Kaya’s Expansion Spree: Taking Toll on Profits?

Kaya’s Expansion Spree: Taking Toll

on
Profits
?
“Since the incorporation of Kaya during 2002-03, its business has been in a development and later in
an
expansion phase. Encouraged by the consumer response to Kaya’s pioneering offerings in products
and services in the skin care category, it has focused on building the brand “Kaya” through setting
up of a large number of Clinics at several locations. In the process, Kaya has incurred significant
set up costs including advertisement and sales promotion, leading to losses. There were significant
improvements in operations during the year. Kaya will continue with its growth phase with focus on
profitability through
consumer
acquisition.”1

Marico Ltd. (Marico), Annual Report, 2008–2009

In 2009, Kaya Limited (Kaya), erstwhile Kaya Skin Care Limited, the world’s largest
cosmetic dermatology chain and a wholly-owned subsidiary of Marico Ltd. (Marico), having
opened 100 company-owned skin care clinics, is further scaling up its business
nationally as well as internationally. Since its start in 2003, the company has been adding 12–
15 skin care clinics every year to the existing ones. However, Kaya’s business has been posting
losses almost every financial year. These losses primarily resulted from Kaya’s rapid
expansion process, wherein the newly opened skin care clinics are taking time to break
even. These losses can also be attributed to Kaya’s choice of operating through the company-
owned-outlet model, unlike other players, which operate through franchisee model. Kaya’s
operating model is burdening the company with huge establishment costs and taking a toll on
its profits. Nevertheless, the company neither intends to change its operating model nor its
idea of scaling up. In such a scenario, the debatable question that crops up is: Is there a
need for Kaya to review its operating model and rapid expansion
strategy?

1 “Uncommon Sense Annual Report 2008-2009”, http://www.marico.com/investor_relations/annual_reports/Consol_Annual_Report_2008-09.pdf

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 Kaya’s Expansion Spree: Taking Toll on Profits?

Overview of Beauty Services Market in India

Every human being has the desire to look attractive and this eternal quest for beauty has been in
existence since ages. Over the years, people in India have been choosing different ways to look
attractive. While few try out economical home remedies for grooming themselves, some reach out
to the trained personnel – skin and hair care specialists, hair dressers, beauticians, cosmetologists
and dermatologists – of beauty services market. Although professional beauty services demand
high charges (based on the services provided), many in India are not deterred from availing them.

Giving her views on the same, Shahnaz Husain, CEO, Shahnaz Husain Group, said, “Indians
are spending much more on beauty and wellness than they did before. This is due to increasing
awareness of fitness and grooming, global trends, work pressure, competitive work environment,
as well as higher disposable incomes. There is a growing awareness that looking good is also a
2
matter of feeling good.” However, the Indian beauty services industry is highly fragmented,
comprising of unorganised players, which makes it difficult to estimate the exact size of beauty
services market in India.

Despite this, there were continuous attempts to estimate the size of Indian beauty services
market. In 2006, the Confederation of Indian Industry (CII) estimated the size of beauty and
3
wellness market, including beauty services, at $2,680 million . Similarly, according to the article,
Armed for the beauty market, the size of the Indian beauty services industry stands at INR 12,000
crore by some observers, while few estimate it at INR 2,000 crore. The article further states that
the organised and semi-organised beauty services industry in India account for about INR 1,500–
INR 1,600 crore (and some estimate it at INR 6,000 crore) and the organised beauty segment is
4
growing between 25%–30% per year. Vineet Gupta, CEO, Jawed Habib Hair & Beauty, opined,
“In the next five years, there will be a marked shift from the unorganised to organised segments in
5
the industry. This implies a turnaround for the business.”

2 “No recession scars in beauty franchising”, http://www.franchiseindia.com/article.php?title=No+recession+scars+in+beauty+franchising, October 19 th

2009
3 Bhattacharya Priyanka, “India’s Cosmetic Market Ready for Big Leap”, http://www.gcimagazine.com/marketstrends/regions/bric/30806969.html,
October 10th 2008
4 “Armed for the beauty market”, http://www.financialexpress.com/news/armed-for-the-beauty-market/166582/0, May 6th 2006
5 Ibid.

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 Kaya’s Expansion Spree: Taking Toll on Profits?

The Indian beauty services market comprises of players like Lakme Beauty Salon (Lakme) (of
Hindustan Unilever Ltd. (HUL)), Kaya Skin Clinics (Kaya), Shahnaz Husain Group, Vandana
Luthra Curls and Curves (VLCC), CavinKare’s LimeLite, Green Trends, Jawed Habib Hair &
Beauty and few others. Each player emphasises on distinct method of operations to scale-up their
business. For instance, Lakme and Shahnaz Husain Group focus on franchisee model (although
operate through company-owned outlets in limited number) to expand their business. On the
contrary, Kaya adopted the model of operating through company-owned outlets for scaling-up its
business. Unlike Lakme, which keeps off large investments (in turn gets franchisee fees), Kaya
6
makes an average capital investment of INR 1.5 crore on each skin care clinic. Kaya also
differentiated itself in the beauty services market by offering upgraded skin care services using
technology approved by US Food and Drug Administration.

Kaya Skin Clinics: A Brief Profile

History of Kaya dates back to 2003 when Kaya Aesthetics Ltd., was set up as a joint venture
between India-based Fast Moving Consumer Goods (FMCG) company, Marico and a New Jersey-
7
based consulting firm, Adil & Associates (A&A), to cater to Ayurvedic cosmetics market. Marico
8
held 76% stake in Kaya while A&A held 24% . As Marico is well-known for its brands like
Parachute, Nihar, Saffola, Almond Gold, Revive and few others, A&A consultants joined hands
with Marico by purchasing stake in Marico’s skin care business (both in India and US), aiming to
create a new business model. Expressing his view on the same, Asif Adil, promoter of A&A
stated, “We are into strategic implementation and will be investing our own money, along with
9
that of the client. The purpose is to develop new business concepts.” Harsh C. Mariwala
(Mariwala), Marico’s chairman and managing director said, “We believe a separate company will
enable the new skin care business to develop a service-oriented culture of work and customer
10
interface.”

6 Menon Sreevalsan, “Bold & the Bountiful”, http://www.businessworld.in/index.php/Corporate/Bold-The-Bountiful.html, February 27 th 2009

7 A&A was a consultancy firm assisting Marico in expanding its skin care business globally. Marico entered into the international market, especially
US, by taking over Sundari brand, which was offering ayurvedic skin care products.
8 “Marico Ind open to acquisitions”, http://www.blonnet.com/2003/04/24/stories/2003042402580200.htm, April 24 th 2003
9 Chatterjee Purvita, “At Marico, skin is in”, http://www.thehindubusinessline.com/catalyst/2003/03/13/stories/2003031300160300.htm, March 13th
2003
10 Dixit Vaid Sumita, “Marico Industries launches Kaya Aesthetics”, http://www.afaqs.com/perl/news/story.html?sid=6106, April 24th 2003

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 Kaya’s Expansion Spree: Taking Toll on Profits?

By launching Kaya Skin Clinics, Marico, however, entered into branded services business.
Giving his views on Marico’s foray into skin care services segment, Mariwala stated, “We are
looking at this venture as a separate entity and this is the first time that a big corporate like us is
11
offering a branded service of this kind.” Marico, realising the changing needs of the urban Indian
women – who moved up from ‘feel good’ cosmetic creams to ‘do good’ high-performance skin
12
creams – customised the skin care services backed by advanced technology. As a result, within 6
months of introducing Kaya skin care services, the company could satisfy 10,000 customers and
13
increased its skin care centres to 13 , in Mumbai and Delhi. In the same year, Kaya also expanded
into international markets by opening skin care clinics in Dubai, where the consumers spending on
skin care services was high. In 2004, Marico purchased the entire stake in Kaya making it the
14
wholly-owned subsidiary of Marico. By this time, Kaya’s turnover crossed INR 5 crore and
Marico was further investing in Kaya clinics to increase its presence.

Kaya, after strengthening its presence in metros of India, moved across tier II cities and towns
of the country. Rama Iyer (Iyer), a consulting dermatologist at Kaya, speaking about the business
that can be generated from tier II towns, which has IT presence, stated, “Young people employed
in IT companies are more conscious of their appearance. Skin care treatment is an affordable
spend for these youngsters. Kaya is not a beauty parlour but a clinic that offers cosmetic
dermatology in the ambience of a spa. We are in the non-invasive space.”15 However, by July
2005, the company had increased the total number of skin care clinics to 3416. The entire capital
was invested by Marico and the major portion of it was spent on technology. Kaya majorly offered
skin care services in the areas of skin beauty (skin polishing and brightening, glow and facial
toning), hair reduction (laser hair removal), acne and acne scar reduction and few others. The
company also offered a wide range of in-house beauty products (Annexure I).

11 “At Marico, skin is in”, op.cit.

12 Chatterjee Purvita, “Marico shows its muscle”, http://www.thehindubusinessline.com/catalyst/2004/08/05/stories/2004080500060300.htm, August 5 th
2004
13 Ibid.
14 Chatterjee Purvita, “Marico may buy out partner's stake in Kaya Skin Care”,
http://www.thehindubusinessline.com/2004/07/21/stories/2004072103010600.htm, July 21 st 2004
15 Revathy L.N., “Kaya Clinic on expansion spree”, http://www.thehindubusinessline.com/2005/07/27/stories/2005072700770800.htm, July 27th 2005
16 Ibid.

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 Kaya’s Expansion Spree: Taking Toll on Profits?

By offering world-class skin care products and services, Kaya also increased its clientele. In
2005, Kaya’s customers were over 40,000 and the turnover was at INR 20 crore17 (Exhibit I).
Witnessing the increased consumer response, Kaya went on to introduce new skin care services
like dark circle reduction and also focused on establishing new clinics across the country and
overseas. It emphasised on advertising and sales promotion for making the brand visible. But, the
newly-opened clinics were posing a challenge for Kaya as every clinic was taking 3–518 months to
break even. However, the growing response from the clientele for Kaya’s products and services
encouraged Marico to increase its investments and advance loans to Kaya (Exhibit II). As of
March 2006, Kaya established 4219 skin care clinics and its turnover more than doubled compared
to previous year to stand at INR 43 crore and Kaya’s client base grew to 1.5 lakh20, nearly four
times to that of the previous year.

As Kaya was showing development, Marico continued to support its expansion process. The
company auditor’s report states, “Based on the fundamentals of the Kaya business, the
management is of the opinion that it is strategically desirable for Marico to continue to support
Kaya through funding (including equity/debt infusion), through either fresh funds or conversion of
existing loans into equity. Having regard to this, the management perceives the erosion in Kaya’s
net worth as only a temporary diminution in value. Hence, no provision for diminution in value is
considered necessary in respect of the Company’s investment in Kaya or of the loans given to
Kaya.”21 With such encouragement from the management, Kaya continued to grow its business
(Exhibit III). In addition, the growing interest of men in availing beauty services further gave a
boost to the company, which encouraged it to offer some special beauty products for men too. In
2006, 20%22 of the Kaya’s customer base comprised of men (which has increased to 25% by
2009). All these factors helped Kaya to grow at a CAGR of more than 50%23 since 2006.

17
Rangaraj R., “Kaya Skin Clinic attracts more men”, http://archives.chennaionline.com/fashion-lifestyle/News/2005/06kayaskin.asp, June 23rd 2005
18
“Kaya Skin Clinic attracts more men”, op.cit.
19
“Auditors’ Report”, http://www.marico.com/investor_relations/annual_reports/ann_report_view_2005_06/Marico_Limited_Financials06.pdf, March
31st 2006
20
Kannan Swetha, “Not just skin deep”, http://www.thehindubusinessline.com/catalyst/2006/07/06/stories/2006070600140300.htm, July 6 th 2006
21
“Auditors’ Report”, op.cit.
22
“Not just skin deep”, op.cit.
23
Iyer Byravee, “Kaya’s new face”, http://www.business-standard.com/india/news/kayas-new-face/09/54/378739/, December 7th 2009

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 Kaya’s Expansion Spree: Taking Toll on Profits?

Exhibit I
Kaya’s Turnover and Profit/Loss Data, Year Ending March 31st, 2005–2009
(in INR crore)

Year Turnover Pofit/Loss

2005 20.9 (7.9)
2006 48 (12.7)
2007 74.7 0.04
2008 101 (3.78)
2009 157 (1.6)
Compiled by the authors from the Annual Reports of the parent company, Marico Ltd.

Exhibit II
Financials of Kaya Skin Care Ltd., Year Ending March 31st, 2005–2009
(in INR crore)

Nature of Transactions 2005 2006 2007 2008 2009

Balances
Balance of loans/advances 44.19 64.00 6.08 35.90 54.71
Interest accrued on loans 1.60 3.91 - - -
Investments 10.00 10.00 73.00 73.00 73.00
Corporate Guarantee given to bank 2.95 2.95 2.95 2.95 8.00
Debtors - - 0.12 - -
Transactions during the year
Interest on loans/advances 1.74 2.98 - - -
Receipt of Interest on Loans - - 3.91 - -
Expenses allocated to the
subsidiary/Payment made on behalf of the 0.54 0.54 4.30 5.27 6.36
subsidiary
Expenses incurred by subsidiary - - 2.42 0.01 -
Loans/Advances given during the year 29.25 18.98 - 25.05 13.20
Loans/Advances repaid during the year - - 59.51 0.60 0.75
Contd…

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 Kaya’s Expansion Spree: Taking Toll on Profits?

Sales of goods - - 0.01 - -

Sale of Fixed assets - - 0.12 - -
Purchase of goods - - 0.09 - -
Professional services availed - 0.12 - - -
Purchase of Fixed Assets - - 0.20 - -
Investment in shares - - 63.00 - -
Corporate Guarantee given - - - - 5.05
Compiled by the authors from the Annual Reports of the parent company, Marico Ltd.

Apart from this, Kaya also reported a good customer retention rate of 90%, which was
primarily due to factors like advanced skin treatment, customer-oriented service and ambience. In
this context, Iyer said, “Customers are not just looking at the physicals of the treatment; they are
also look for a soothing ambience and softer aspects such as proper customer service,
appointments and reminders. At Kaya, the emphasis is on personalising the experience based on
the customers’ needs so that they feel at home and come back for more.”24 By focusing on all these
aspects, Kaya continued to scale-up its business and won the ‘Best Retailer in the Beauty and
Fitness’ award from India Retail Forum for two consecutive years – 2007 and 2008. For
emphasising on customer services, Kaya also received ‘Star Retailer Award 2008’ from Franchise
India. Riding on the success in skin care segment, it expanded the portfolio of services and also
forayed into wellness segment with Kaya Life, which offers weight loss solutions.

24
“Not just skin deep”, op.cit.

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 Kaya’s Expansion Spree: Taking Toll on Profits?

Exhibit III
Kaya’s Sales Growth (2004–2008)

Source: “Uncommon Sense Annual Report 2007-2008”,

http://www.marico.com/investor_relations/annual_reports/ann_report_view/Annual_Report_2007-08.pdf

Kaya’s Rapid Expansion: A Right Strategy?

Since its inception, Kaya differentiated itself in the organised Indian beauty services market by
stressing on advanced skin care services over products. It brought in a scientific approach in
dealing with skin treatments. Consequently, it was successful in retaining customers, which
encouraged Kaya’s expansion process. By 2008, Kaya did a business of INR 100 crore and fetched
25
10% of Marico’s revenue. In 2009, Kaya opened its 100th skin care clinic (87 are in India and the
26
remaining in West Asia) and had a turnover of INR 200 crore .

25
Shashidhar Ajita, “The vanity fair”, http://business.outlookindia.com/article.aspx?101705, November 29th 2008
26
“Kaya’s new face”, op.cit.

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 Kaya’s Expansion Spree: Taking Toll on Profits?

Despite tremendous consumer response, encouragement from the management regarding

investment and loans and market recognition, the company has been continuously making losses.
Kaya made a loss of INR 2 crore in the quarter of July–September 2009, which was much higher
than the loss incurred in 2008–2009. The losses were mainly attributed to the aggressive expansion
27
of skin care clinics – with 45 establishments in the initial 4 years and 55 in the next 3 years . The
company took the expansion route even during the recession (2008), as the market space of skin
care services was growing at 18% per annum.

The company’s operating model is resulting in huge establishment cost. Nevertheless, Kaya
believes that it can build a strong brand by offering quality services, which is primarily possible
through company-owned skin care clinics. Kaya is in favour of owning outlets because of the
advantages offered by them over franchised outlets. Suvodeep Das, Kaya’s Marketing head stated,
“One of our biggest focus areas has been service quality and we felt that franchisees would not be
28
able to deliver that.” However, when it comes to making profits, franchisee model is more
attractive.

Offering quality services and maintaining the consistency of services has been a challenge in
beauty services industry. For instance, Lakme faced problems with its franchisee model. Anil
Chopra, Business head, Lakmé opined, “Not all franchisees are mentally-oriented towards offering
29
standardised experience and service in the salons.” Consequently, Lakmé, to ensure that
customer service is prioritised in salons, revised its strategy towards franchisee selection process
and training. Industry analysts stated, “HUL makes image profits from Lakme Beauty Salon and
30
financial profits on the brand fee paid by franchisees.”

However, Kaya continues to embark on its existing operating model despite confronting
financial challenges. Kaya is also making massive investments on acquiring latest technology like
Fractional Laser Technology (Fraxel), for offering breakthrough services to its clients. All this is
increasing pressure on the company’s financials. Moreover, the break even period (3–5 months)

27
“Kaya’s new face”, op.cit.
28
Ibid.
29
Jain Shweta, “Booty salon”, http://www.business-standard.com/india/news/booty-salon/162727/, September 14th 2004
30
Saxena Ruchita, “Services next big idea for consumer goods firms”, http://www.business-standard.com/india/news/services-next-big-idea-for-
consumer-goods-firms/287719/, June 14th 2007

1
0
 Kaya’s Expansion Spree: Taking Toll on Profits?

31
for new outlets, is increasing burden on Kaya. Besides, the company is also spending 15% of its
revenues on advertising and promotion, for strengthening its brand. Industry observers consider
advertising expenditure as another major reason for losses. As the awareness on cosmetic
dermatology is vey low in India, Kaya initiated a 360-degree campaign, by choosing different
platforms like social networking sites (Facebook) and live chats on Kaya’s website. The aim
behind such campaigning was to remove the negative notion regarding cosmetic dermatology
among the people in India and promote its brand.

Although Kaya is spending extensively on few fronts, it is also working on ways to bring down
the financial pressure on the company. Kaya is focusing on reducing the break even time and
improving revenues in new skin care clinics. It also intends to increase capacity utilisation in
existing skin care clinics. Along side, the company is also prioritising training and work exposure
for its members and quality services in its clinics through technology investment.

Nevertheless, the need for posting profits and supporting the parent company is high on Kaya,
as the other brands of Marico (Parachute and Saffola) ,which were considered as cash cows, were
facing threats of stiff competition and global recession. Mariwala stated, “Kaya Skin Clinic
32
expected to contribute as a key growth engine of the Marico Group in the years to come.” While
33
Anand Shah, an analyst from Angel Broking’s , is confident that “Kaya will break even within
the next six months”, he is also worried about the company’s fixed costs, which he says, “needs to
34
be distributed and that will only happen when it ramps up its outlets.” However, pointing to
Kaya’s aggressive expansion strategy and its operations, analysts suspect whether the expansion of
services firm could create the same effect as that of a manufacturing firm delivering mass
production, particularly in a situation, where the company is incurring losses due to its investments
in setting up new outlets.

31
“Kaya’s new face”, op.cit.
32
“Kaya Skin Clinics celebrates the launch of its 100th clinic”, www.marico.com/news/PressRelease_Launch_of_Kayas_100th_clinic.pdf, November
24th 2009
33
Angel Broking's began in 1987 and emerged as one of the most respected Stock-Broking and Wealth Management Companies in India. With its
unique retail-focused stock trading business model, Angel is committed to providing ‘Real Value for Money’ to all its clients. The Angel Group is a
member of the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and the two leading Commodity Exchanges in the country: NCDEX
& MCX.
34
“Kaya’s new face”, op.cit.

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 Kaya’s Expansion Spree: Taking Toll on Profits?

Hence, the questions arises, will Kaya be able to contribute positively to Marico with the
existing operating model. With its competitors relying on franchisee model, is it a wise decision
for Kaya to continue with company-owned outlet model? Is there a need for Kaya to rethink on its
strategy for scaling up? Will the company be able to achieve economies of scale and a distributed
fixed cost if it continues with its expansion spree or will it lead to further losses?

Annexure I
Kaya Skin Clinic: Products
Product What it does Price in INR
Daily Care Range
All purpose, gentle, soap-free cleanser that provides deep-pore 550 for 200 ml.
Soothing Cleansing Gel
cleansing
Alcohol free toner that completes the cleansing process by 450 for 200 ml.
Revitalising Tonic
reducing the pore size to normal
Daily Use Sunscreen SPF Light and non-greasy with SPF 15 protects against the ill-effects
680 for 50 ml.
15 of both UVA and UVB
Daily Moisturising
SPF 30 with moisturiser protects against both UVA and UVB 950 for 50 ml.
Sunscreen
Anytime Moisturising Its unique formulation with jojoba oil minimises water loss from
650 for 50 ml.
Cream the skin, keeping it soft, supple and nourished.
With Peach, Melon and Aroma therapy oils – cleans, softens and
Body Gel 250 for 200 ml.
conditions the skin
Fairness Range
Refreshing non-foamy and deep pore cleanser with exfoliating 350 for 100 ml.
Fairness Cleanser
beads
With skin lightening agents such as Niacinamide and Vitamin B3
Fairness Day Cream 990 for 50 ml.
and triple sunscreen for additional protection
Fairness Night Cream With Lumiskin that fights against excess melanin production 990 for 50 ml.
Sensitive Range
Mild, soap-free to gently cleanse without causing dryness or 600 for 200 ml.
Sensitive Cleanser
irritation. Perfume free
SPF 15 in a non-greasy formula hydrates and protects the skin.
Sensitive Sunscreen 750 for 50 ml.
Perfume free
With aloe-vera and almond oil it soothes and moisturises the skin.
Sensitive Moisturiser 700 for 50 ml.
Perfume free
Ageless Range
Early Defence Cream/Skin With DermaxykTM Protects skin from signs of aging.
800 for 50 ml.
Repair Complex
Revive and Firm With anti-oxidants like Curcumin extracts & Vitamin E to fight 800 for 50 ml.
free radicals. Anti-wrinkle & firming cream.
Advanced Range
Contd…

11

Lighten and Smooth
Under-eye Gel
Pigmentation Reducer Gel
Pimple Free Cream
Hair Care Range
Nourishing Shampoo
Anti-dandruff Lotion
Hair Health Gel
Daily Care for Men
Revitalising Face Wash
Skin Relief After Shave
Gel
Whitening Moisturiser
with SPF 20
Compiled by the authors
Kaya’s Expansion Spree: Taking Toll on Profits?
With Haloxyl TM reduces dark circles. Improves skin firmness. 500 for 15 ml.
With AHA & Niacinamide Lightens pigmentation & dark spots 500 for 25 ml.
With Triclosan, niacinamide and AHA controls and reduces
150 for 25 ml.
pimples
With Almond milk and Hibiscus extract. Reduces hair breakage 250 for 200 ml.
and leaves hair soft
Reduces dandruff related itching. Nourishes and conditions the 370 for 200 ml.
scalp
K2 protein, minerals and vitamin complex reduce hair fall and 400 for 200 ml.
promotes hair growth
This refreshing and foaming face wash gently removes oil and
grime residue without drying the skin. 450 for 150 ml.
This alcohol-free gel sooths cut, rough and abraded skin post
shaving. The non-greasy formula with a refreshing 400 for 100 ml.
fragrance instantly refreshes the skin
With 3-in-1 benefits, this product effectively delivers skin
lightening, sun protection and miniaturisation for the tough male 750 for 75ml.
skin
12