Kaya Skin Growth Deteriorates – Client Retention Falls

Marico is facing a steady deterioration in the fortunes of its flagship business, Kaya Skin Clinic which was one of the fastest growing segments of the company.

The Managament says that Kaya will continue to make losses in FY11F (we estimate a loss of INR100mn) and is only looking at breakeven in FY12F. Management remains convinced of Kaya as a business model and reaffirms its view that it will succeed in the medium term; it will continue to support Kaya while looking to resolve issues facing the venture.

Some of the Major Issues Kaya is facing are,
Low Client Retention: Kaya currently offers more in the way of solution services and very little in the way of maintenance services. As a result, the client retention rate is just 40%. To improve the profitability and sustainability of the business, we believe client retention needs to increase. The company is trying to address this by introducing more regular maintenance services, such as high-end facials, which would help in having the customer return to the clinics more often.

Employee attrition Given the personalised nature of the service, client and service provider comfort is very important. In such circumstances, attrition becomes a key reason for client loss.

Small product portfolio The company is also looking to expand the product portfolio at Kaya. Currently, products make up only ~13% of overall revenue at Kaya. Over the next couple of years, the company intends to take this percentage to ~20%. This should be helped by introduction of the Derma Rx product portfolio, some time in FY11F.

The company last year stepped up the availability and visibility of Kaya products by making them available in modern retail formats. This was the first time that consumers would have bought Kaya products outside of a clinic. But, in our view, the end-results suggest little significant headway has been made since the bottomline is not reflecting it.

Lets see if Kaya will turn around as more than 60% of its stores are in Metros which is attaining saturation.