter was another very good quarter for us. And you can see year-on-year, we have increased our transacting retailers by 2.7x. We have increased our brands on the platform by 1.1x. We have increased our coverage of cities by 1.4x and orders by 2.5x. So we make very good quarter-on-quarter and year-on-year progress on -- as per our plan.

Next slide. And you can see that the benefits of this also are flowing into our bottom line because as our GMV is growing by 2.6x, our feet on ground people productivity has gone up by 1.8x. Our fulfillment cost has come down by 10%. Our salesmen and the distribution cost has come down by 30%, which are the benefits of scale. But we also know that we have a long way to go.

Next slide. So if you see the bottom part, we are confident at scale, we can be at 3% to 5% EBITDA for the simple reason that our focus on beauty and wellbeing means that we make 2.5x the margin of industry, which is at 5% to 6%, and we can make 12% to 15% because of our focus on beauty and wellbeing. But profitable scale means we have to grow our GMV by 18x, our orders by 13x. You can see BD productivity, brands listed. So it's a journey. But like I said in my previous slide, every quarter-on-quarter, we are moving as per our plan on that part to profitable scale.

Next slide. And technology is at the core of our operations because that is where we are bringing the disruption and this is where we have a lot of data. We not only have our B2B data. We also have B2C data. For example, what beauty products are selling in a certain pin code. So we have a unique advantage over anyone else in terms of helping our retail partners to buy and therefore stock and sell the right assortment, which is going to increase their overall throughput and increase their income. So recommendations is one such way where technology is adding value. We also have our own salesman efficiency app with location-based check-in, et cetera. So we are able to drive very high rigor in terms of our feet on ground. So net-net, we will continue upping the game on technology to bring the disruption and improve the service to the retailers.

Thanks. I think now I hand over to Ganesh for the financial part.

[P. Ganesh, executive]

Thank you, Vishal. So looking at Slide #39. As we can see, our revenues grew by 24% Y-o-Y during the quarter. Our gross margin was at 43.5% for the quarter, and our EBITDA margins improved by 120 basis points to 5.2% during quarter 1 FY '24.

We delivered a 17% Y-o-Y growth in PBT for the quarter.

Moving to the next slide. I'd like to focus over here in terms of the improvement which we have seen in our operating costs year-on-year. Operating expenses as a percentage to revenue was 38.3% during the quarter versus 40.4% during quarter one FY '23. Quite a lot of the operating cost improvement has come through with the regionalization of our fulfillment centers and reduced freight cost as also rationalization of our marketing expenses. Fulfillment expense as a percentage of revenue was at 9.5% during the quarter versus 11.3% during the same quarter last year.

Marketing costs as a percentage of revenue was at 11.2% during the quarter versus 12.3% in quarter one FY '23, which is an improvement of more than 110 basis points. Our employee costs have also started seeing leverage come through as had been guided earlier. And employee cost as a percentage of revenue was at 9.7% during this quarter versus 10% in the corresponding quarter last year.

Moving to the next slide. Here, we have a waterfall in terms of our EBITDA margins. As you can see, while gross margin has contracted by nearly 90 basis points as a result of a higher proportion of superstore business in our NSV mix. The fulfillment cost improvement which has been achieved through regionalization strategy and better freight costs, along with shift optimization of our fulfillment centers as well as the marketing efficiency, which has been achieved through attracting better quality customers. All of this has actually helped in ensuring that the overall cost parameters have improved.

Selling and distribution costs, of course, increased during the quarter with the offline distribution of own brands as we have seen earlier in the presentation, employee costs, as I mentioned, have started to see leverage coming through and other expenses increased due to investment in technology and infrastructure. Moving to the next slide. This slide explains the waterfall from EBITDA margins to PBT margins and gives color on the investments like we have made and the impact, which it is having. So depreciation and lease costs increased during the quarter is on account of incremental CapEx that we did in FY '23 in retail stores, warehouses as well as offices. And other income has been lower on account of the utilization of IPO proceeds.

Moving to the next slide. Here, we can see the vertical performance as it stands. And I would like to bring your focus to the bottom part of the chart where the cost items are calculated on NSV, which makes it comparable across the 3 verticals of the business. The key point to highlight over here has been the improvement in the contribution margins in the business for the BPC business from 25.2% to 26.5% during the quarter. For fashion in a challenging environment that has been and given our consistent investments in the business, our contribution margin has come through at 2.7% for the quarter.

The key improvement has been from the superstore business, again, as highlighted by Vishal. This business has done quite well in terms of cost. And as we can see, within the others vertical, all operating cost parameters have actually improved significantly.

Moving ahead. Here, we have the one Nykaa income statement for FS and e-commerce. Our revenue grew by 24% Y-o-Y to reach INR 14.2 billion during the quarter. Our EBITDA margins, as we saw earlier, was at 5.2%, an improvement of 120 basis points over the corresponding quarter the previous year. And this has come through reduction in fulfillment costs, better marketing spends and employee cost rationalization. Our investments in building retail infrastructure have meant that some of the increase in other expenses and the emphasis in building own brands has meant that there is sales and distribution expenses that have seen some increase during the quarter.

All in all, we believe we have managed to improve our scale efficiencies in a challenging macro environment, and we continue to invest in the growth, diversification and improvement of the quality of the business over time. With this, I would now like to invite Suyash Saraf, co-founder Dot & Key to talk about the brand and its performance.

[Unknown Executive]

Thanks, Ganesh. Hello, everyone. I'm Suyash Saraf, Co-Founder of Dot & Key. I think, I'll just brief a little bit on what Dot & Key is for you all who don't know this. Dot & Key is a newage D2C skin care brand. It promises efficacious products with a fabulous user experience. We have a strong product portfolio with a primary focus on face care because we feel case care has more premium. And with the core categories being moisturizers, sunscreens, serums, and face washes. And we have about 15 different products, about 68 different SKUs for it.

Next, please. So -- my wife Anisha and me started the brand back in 2018. And we really wanted to create a beautiful skincare brand, which is in par with global standards. So we incorporated Dot & Key with efficacious products, joyful skin care experience and a packaging that would really make the customers enjoy their skin care rather than making it just a product that they've used. I think post our initial launch, we delivered traction because of our innovative products, which got a lot of users eye and specialty influences, which give us our first traction.

I think the real game changer for us came back in 2021 when we shook hands with Nykaa. Nykaa got majority stake into the company, which completely changed the game that we were in, and we have massive ambitions for Dot & Key then. And I think the next 2 years, we actually spent in restrategizing, realigning, repricing our products in order to really start building Dot & Key as a large FMCG skin care company. And I think all our efforts have paid off in 2023. We now have an annualized run rate of INR 3 billion. We are now -- we now have improved profitability. We have top 3 skincare brands on Nykaa.com. And actually, several of our products are top sellers across different platforms on the Internet. So we have grown about 5x since the 2021 acquisition. And we do want to become a INR 5 billion brand by 2026. So I think one of the key product innovation is at the core of Dot & Key as a brand and our biggest reason to win. I think one of the key points for Dot & Key winning and the products being differentiated is that we identified the international trends very early on, and we make sure that we actually bring those products to the Indian market way before any competition can. This makes a product strong and what's trending globally and the Indian consumers really want these products.

And I think for any successful FMCG company, the consumer and understanding the consumer is at the core of the business. So we at Dot & Key really feel that if we understand our consumers, we can make great products for them. I think this entire philosophy of ours where we are obsessed with the customer, making sure we are delivering products that they are expecting from us and being very detail-oriented when it comes to our product has really helped the brand grow and has created a [ clear ] right to win for the brand, as you've seen in our number growth.

I think one of the key wins have also been setting up a strong new product development vertical within the business, which gave us -- got us to the market much faster than competition. So the speed to market was a clear differentiating factor in the brand and the reason for the brand to win, which we are streamlining further to improve our speed to market to be always number -- like in the top in this space.

Next, please. I think last year, about 30% of our revenue came from the innovation funnel that we built out. That really tells our new launches have been more and more successful as we launched them. And the beauty of the success is that about 70% of our revenue does come from cities beyond the Tier 1, the metros and the Tier 1s. So we as a brand believe that the next growth story is coming from beyond Tier 1, and that is where Dot & Key as a brand is structuring its portfolio, its pricing, et cetera. So we can cater to this mass audience, which have the aspiration to buy the products yet don't have accessibility around them, and they buy products which the world wants, and they can get it easily. So our growth is aligned with the growth in the metros, Tier 1 and beyond them, actually.

So I think what we've also done in the future is that we've actually gained a lot of market share over the last couple of years across all marketplaces that we are available at. Our objective is to strengthen our leadership position in some of these categories by launching more products, by increasing our market share to become a dominant player in the market. I think we also want to focus on increasing our retail distribution via the Nykaa retail channel and other modern trade retail channels to increase retail distribution. I think with this, our ambition is to make Dot & Key a INR 5 billion brand by 2026, and I think hopefully, we'll achieve it. Thank you. Over to you, Sunita.

[Sunita Sachdev, executive]

Thank you. So with that, we've come to the end of our presentation, and we'd like to now open the platform for Q&A. We request you to raise your hand and will allow you into the meeting room for Q&A with the management. We'll just wait for a couple of seconds for the listeners to raise their hand.

[Falguni Nayar, executive]

I think, Sunita while that's happening, I think I wanted to request Anchit to come in and share his insight on what we are seeing in terms of how the beauty industry is doing internationally and what we've learned through our recent visit. Anchit, if you would like to just share some qualitative stuff.

[Anchit Nayar, executive]

Yes. So I think we were on the road for a lot of April and May and even parts of July meeting with a lot of our global brand partners in the U.S., Europe as well as Asia. And I think the feedback we're getting is that India is clearly now very much on everybody's radar. A lot of the global brands, both on the premium side as well as more on the FMCG side have always historically prioritized China for driving a majority of their growth. But I think with everything that they've seen with the lockdown and the impact to supply chains. And also, I think what has been a relatively tepid recovery in the luxury and the premium market in China. Everybody is looking for China plus 1 strategy. I know we heard a lot about this across manufacturing and electronics and other categories, and I think it's equally the case for beauty. And so everyone is looking to now invest into India. It is still very early days. They feel and we've always shown you the numbers around, the market size, but I think everyone is very excited by the growth opportunity and they know it's a multi-decade story. So we're seeing a lot of interest for the first time this level of interest from global brands.

And they're keen to partner with the right retailers. I think that's another differentiator for us. I think we've seen the kind of work Nykaa has done in India, leveraging technology, but also focusing on building stores, having a very extensive network of physical stores is crucial for global brands when they are deciding on their go-to-market strategy. And I think the technology, our content, education, assortment and omnichannel approach has been a big differentiator for us and has allowed us to not only continue to win new brands the platform, like I showed you, like we showed you during the presentation, but also to continue to strengthen our business with the existing partners. So it's -- I think it's -- the optimism is high. There is an understanding that the market is still subscale, but there is a belief that it is -- it can be a very meaningful contributor to their business in the coming years, and they are looking to partner with Nykaa to achieve their goals in India.

[Sunita Sachdev, executive]

Thank you, Anchit. We have our first question from Manish. Manish, please go ahead.

[Anchit Nayar, executive]

I think Manish might be on mute, but Sunita also just introduce the name as well as the company if possible.

[Sunita Sachdev, executive]

Manish, are you in the call?

[Manish Adukia, analyst]

Can you hear me okay?

[Sunita Sachdev, executive]

Yes. Can you introduce yourself and then you can go on with your question.

[Manish Adukia, analyst]

This is Manish Adukia from Goldman Sachs. I have a couple of questions. Maybe first on the Beauty business. So you talked about Beauty seeing a tough quarter and the industry was facing some challenges. Can you maybe just elaborate on what these challenges were that the segment was facing.

[Falguni Nayar, executive]

I'm sorry, Manish, I was speaking at that time. I didn't say beauty, I meant -- I said fashion was -- faced a tough quarter, challenges. I think Beauty was in line with expectation, and we do believe that we have grown ahead of the market.

[Manish Adukia, analyst]

Right. Sorry, my bad. I was referring to the Fashion segment.

[Falguni Nayar, executive]

So on Fashion, I think we are also aware that it was a very tough quarter for other players in the fashion industry, be it e-commerce or physical retail as well as the fashion brands. It's been a tough quarter for most of the players. I think it was one of those odd quarters where some other consumer was just not interacting and picking up, and it was what we saw that there was really nothing much you could do to get the consumer interested. So it was one of those way below -- if we have an annual trajectory, I think it clearly came out way below that trajectory. But I think when we gave the revenue guidance earlier, at the beginning of the quarter, new quarter, we realized that industry had seen even lesser growth, and I think that's when we started as we started picking up the revenue growth of others, we realized that our growth was still better than the industry. But all I can say is that since then in July, we have seen better growth, growth coming back to long-term annual trajectory that we would consider for that business. And to that extent, we remain -- we remain excited. And -- but however, I want to caution that July is just 1 month out of a quarter which would have 3 months.

[Manish Adukia, analyst]

Thank you for clarifying on that. Maybe just a couple of follow-ups on that. So of course, at the start of the year, I think in the month of May, there was an expectation that the fashion business in fiscal '24 could also grow at a similar pace versus fiscal '23. So given just the start to the year, would it be fair to say that for the full year the growth may end up being meaningfully lower than what we had previously in the fashion vertical.

And second follow-up there would be, given that you are focusing on the premium online fashion category. Just a bit odd that we are seeing a bit of slowdown even in that category. So is there any more color you're able to add as to whether by segment? Is there something [indiscernible] you're seeing more slowdown than the other? That would be helpful.

[Falguni Nayar, executive]

No. So honestly, I'm not saying that it was due to affordability. It almost felt like customers were missing, maybe they were traveling, maybe the year ago quarter was stronger online because of circumstances at that point because even previous year, there was a lot of COVID, non-COVID. First quarter after COVID. Also, there is certain amount of -- there was generally a trend where customers were going back into the stores, and this is a global trend where customers are going back into the stores compared to e-commerce and it was shaving off a little bit across that effort. But I think if you take the first quarter from what we are hearing from the market, even physical retail has not done well for fashion.

So it almost felt like customers were absent, maybe a lot of customers were traveling, a lot of customers were postponing their fashion purchases. I wouldn't say it was coming out of affordability. Maybe at our end, also maybe like sometimes what happens in an industry that new assortment and excitement comes at a different point in time. And definitely, in Beauty, which we've observed for a long time, that second half is when most brands launched their new launches because it is an off-season in India generally. The quarter is not such a strong quarter from a seasonality perspective. So maybe some amount of that excitement was missing.

[Adwaita Nayar, executive]

Think I'll just add there that, yes, I think it's way too early to sort of write off the year or anything like that. We as a team remain really confident and sort of focused on the rest of the year, 3 things are giving confidence as we're sitting in August. The first is that we have shared that July was actually quite good for us. And we did feel that there was a normalization of growth again, when we were looking at July. Again, that's only 1 month, but we're feeling sort of confident going into festive season that we're going to be able to hold a higher level of growth. So that's point number one.

Point number 2 is we are noticing that our repeat metrics and our cohort metrics are improving. And so again, that is giving us confidence that the customer is sort of starting to come back again. And that also like points to the inherent strength of the platform and the proposition we're building. And then the third thing that's seen as confidence sitting in August is that the marketing metrics again are looking better. So one is, we're not at all giving up on the growth targets and the growth that we believe that this business can achieve in a year. Yes, Q1 was a bit odd. But again, from what we're hearing anecdotally from all our brand partners, other retailers, is that Q1 seems to be a degrowth or flat for a lot of fashion folks out there. So in that context, we feel that we still did take market share. But yes, it wasn't to our overall expectation from a growth point of view.

I'd say the second thing that I'm feeling good about sitting in August is that I do feel that the business has made a lot of changes in Q1, sort of during the slower time, we've really continuing to shape the business. So we've deprioritized certain categories. We're focusing a lot more on women. We're focusing on certain quite profitable segments. So my belief that the profitability -- the shape of the profitability of the business is going to show improvement in the near future is again increasing. So yes, I would definitely not say that we're losing confidence for the rest of the year.

[Falguni Nayar, executive]

Also in the quarter that went by, it wasn't that there were no improvements, I think our shrinkages came down and our ratio between GMV to NSV improved in fashion. So I think there were a lot of improvements in the business which were made including controlling the marketing expenses. It's just that we found it harder to achieve growth that quarter.

[Manish Adukia, analyst]

My last question is on the B2B business. The contribution margin there seems to be improving on a trend line basis. Would you be able to comment on how many quarters from now, could you potentially, let's say, get to breakeven or at least at the contribution level and -- of course, at the start of the call -- during the call, you also guided to 3% to 5% EBITDA margin at scale, again, in terms of some sense on how far away are we from that? Like qualitatively, that will be helpful.

[Vishal Gupta, executive]

Can I answer that...

[Falguni Nayar, executive]

Yes, Vishal. Go on.

[Vishal Gupta, executive]

Yes. Look, firstly, it is obviously a slightly difficult question to answer because how long it takes. But I think that it will take a few years for sure, okay? And if you look at my slides, then what we are clear on is at what scale, what number of orders, et cetera, we get to the profitable scale. And you can see that previous quarter what kind of growth we had, right? So you can make your own judgment. It will be a few years. It won't be 2 years, it won't be 7 years, 6 years. So you can [indiscernible].

[Falguni Nayar, executive]

Also I think the growth generally as a platform becomes bigger, comes down, but also this is a platform, which is not at its full scale, it's not servicing -- I mean, as we have said in the past, that we are trying to service in a concentric manner with pin codes around our warehouses being serviced. So both the inputs into it in terms of additional warehouses, additional feet on street that will service those markets and panel, the customers can also go up. So -- and we want to also keep the discipline of the way we invest in this business. So I think at the moment, we can only say that at what scale we'll be profitable, we are not giving very clear guidance on timing.

[Sunita Sachdev, executive]

Thank you, Manish. We have the next questions from Sachin. Sachin, once you're in the call, please introduce yourself and go ahead.

[Sachin Dixit, analyst]

This is Sachin from JM Financial. I had a couple of questions. The first one was on beauty vertical. This was one I think I highlighted last quarter as well. We were adding roughly 0.5 million net users in Beauty every quarter since IPO until last quarter when it dipped to 0.4, now it looks like this quarter, it has dipped further to 0.3. And that there is a costing that the marketing expenses are still holding up. You have not really cut it down. So how do we think of ramping that back up?

[Falguni Nayar, executive]

I think what I can say is that, honestly, like the team, I've always felt is not the right, it's not the right metrics for measuring Nykaa customer and how often they come because while we say on an average customer buys 3.5x in a year. It is not like food and others, where customer comes back a lot more times in a year. And because of the way the customer distribution is that there are customers who come back sometimes once in 1.5 years or once in 2 years. So I think the TTM number doesn't truly reflect Nykaa's buying customers. All I can say is that we do study the cohorts, the monthly cohorts, and we do feel that the cohorts are kind of similar and not deteriorating as we go wider, but also with an acceleration of new customers that you bring into the net that balance itself can lead to the changes. So I think all we are seeing is that we have 2 separate programs so see our -- we have a CLM -- CRM program that monitors about our growth of our repeat customers and how that is growing and also monitors the growth of our new customer acquisition and in fact, a repeat customer, both the customers and the purchases continue to grow at a healthy pace.

[Sachin Dixit, analyst]

In that case, would you be comfortable sharing the new customers added in a quarter for at least the last few quarters?

[Falguni Nayar, executive]

I think the point is that we -- I mean, I think we as a company are sharing far more information than anybody else in the industry does. All I can say is that sometimes certain metrics we're not very keen to share on a regular basis because of the changes which can be due to many reasons. There could be seasonality, there could be other things. And -- in essence, investors tend to read too much into it. So the decision to share something annually and something quarterly is a very conscious decision based on not creating further confusion amongst the investors who may not understand the strategies that may be employed during a quarter?

[Anchit Nayar, executive]

Yes. I think, sorry, Sachin, I'll just add something. I think Look -- if you look at the year-over-year growth in terms of the trailing 12-month transacting consumer base. That's almost 20% growth, right? And also for BPC. And in that same time, we've reduced the marketing spend year-over-year by about 30 basis points. So marketing hasn't -- the marketing cost hasn't grown in line with the increase in the number of transacting customers year-over-year. So I think that's one thing to point out. I would say the second thing is that, as you can see from Nykaa, it's not just about the growth in customers. It's also about the growth in the customers' basket size, frequency of purchase, right? So you must also look at it in that sense. These are unique transacting customers, but the frequency of purchase, the average basket size, the average selling price and therefore, the average order values obviously have improved to deliver 24% growth year-over-year when the growth in customers year-over-year has been 18%. So we have many levers. One is, of course, importance of increasing the number of transacting customers, but also the frequency and the quality of their transactions is also equally important, which has improved, and that's why we've delivered higher revenue growth as opposed to the marketing spend growth.

[Sachin Dixit, analyst]

[indiscernible] and other metrics as I tell you holding up. So I'll move to my next question. That's a housekeeping question. It looks like there has been some cost movement that has happened between selling and distribution and fulfillment, I would love to have probably at least the last quarter and the last fiscal year's number, if possible. Also on like-to-like basis.

[Falguni Nayar, executive]

[indiscernible] comparable numbers for the last few comparable quarters. I think the team will share it.

[Anchit Nayar, executive]

Yes. It's a reclassification. Yes, it's a reclassification off-roll [ variance ] costs, which have logically now been reclassified into fulfillment and in terms of value, this is roughly about INR 100 crores annually. If you look at FY '23 numbers.

[Sachin Dixit, analyst]

Understood. Would it be possible to share like-for-like numbers for last quarter. Just to see the variance.

[Falguni Nayar, executive]

Yes, the effort will be to give it to you for last quarter. I think -- I don't know if it's really available.

[Anchit Nayar, executive]

So it's about INR 25 crores for the offer. If you look at Q1 FY '23, it's about INR 25 crores. That's a quarterly one.

[Sachin Dixit, analyst]

I'll probably check on this offline.

[Sunita Sachdev, executive]

So the next question is from Sheela Rathi.

[Sheela Rathi, analyst]

So my first question was with respect to the pink day sales. So is this the first time where we are planning to do it 4 times in a year. I believe earlier it used to be twice a year, right?

[Falguni Nayar, executive]

It's been 4x a year since last year.

[Anchit Nayar, executive]

Yes. We've done this May. It's a May sale. So we call it our pink summer sale. We've done it -- we did it last year as well. In terms of doing only 2 pink sales in a year, that was a couple of years ago. But in the last at least, I would say, maybe 8 to 12, maybe more quarters, we've done about -- we try to do at least 3 to 4 pink sales in a year.

[Falguni Nayar, executive]

I think I can explain -- I think why Sheela, you may be confused because I think about a year ago when we were planning the sale, it was a third phase of COVID and we were afraid to call it pink sale. So we called it Nykaa super summer days. And this year, we brought it back into our pink sale. We didn't want to call it sale at that point.

[Sheela Rathi, analyst]

Understood. Falguni, my second question was with respect to the scaling, which we have seen for Dot & Key. And if I compare that with K Beauty, there is a stark difference. Is it transition which is happening with respect to the Indian consumer in terms of more preferences towards skin care versus cosmetics, which was the case in the past? And especially, you're going ahead with the CMS -- CSMS campaign. Are we seeing some behavioral changes among the customers? And how -- what does it mean for our margins?

[Falguni Nayar, executive]

Yes. No, I think, I won't worry about the margins. But I think what I can say is that world over, there is skinification of beauty, which means that world over, there is a higher growth in skin care consumption compared to makeup. I think in the industry I have seen that these are short cycles over 1 or 2 years, industry moves in favor of 1 particular subcategory and then the growth happens somewhere else 2 years later. So for now, definitely, it's a worldwide trend, whether it's skinification of beauty with a lot of products consumers preferring to you have -- the starting point is that let's have better skin than trying to hide faults in your skin. So I think there is skinification of beauty going on. And the same trend has been seen in India.

[Anchit Nayar, executive]

Yes. But I just want to add because I think Sheela, you mentioned that there has been a stark difference in the performance of K-Beauty and Dot & Key. But I think that's not the case. So K-Beauty actually, which is our color cosmetics brand, which we have in partnership with Katrina Kaif, and it's a premium, slightly more premium brand that actually has done very, very well, and it's growing incredibly fast. I don't know if we disclose those numbers or if Vishal would like to point that out. But I think that would be a wrong assumption from you that K-Beauty is -- the performance has been starkly different from Dot & Key. In fact, K-Beauty is one of the fastest-growing brands on the Nykaa platform. And actually, just yesterday, it won some award at some economic times brand award show, but that's not the point. The point is the numbers are also showing that the brand is doing incredibly well and it has become now one of our top top 10 or so makeup brands in the platform out of 1,000 makeup brands that we have.

[Falguni Nayar, executive]

Anchit on a makeup basis, I think he is doing fantastically well. I think to Sheela's broader question. I think if we see maybe 3 years ago or 2 years ago, most of the top 5, 6 brands would all be makeup, you are increasingly seeing that -- there are a lot of skin care brands creeping into being top brands at Nykaa. So skincare is definitely growing very strongly.

[Vishal Gupta, executive]

Absolutely. And just to build on that, look, both brands are doing really well, but skin as a market is addressable market is far larger than makeup. And therefore, skin brands will be bigger than makeup brands, right? But both brands are doing really well. I mean, across India, not just Nykaa, I'm saying the overall market.

[Sheela Rathi, analyst]

Okay. And there are not much differential on the margin side from our perspective.

[Falguni Nayar, executive]

I think if you're talking about as a margin as manufacturer, no, not much difference, and margins as retail also not much difference.

[Sheela Rathi, analyst]

Okay. My other question was actually on gross margins. As the share of eB2B goes up for us in the coming quarters and years. How should we think of the gross margin trajectory now going ahead? Because at the consolidated level, the numbers could be now lower versus what we have been seeing in the past?

[Falguni Nayar, executive]

I think the consolidated gross margin will be a function of 3 distinct businesses, which is Beauty Fashion where the gross margins are a certain number because, again, in Fashion lot of business was marketplace and then now B2B. And then against that, even our own brands, as we call it, between beauty and fashion also where -- as you are aware, we have quite a few brands like about 12, 13 in beauty and similar number in fashion. So I think even they have a little different structure of revenue versus margins. And we also now have LBB, which is a content business. So I think the margins are a combination of a number of things. So I think the reason why we give all the 3 segments and costs -- variable costs as a percentage of net sales value is with a view to -- for you to be able to see how they will emerge. And I would just caution that in others. It's a combination of B2B as well as other businesses in terms of revenue, large portion is B2B, though in other cost items, it could be variable. And that's why we are making this effort to share the B2B unit economics very clearly for you to be able to project.

[Sheela Rathi, analyst]

Understood. My final question was to Adwaita on the fashion business. She mentioned that we are confident about delivering the full year growth, which we had talked about last quarter. And she also mentioned about deprioritizing certain categories and focusing on profitable categories. So just wanted to hear more details on what exactly we are doing here.

[Adwaita Nayar, executive]

Yes. So I think, first of all, I think we have to begin with the fact that fashion is a massive market, and we are so excited that Nykaa has sort of put its stake in the [ ground seems ] we want to play in fashion. And I think in the long run, us having a role in this -- in silly large fashion industry will be a really great thing for Nykaa. So I think growth will come. But I do believe that in this category, it's absolutely incredible to crack some sort of formula to be able to drive profitability. There is 100% a model in fashion, as I always see to deliver 50%, 60% top line growth with limitless funds and limitless losses, which is what the industry may have seen till date, but that will never be the Nykaa way.

So as always, the focus is for us remains that how do we deliver sensible growth while every quarter shaping the business such that we're driving closer and closer to being truly profitable in a meaningful manner. And as you can see over the last couple of quarters, we've been hovering around this contribution margin of about 3%. And so it is time that there are some decisions that we take to really drive meaningful step function changes in that number. And I always think that every new leg of profitability requires some bold decisions to get to that new leg and then you work from there and go onward and upward. So how are we thinking about the profitability. A couple of things. The first is category mix. The reality is that certain categories are better from a profitability perspective. They have better margins, they show better cohort behavior. They show better type of customers who adopt to those categories. So a perfect example is like India wear is a great category. In women, accessories, so bags, lingerie. These are great categories. Men's is a slightly less great category, particularly men's footwear, you end up seeing a lot of sort of returns. So nothing super dramatic, but as a team, we're just being really mindful of what is the profitability profile of various categories and how can you shape it. So that's 1 example of what we're doing on the profitability front.

A second example is, we're doing a lot on cart charges. So I'm sure you guys can even see Zomato and other companies out there, they're starting to layer on a lot of charges at the cart level, whether it's around shipping or returns or whatever. So we do feel that there's a margin opportunity in putting some level of charges on the cart to drive better customer behavior. So that will also drive some amount of profitability.

The third is own brand strategy. I'm relentlessly focused on growing our own brand share. Why? Because it is a significant delta when it comes to a profitability point of view. So you just see on an LSD level, right, like own brands is now 17% of our GMV, up from 12% a year ago. And up from like negligible 2 years before. So with every 10%, we're being able to increase in own brand share, there's a profitability improvement coming out there. And then the fourth thing we're doing from a profitability point of view is again, we're trying to increase our ability to deliver truly to the customer. So fashion is often plagued by returns and RTOs, which is when the customer refuses or the logistics partner can't get to the customer. So there's a lot of operational heavy lifting we're doing to try to fix those. So these are sort of like 4 examples of strategic decisions we are taking and initiatives that the team is doing over the last quarter. And this is the only way in fashion to keep clawing back profitability and to build a profitable business in the long run. So I hope that was clear. Like growth is not really the concern, the concern is actually being able to drive a profitable business and a very clear path to profitability while still getting some amount of growth. Happy to wait a little longer for growth, but definitely want the right cost structures in place as we keep scaling up.

[Falguni Nayar, executive]

So I think what I can definitely say is that over the whole year, we have given up a lot of business on tech accessories because we felt that it didn't make any meaningful addition to our profitability. You can get a lot of top line revenue, but there's a lot of shrinkage and there is a lot of cost of -- from a marketing perspective, it was not justified. And then we do this across brands. We do this across subcategories. So it's very difficult to give too many examples. So I'm just giving you one example that kind of stands out.

[Sheela Rathi, analyst]

Thank you. I think this is very clear.

[Sunita Sachdev, executive]

We think we -- you should have Vijit in the meeting room soon.

[Vijit Jain, analyst]

This is Vijit Jain from Citi. I have 2 questions. My first question is, did ad revenues go down Y-o-Y in the BPC segment. My question's context is, I just look at the NSV in BPC business. And I deduct that from revenues and that number seems to be down on a Y-o-Y basis. So just wondering on that given you have rolled out new ad products in the quarter, right? So if you can comment on that?

[Anchit Nayar, executive]

Yes, maybe I can take that. So I think there is -- I would say, it's not a decline, but there is a slight softness in the advertising income on the dot-com platform. And I think it's predominantly for 2 reasons. Although we believe it's an aberration, and I would not try to draw some sort of longer-term trend from this, so the first is that we did launch our ad tech platform towards the end of the quarter, and it is a very different ways of working for a lot of brand partners from what they were used to earlier. In the past, everything was handled by the Nykaa brand managers, helping full service where we would help them upload their ads and monitor the performance, et cetera. And now we've moved to what is really industry standard, which is a self-serve ad platform where brands have to themselves, come up with the creative design, the commercial offers and beside of the duration of their banners on the platform.

So I think there was a little bit of changed management that took a little bit of time for brands to get up to speed on because they were not used to that ways of working earlier. And there are many brands who are very, they are direct-to-consumer brands or they're smaller and they don't have the kind of bandwidth or infrastructure to manage this on their own. So it's taken them a bit of time. I would say a couple of weeks, months or so to get up to speed on how to use our new ad platform. But we knew there would have been some teething issues when we launched this, but we know that longer term, it is very beneficial for our brand partners. In fact, it's something that they have been asking for, for a long time. And as they get more comfort with it, I think you'll see that gap closing.

I think the second thing is, there was a little bit of a pullback on spends this quarter from direct-to-consumer brands, not so much from FMCG or CPG brands, some pullback from a D2C because as we all know, and we're all reading there is a little bit of pressure on D2C brands with regards to profitability as they look to enter their new fundraise cycles, et cetera. So I think it's a slight aberration, could it be 1 quarter, 2 quarters, maybe. But look, I think you have to keep in mind the longer-term trend that there are more and more brands coming alive every day, every month. and they need a place to do their storytelling, they need a place to acquire customers. And that continues the platform of choice, for that continues to be Nykaa, given the, given the kind of customers that we have and the kind of marketing, which we're able to do.

[Vijit Jain, analyst]

Got it. My next question is just a clarification to Vishal and Falguni's comments on B2B margins because I think the question was in part what Manish was asking was on contribution margins. So I just wanted to make sure I understand that right. The scale charts of slide that you've put up, they address overall business-wide profitability, right? If you could separate your answer into -- on the contribution side and on the business side, that will be helpful.

[Falguni Nayar, executive]

Sorry, I think the scale is for B2B only, the scale chart for B2B only.

[Vijit Jain, analyst]

Yes. I just wanted to understand if the contribution margins itself probably need a smaller scale than what shows up right, to hit the breakeven?

[Vishal Gupta, executive]

Yes, Yes. No, absolutely. You're 100% right. What we spoke about is the EBITDA includes our people costs and overheads and technology costs and everything, but contribution margin is far, far shorter turning.

[Sunita Sachdev, executive]

I think Kapil, Maybe you want to go ahead.

[Unknown Analyst]

You talked about growth in fashion picking up in July. I just wanted to check what is the trend you are observing in BPC? Is it holding around the same range?

[Anchit Nayar, executive]

Yes. So look, I would say, as you can see, BPC definitely had a good quarter. Q1 was a good quarter. It is not only in absolute terms, but also if I look, especially relative to competition, it's been -- I think there was definitely further market share gain for us across our core categories of beauty, which is makeup and skin care predominantly. So I think it's a good quarter, Q1 for beauty. And I think you'll see a similar trend in Q2, as we've always said, Q3 in the festive period. So that's obviously when there is the most aggression from brands as well as the most interest and excitement from customers. So Q3, I think, as we've always said, is our in a seasonal business is our best quarter. But I think Q2, you see a -- we're seeing so far similar growth trajectory to what we saw in Q1.

[Unknown Analyst]

Okay. And just secondly, on the EBITDA margins for the business, they have been ballpark in the same range for last 4 quarters. And BPC also, if you look at contribution margins, they've been in the last 4 quarters been around the same range. We have seen some increase in revenues also, but that's not brought in a margin expansion, I would say. So I just wanted your perspective on what is the plan for margin expansion? What will be the drivers for BPC and for the company as a whole also if you could give some direction.

[Falguni Nayar, executive]

I think if I may say so, in BPC, a lot of cost improvement and margin improvements have been made. And while we only share up to contribution margin level below that also the employee cost and all in BPC are quite tight. So in my opinion, but BPC business also is a combination of online, offline and also our private label business. So it does get influenced by all the 3 elements. So I think -- so some of it balances out, some improvement somewhere balances out with some deterioration, somewhere else. And deterioration not from a business hardship perspective, but clear strategy of, say, going more in GT/MT for private label that we may adapt or in a future date, we may adopt certain strategies about taking our brand internationally or investing in a brand marketing sometime. And similarly, our physical retail business also goes through the best quarter when the -- that business is very sensitive to revenues, and there is seasonality in beauty business and that we've seen over a long period of time.

So I think it's very difficult for us to say that there will be like massive improvement in contribution margin or even EBITDA margin in beauty from here, there will be some improvement. I think at the consolidated level, most of the improvement is going to come from bringing our costs under control for other businesses, which include fashion, fashion private label, B2B business, as well as Nykaa Man and others that we have in our field.

[Anchit Nayar, executive]

Yes. But I think just to look, I think it's -- the point was made that our BPC vertical is a combination of us as an online and off-line retailer as well as a consumer company, right? So it's a mix. So there's some impact there. But -- that being said, there's still been a 130 basis point improvement in contribution margin year-over-year despite there being a 60 basis point deterioration in the gross profit margin. So I wouldn't really call it flat year-over-year, the contribution margin. And for a business that's already at decent scale. And as we said, costs are already relatively well optimized. It's still acting a meaningful improvement on the contribution margin line.

[Falguni Nayar, executive]

I think, Sunita, we can -- it's quite late now, 7:30 for everyone it's late, so maybe we can end here.

[Sunita Sachdev, executive]

We just have 1 last Falguni, with your permission. Latika, why don't you go ahead.

[Latika Chopra, analyst]

I'm Latika from JPMorgan. A few questions. The first one was just taking forward Anchit's comment. I wanted to understand what led to reduction in gross margins for the BPC segment, both on Y-o-Y and Q-o-Q basis. Is it largely to do with mix? Or is there something else?

[Falguni Nayar, executive]

Sorry. Can you say again, what you were saying.

[Latika Chopra, analyst]

The gross margins for the BPC segment, there was a reduction on a sequential basis and even on a Y-o-Y basis. What led to that? Is it just a function of product mix or there is something else here?

[Anchit Nayar, executive]

Well, I think I answered that question. It was asked by somebody else. So it's -- as we said, there's a couple of things. One is, of course, mix between the 3 distinct businesses of physical retail, online and consumer brands that is built into that. But also, as I mentioned, there was a little bit of a pullback on advertising spends from direct-to-consumer brands in specific, not really from anybody else, international brands, FMCG, CPG everybody has continued to spend well. And I think if you read the news or you see the press out there, it's all saying that A&P spend for FMCG and CPG are back to pre-COVID level. So that we think is a very optimistic trend, and we hope to see that revival continue and strengthen for a large part of our base of brand partners in the coming quarters. But yes, I think D2C has had a difficult quarter. As all of you know, there is a desire for profitability and they are in the midst of fundraising. And as a result, they are trying to optimize for the quarter. I don't think there's much to look into it from a longer-term trend.

There will be quarters where -- where growth and income will be will be up and down. But I think we all have to continuously believe in the long-term trend here. And that being said, look, our BPC growth is very strong, right? I think a 24% growth for GMV that is definitely ahead of the market. I don't know what numbers you have, but the numbers I have, this is at least 5 to 7 percentage points higher than the other platforms. So I think we continue to take market share in BPC despite being already quite large in size. And ad spends, there will be some ups and downs in quarters, as I said, one, because of [ D2C ] pull back. But the second point I made earlier, which is we have rolled out a very new way of buying ad real estate on our platform, and there will be some change management to be done. Certain brands will have to learn to use that platform and that is something we expected and that is something which should be mostly, I think, between June and July, that's being taken care of. And I think by August, September, everybody should be very much of the speed on how to use our very new and very enhanced ad platform service that we've rolled out.

[Latika Chopra, analyst]

Sure. Thanks, Anchit. The second bit I wanted to check with you is, are you sensing any change in consumer behavior from a purchase perspective. You talked about 4 discount sales period -- seasons in a year, are you seeing salience of sales increasing more than previous years during these periods. I understand you don't fund those discounts, so it doesn't really affect your profit line. But just trying to understand, is this something which is getting more consumers on board or help them to spend more during these periods.

[Anchit Nayar, executive]

Maybe I'll kick it off. So I actually don't really think it's a change in consumer behavior. I think what's -- a little bit of what we saw in Q1 is a lot of the horizontal marketplaces, they did step up their retailer-funded discounting quite significantly, and they were pushing brands to also discount more -- so I don't think it's a consumer-led change. I think it's a retailer. There was a bit of aggression from other horizontal retailers, maybe in a scramble to accelerate growth in what they were seeing as a soft market. They probably push the pedal on their main lever, which is always discounts to try to generate some business. So brands did move some budget from marketing and visibility into discounts and heavy retailer-funded discounts as well. But I think, again, that's I don't think it's a longer-term trend from them either. I think they're just trying to shore up a quarter that was looking challenging. I don't think this is a new ways of working. And the reason I don't think so is because the brand partners do not like it at all. All the large brands are very disappointed that retailers are taking this approach to heavy discounts and trying to commoditize this category, which has never been the case. So you will see a lot of pushback from brands to retailers who are looking to do these kind of discounts. And I think it should revert to the median in the coming quarters.

[Latika Chopra, analyst]

Okay. And the last bit, of course, there has been -- is on employee attrition. And I did see the press release put out by the company, and I do see new hires and expansion approvals for the existing employees as well. But just wanted to understand, are there any specific initiatives which your company is undertaking to arrest the attrition and could that have any influence on employee costs going forward? And that was the last one from my side.

[Falguni Nayar, executive]

I think, I'll address that. I think attrition is a wrong word. I think Nykaa has definitely been very -- we went through a very tight evaluation process where we have decided to differentiate quite a bit between high performers and average performers, and performers which were below the threshold, and there is clear upgradation of talent going on. I think some of these tend to be misrepresented in the media. And I wouldn't call it an attrition. So I think it is a media -- I mean there are people in that group who were not doing any significant rules and very often, media picks up what they intend to pick up. So I think there was no significant erosion of talent, if I may say so. In fact, the quality of our talent is better now than ever. Sorry, go ahead Anchit.

[Anchit Nayar, executive]

I think it's 2 things. One is, of course, upgradation of talent because we are getting a lot higher quality talent coming into key roles, and we have revamped and really focused on our appraisal process and the way we are deciding on what roles are critical and which are not. And I think you must look at this in context of what's happened in the broader consumer technology space and probably in the broader space globally in terms of the kind of reduction in force you've seen across hundreds of companies. I think Nykaa has not done that at all. And so for us, the focus has just been on ensuring we have the right people in the right seats. So you may call it attrition, but I think in the kind of -- if you look at the context and the macro comparables, it's very different. And as FN said, we're trying to make sure we have the right people in the right seats.

[Sunita Sachdev, executive]

Falguni, since that's the end of the con call, maybe you can have some closing remarks, please?

[Falguni Nayar, executive]

No, I just want to thank everyone for attending this. And like we have said in our press release, I continue to say that Nykaa remains very confident of creating long-term value for all its shareholders. We do feel that our beauty vertical continues to shape into an ecosystem of its own with steady and balanced growth across our online platforms, physical footprint as well as our consumer brands. Our fashion consumer brands have experienced steady growth, and they're also building their own label spanning across categories of Western wear, Indian wear, lingerie, menswear, accessories and much more. And even though this quarter growth was slightly below long-term trajectory, we remain confident that this will not be the case going -- I mean, we hope that this -- we are able to go back to the trajectory of growth that we are planning. Also, Nykaa ethos to grow businesses and brands with passion, but also with the discipline is again visible in the way we are growing our superstore business by Nykaa as well as our beauty brand Dot & Key has had significant scale quickly with a lot of inputs that went in from Nykaa on Nykaa way of building. And of course, we appreciate what Suyash and Anisha bring to the table in terms of innovation and their passion to build the business. So it's a great partnership. And similarly, we are also seeing that K-Beauty is a brand as well as Nykd that we talked about in our Annual Day. So building a number of very interesting brands.

And we continue to work with each of our businesses, improving their unit economics. Our Dot & Key has, in fact, crossed the annualized GMV run rate of almost INR 300 crores, which we are very proud of, growing almost fivefold since the acquisition and achieving profitability and demonstrating the successful business model that Nykaa aspires for, which is building value with Nykaa playbook. So with that, I thank each of you to being present today in the call, and we've enjoyed our interactions.

[Sunita Sachdev, executive]

Thank you.

[Anchit Nayar, executive]

Thanks, everyone.