Beauty myth?

Urban Company, formerly UrbanClap, has found a growth engine in the on-demand salon services. But can it afford the cash burn?

Vishal Koul

Beauty is but skin deep. Such an innocuous-to-the-point-of-banal axiom, but the line has a dangerous history. It is from a 17th century poem, written by a man trying to warn his friend of a duplicitous lover. It caused a scandal and even led to the poet’s execution. There are more details in that story, of royals and loyalists and romance, but you get the broad idea — that beauty cuts deeper. Centuries apart, Gurugram-based Urban Company (formerly UrbanClap) can vouch for this.

The start-up was founded six years ago as an aggregator of varied services. Through the companies listed on its platform, it sent home plumbers and electricians to fitness experts and masseurs. But, over the past few years, Urban Company has realised that its most profitable vertical is the Salon at Home service, which sends trained beauticians over. Beauty (or the promise of it) was and is a compelling hook. This vertical contributed 40% of Urban Company’s Rs.1.16-billion revenue in FY19, when orders had increased to 250,000, 2x what it was a year before (See: Groomed for growth).

A few years ago, Varun Khaitan may have never imagined that he would need to know the nitty-gritty of waxing. He and Abhiraj Bhal were working at Boston Consulting Group (BCG) in the US in 2013, when they began discussing ‘starting up’ in India. Their families were concerned. Why leave a good job at a management consultancy firm and to open what business? But the two did come down and launch Cinemabox, building entertainment units for buses and trains, and also happened to meet Raghav Chandra. Chandra had by then built Buggi.in, a mobile app to call autorickshaws. The three decided to start a company that would become large in the next 10-15 years and be used by millions of customers. They didn’t dream small.

To figure out what they should sell, the three spoke to “hundreds of potential customers” in the 25-50 age group, across cities. These conversations revealed that reliable and personal homecare services were nearly impossible to find in India, and slowly the idea of Urban Company began to take shape. “Every couple of weeks, one needs a service, either for oneself or for the home. In this country, almost every time, you are likely to be shortchanged on quality or cost or punctuality,” says Khaitan, co-founder, Urban Company. Technopak estimates the market for on-demand services in India is a $100 billion, but the providers are mostly unorganised and quality of service is inconsistent.

The makeover

The start-up was initially launched with ten services, which were needed frequently according to the founders. These included plumbing, yoga training, wedding photography and also beauty treatment. The last was a service that all (or nearly all) women needed every month. “Enough women told us from the very beginning that they would like to have this service at home, that it takes up a lot of their time,” says Khaitan. Urban Company was set up as a marketplace, that brought companies and individuals on its platform, who would then provide the service. In the beauty category, salons would be listed and they would send their employees to homes of the customers. Revenue was split 20:80, with the smaller share for Urban Company.

But within a year, founders Khaitan, Bhal and Chandra realised that it wasn’t working. “Service quality was inconsistent, and while the companies were making a lot of money, the earnings of the beauticians were meagre,” says Khaitan. It was a crisis but also an opportunity. The trio realised that, structurally, the beauty salon industry in India was open to disruption. “Physical salons have to be in well-populated areas and that means expensive real estate. To charge competitive prices, the salons have to save their costs somewhere and so they reduce the beauticians’ pay,” he says. Real-estate cost can come up to 50-60% of the operating expenses. Taking the service to the customer’s home would mean one stone, two birds. In 2015, Urban Company decided to transform from a marketplace to a service provider. It was a radical shift. The change in business model affected the beauty vertical immediately, and it worked so well that the company began rebuilding the other verticals along this line. It had been tested in Delhi first, for four months, but by the end of 2016, it was rolled out in eight cities.

Beauty and the biz

In the early days, was it easy to get the beauticians to sign on? Nope. It could not be done through polite, encouraging emails or cold calls. The founders had to speak to them face-to-face. “In the early days, all of us were on the field. We would wait outside the salons around the closing time, of 8.30 pm, and talk to the beauticians when they stepped out. It was us trying to sell a dream,” recalls Khaitan with a smile. Through the start-up, the beauticians can now earn up to Rs.40,000, a huge leap from Rs.8,000 to Rs.15,000 that regular salons paid them. But, in the beginning, a smile and promises had not been enough to win them over. Urban Company had to give them a minimum guarantee of two to three jobs a day and a legal contract. With their hustle and promises, the team finally had their early adopters.

Once was the team was on board, the first step was to standardise delivery of every beauty service. But before that, they had to define each service — the steps involved, products/tools to be used and processes to be followed. Second step was to train the beauticians. The beauticians come from a largely unorganised industry, and so, they had to be made ready for a more organised service. A training centre was set up and experienced professionals were hired to teach. Lessons were also given on business management, such as handling the customer, buying the products and managing the finances. “The beautician had to think like an entrepreneur, not an employee,” says Khaitan. Today, the company has 70 trainers and each beautician undergoes a two-week training course.

Now, the beauticians need the tools to provide their services. But they rarely make enough at regular salons to buy the necessary kits, which can cost up to Rs.35,000. That’s how Urban Company began loaning them money at market rates, which would then be recovered from their salaries. Beauticians and the start-up shared revenues as before, 80:20, with the smaller share for Urban Company. The tools had to be of a particular quality, too. How many customers would open their doors to a stranger with a rusty pair of scissors? The start-up tried a tie-up with cosmetic manufacturers, but that meant the women had to take a day off to go shop. To make it easier, Urban Company now opened a marketplace in 2016. Talk about commitment to transition. It bought products from national manufacturers and shipped them to the buyer beautician. As a bulk buyer, the start-up was given a 10-20% discount in price and a say in the quality of the tools. Today this marketplace generates 5-10% profit for Urban Company. “In fact, today we ship products for all other services as well. We look at this as a separate arm of the company. Over time, we can even do product sales to folks outside,” says Khaitan. These product sales, across categories, have contributed Rs.250 million in sales in FY19.

Mukund Kulashekaran, SVP at Urban Company

Next for the start-up was men’s grooming service. It was started across nine cities in November 2019. Khaitan says that they are already doing more than 100,000 orders a month. But this category had its peculiarities. Convenience is a given, one can avail service at 7 in the morning and even 11 at night. But Mukund Kulashekaran, SVP at Urban Company, says that there is a more compelling reason the start-up offers. “Men are uncomfortable going to a salon and asking for anything more than a haircut. It's not considered masculine enough. Therefore, the adoption is higher when the salon goes home. Men are getting pedicures and facials done more than haircuts.” This is a more competitive market though as men don’t like to spend more than Rs.1,000 per sitting. A haircut costs only Rs.249 for men with Urban Company, thankfully only 10% of the bookings are for these.

In the past two years, the start-up has also expanded to overseas markets such as Dubai, Singapore and Australia with home-cleaning service priced 3-4x what it is in India. It helps that domestic help is expensive in these geographies. The recent renaming of UrbanClap to Urban Company was even done to make it “globally acceptable”, according to the management.

CK Kumaravel, CEO, Naturals Salons and Spa

So what next?

The start-up seems to be galloping ahead but older, offline players don’t see it as serious competition. CK Kumaravel, who founded Naturals chain of salons two decades ago, says that Urban Company has made only a “small impact, in the few cities” they are present in. The problem he sees is the lack of personal connect. “The customers want to know who the stylist is. They develop trust towards particular beauticians and stay loyal to them. I don’t think it is possible to replicate that interaction at home,” he says. Another industry veteran Sandeep Ahuja, Director, VLCC Personal Care, says, “Beauty is an intensely experiential service and the consumer is becoming more demanding. Therefore, the biggest challenge will be to provide a consistently good experience at a large scale.” VLCC has launched an app and delivers the on-demand service through its vast network of offline stores, which it believes gives better control over quality.

Khaitan does not dismiss that challenge lightly. He knows it is difficult to replicate the salon indulgence at a customer’s home. For example, in a salon, a beautician knows where to get the hot water for pedicure. In a home, it becomes a bit awkward to ask the client to get her that. Urban Company has found a way around a few of these stumbling blocks, such as a pedicure tub that can be plugged in for hot water, portable steamer for facials, and smaller, “mono doses” of cosmetic products (which otherwise come in large jars) to ensure the right amount of product is used for every service. The beauticians arrive at homes in uniforms, wheeling in a trolley of products and tools.

It is also not cheap to be involved in the process from end-to-end, from training and managing the supply chain to marketing and branding, and the start-up like many others is burning cash. It posted a loss of Rs.750 million in FY19, a good deal higher than the loss of Rs.560 million in FY18 (See: In a fix). Its advertising promotional expenses more than doubled to Rs.690 million from Rs.330 million, and its employee benefit increased to Rs.810 million from Rs.450 million, over the same period. Kumaravel questions the sustainability of such a model. “They are generating Rs.500 million by spending Rs.400-500 million. It is money down the drain,” he says. But Khaitan counters this by saying that the initial high investment is in training and technology, and once they are in place, the operational expenses are likely to go down. He also sees the marketing expenses reducing with clients recommending the service to others and bringing in repeat customers of seven to eight times through the year. Khaitan insists that Urban Company will turn profitable in a few years’ time. 

Sanchit Vir Gogia, MD and Founder, Greyhound ResearchSanchit Vir Gogia, CEO at Grey Hound Research, does not find the cash burn “alarming”. “They are scaling up, and I don’t think their investors are too concerned about the cash burn. The company still needs to be given two more years to grow and expand,” he says. Gogia counts scalability (and not the cash guzzling) as the biggest challenge for a new-age business such as UrbanClap. “You have to focus on your service standardisation, but offering optimum quality at a scale is always difficult. Technology is just a supply-demand aggregator,” he says. Technology can do little when human interaction, such as with a service company, is involved. “That’s a classic services industry challenge,” says Gogia, adding that Oyo is trying to overcome a similar challenge. 

Undoubtedly there are teething troubles, but the start-up has grown rapidly on the back of one vertical, that of the beauty business. If Urban Company can consistently deliver quality services and manage the expenses of running this show, they have a winning hand. Skin deep has proved not so bad, after all.