FINAL CASE STUDY

Rishi Patnaik, director of cosmetics at Jade eServices Pvt. Limited (BeautyStation) an e-retailer of beauty products in
India, regularly faced the challenge of balancing conflicts between the expectations of supplier brands and
customers. However, Patnaik was worried when Katebavelzgonia SE (Katebavelzgonia), an international beauty
brand, communicate its decision to stop discounting 25 per cent of its product lines, effective October 1, 2014.
Katebavelzgonia accounted for more than 20 per cent of BeautyStation's cosmetics sales in the first half of 2014. The
models included in Katebavelzgonia's proposed "no discount" list contributed to 70 per cent of BeautyStation's
Katebavelzgonia sales. Additionally, many Katebavelzgonia buyers subsequently purchased other products from
BeautyStation, which contributed to the company's gross margin. Patnaik was responsible for ensuring growth in
both gross sales and net income in the cosmetics category, and was unlikely to meet his targets without discount
support from Katebavelzgonia. Patnaik had just closed Q2 sales for FY 2014/15, but Katebavelzgonia's decision now
posed serious difficulties for BeautyStation's annual cosmetics sales objectives in the future.

The most common challenge for beauty e-retailers in India was that suppliers wanted brand salience, premium price,
and exclusivity, while customers wanted assortment and discounts on premium brands. Between 2011 and 2014,
exponential growth of e-retail in India had forced many premium beauty brands to sell through the emerging
channel. However, the discounts that e-retailers had to offer to their customers to generate high sales volumes
resulted in brand dilution, which compelled these same brands to avoid the online channel. The problem was more
critical when the brand commanded a premium and had significant offline presence.

Patnaik knew that sales were key to premium brands. Access to online customers and high sales volumes, which
BeautyStation delivered to supplier brands, had always helped Patnaik tilt the negotiations in favour of deeper
discounts for customers and BeautyStation. Still, intense competition and diversity strained the profitability of the
cosmetics category, which was the most significant component of the beauty business.

Patnaik knew he could not renegotiate Katebavelzgonia's all-India discount policy; it was Katebavelzgonia's internal
decision. Thus, he had to find his own way to preserve BeautyStation's sales and financials. Katebavelzgonia still
offered discounts on some specially manufactured units and old season stock. Yet Patnaik needed hard data before
deciding what Katebavelzgonia's product portfolio should be with BeautyStation. Therefore, Patnaik waited two
months to assess the business impact of Katebavelzgonia's new "no discount'' policy.

The "no discount" policy went into effect on October 1, 2014. Results from October to November 2014 showed that
Katebavelzgonia sales were down significantly, while the rest of the cosmetics category grew as expected.
Katebavelzgonia was still the most searched keyword on BeautyStation's website and the search for
Katebavelzgonia's products was an important source of new customers. Patnaik had insufficient data, but he had to
take immediate action; any further delay would mean that he would not be able to achieve his business results for
FY2014/15.

BACKGROUND

BeautyStation was a beauty and lifestyle e-commerce portal (see Exhibit 1). The company was headquartered in
Gurgaon, National Capital Region, India. It was co-founded by Arun Chandra Mohan, Praveen Sinha, and Lakshmi
Potluri. Mohan and Sinha were directly involved with business operations and took an active part in key decisions.

BeautyStation's goal was to provide the highest level of customer satisfaction. To achieve this objective,
BeautyStation relied on a cutting-edge e-commerce platform, a highly experienced buying team, agile warehouse
systems, and a state-of-the art customer care centre. The company's value proposition to its customers was a broad
selection of products, a superior buying experience, timely delivery, competitive prices, and a quick resolution of
problems. BeautyStation also provided cash-on-delivery services to reduce customers' anxiety about the risks and
uncertainties involved in online shopping.
In FY2012/13, BeautyStation's first year of operations, the company recorded gross sales of more than US$100
million. By March 2013, BeautyStation was shipping 6,000 to 7,000 orders a day, which increased to 14,000 by
September 2013. In October 2013, it began adding top international brands, such as USA’s high-street beauty brands
Colorbar, Bobbi Brown, and Medusa, along with Italy’s brand Kiko Milano. In November 2013, BeautyStation entered
into a partnership with Nykaa to sell merchandise for a Beauty competition, Femina Miss India. In March 2014,
BeautyStation launched in-house brands in apparel, cosmetics and accessories. Industry watchers believed that
BeautyStation was set to enter the $1 billon club in FY2015/16.

BeautyStation followed an inventory model for high turnover of its products, and a marketplace model for the rest of
its products. In the inventory model, the company purchased products from brands, stored them in BeautyStation's
warehouses, and shipped the products to consumers as they ordered. The monthly inventory carrying costs were
almost 2 per cent of the product cost, in addition to the risks of obsolescence. In the marketplace model,
BeautyStation provided marketing, logistics, and delivery support (for a fee) for suppliers to do business with its
customers, but BeautyStation did not take ownership of the products.

The company had been active on digital media from its beginnings. Among e-retailers, BeautyStation was the first to
use television campaigns (introduced in March 2012). In November 2013, BeautyStation introduced the Fresh face
campaign "City Fresh Face" in association with Katebavelzgonia, which featured Bollywood actors. In a bid to position
itself as an online beauty destination, BeautyStation joined with Lakme Beauty Week's annual event from 2014 to
2017. In April 2014, BeautyStation launched the India Online Beauty Week and a monthly beauty magazine called
Femina. The magazine covered topics pertaining to beauty, health, people, trends, travel, and pop culture.

BeautyStation converted approximately 1 per cent of new visitors to its website into paying customers; however,
these new customers had considerable impact on BeautyStation's order book (see Exhibit 3). Thus, acquiring new
customers was critical for BeautyStation. To meet this objective, the company needed to partner with brands and
websites that could drive customer traffic, and invest heavily in marketing, irrespective of sales outcome.

To increase its customer base, BeautyStation added partners such as Kama Ayurveda, Shehnaz Hussain, Khadi,
Twakh, and Himalaya. It regularly partnered with well-publicized Bollywood projects, showcasing the beauty
products used in the movies and developing collections inspired by the movies. The company also sourced the beauty
products used by the movie stars and offered these products to its customers. In total, BeautyStation offered its
customers more than 100,000 products from more than 1,000 brands.

With respect to customer service, BeautyStation invested in warehouse capacity, and could deliver goods to over 630
cities. It had created its own logistics arm ("JaVAS") to ensure customers had a good experience with delivery
services. (Though BeautyStation sold JaVAS in early 2014.) BeautyStation's sales were 37 per cent in Tier 1 Indian
cities, 35 per cent in Tier 2 cities, and 28 per cent in Tier 3 cities. Hence, the firm could provide good distribution
reach for brands that were not very widely distributed across India. In addition to maintaining its delivery
infrastructure, BeautyStation had to continuously upgrade its technology, marketing, and logistics to keep pace with
the competition. This required considerable financial resources.

BeautyStation attempted to improve its overall profitability by increasing the share of private label products,
increasing its scale of operations, and negotiating better pricing and promotional support offered by partners.
However, despite earning significant operating profits in all product lines, BeautyStation posted a net loss during
FY2013/14. In June 2014, BeautyStation received a $5.5 million investment from Rocket Internet, which owned a 21.4
per cent stake in the company. Overall, BeautyStation had raised $240.7 million, and the company was valued at over
$500 million.

E-RETAIL INDUSTRY OUTLOOK

BeautyStation and one of its competitors, Purplle, had been the biggest beauty e-retailers in India since 2012. They
consistently recorded very high sales and were growing exponentially. Their success signalled a tipping point in
consumer behaviour: shopping online for beauty was the new trend.
 BeautyStation and Purplle's combined turnover reached $154 million for FY2013/14. In that same year,
BeautyStation's sales jumped to $82 million, up from a mere $800,000 in FY201 l/12. Similarly, Purplle's sales grew
from $11 million to $72 million during the same period. The growth of these beauty e-retailers outperformed that of
brick-and-mortar beauty majors such as Maybelline, Loreal Paris, and MAC-brands that had been in business in India
for five to 10 years.

Consumers gravitated to e-retail because they enjoyed the convenience of browsing through thousands of big label
options from the comfort of their homes or offices. An online shopper and director at retail consultancy Elargir
Solutions, Ruchi Sally, commented:

Where will I get international brands, such as MAC and Colorbar, and not-so-high-priced [brands like] Maybelline and
Lakme all in one place? I won't ever get to browse 5,000 products at stores, and I can't go there every day braving the
traffic. But I can go to the virtual store every single day, and if l don't like what I have [purchased], I can just return it,
all from the comfort of my chair.

According to Sinha, co-founder of BeautyStation:

Apart from the acceptance of e-commerce at a macro-level, we have, over time, built our reputation through
customer experience. This will now translate into higher sales [because) we laid a strong foundation. There has been
a lot of focus on branding and investment to build properties and technology, which will help in the long run even
though it impacts profitability now.

The Indian online beauty market was estimated to grow to $8 billion by FY2015/16, as a result of rapid expansion of
e-commerce in the country. The market size of the online beauty sector was estimated at $5 billion in FY2013/14. In
2014, Indian e-commerce companies secured over $4 billion in investments from venture capital, private equity, and
internal funding. Many leading international e-retail companies were planning to invest in the Indian growth.

Beauty products were poised to become some of the top sellers in the e-retail business in the near future. Business
consultancy firm RNCOS predicted.

Purplle and BeautyStation were similar in their approaches to business and consumers. Only their product portfolios
were different. Purplle focused on beauty and lifestyle products, while BeautyStation catered mostly to customers of
premium and international beauty brands that were established in India. Both were receiving similar net prices from
their suppliers, and both also offered similar discounts and prices to consumers.

THE BUSINESS WITH KATEBAVELZGONIA

Katebavelzgonia was a France multinational corporation headquartered in Paris, France. It produced both high and
medium range cosmetics. Katebavelzgonia had been late to the Indian market, entering in 2009. The company used
Revlon's downfall in India to rapidly notch up its own sales. Katebavelzgonia was aggressive in using e-retail to rapidly
increase sales and gain market share (see Exhibit 4). In India, it partnered with all of the major e-commerce
companies: Flipkart, Amazon, Tata Cliq, Shopperstop, Lifestyle, Myntra, eBay, and Jabong (see Exhibit 5). However,
Purplle and BeautyStation were Katebavelzgonia's key strategic e-commerce partners.

BeautyStation dealt with Katebavelzgonia using the inventory model. BeautyStation bought the items from
Katebavelzgonia, and paid Katebavelzgonia irrespective of actual sales. Hence, BeautyStation was careful to stock
only the high-selling items. BeautyStation's consumer analytics web tool was sophisticated: it could optimize the
product portfolio precisely, allowing BeautyStation to stock only what it classified as "core items." BeautyStation was
able to generate a significant gross margin from sales of Katebavelzgonia products; however, the customer
acquisition costs were high, even though some of those costs were shared with Katebavelzgonia.

To maintain aggressive growth in e-retail, Katebavelzgonia offered extra margins as special support to the online
companies. E-retailers helped Katebavelzgonia's sales efforts, and provided better visibility of Katebavelzgonia's
products to consumers, but the e-retailers also passed on Katebavelzgonia's extra discounts to attract new
customers. Initially, online business was insignificant; Katebavelzgonia's brand team and conventional retailers did
not experience any major problems as a result of online sales.

However, by early 2014, the e-retail business was strongly affecting the market share of conventional retailers and
distributors. All major cosmetics brands-and Katebavelzgonia in particular-were facing objections from the well-
established sales channels. It was also unacceptable for brand management to be giving regular discounts on
products sold through e-retail, while selling the same products at maximum retail price (MRP) in conventional
channels.

Because e-retailers experienced intense competition for new customers, they were not willing to stop discounting
products, even if they were not earning anything on the sales. To attract new investments from investors and
promoters, some e-retailers focused on increasing gross sales and tried to maximize their turnover, which lead to a
price war among the e-retailers.

Katebavelzgonia's management had decided to reign in the discounts offered throughout the entire e-commerce
channel in India. Therefore, management framed brand guidelines that Katebavelzgonia's sales teams had to
incorporate in agreements with all existing and new e-retail partners, effective October 1, 2014. The guidelines were
as follows:

 Katebavelzgonia would provide a list of styles called "core articles" that channel partners could not discount
or pair with promotional coupons or similar campaigns. This list would be comprised of premium products
that built Katebavelzgonia's brand image, or products that were economically priced, sales-volume-
generating products. This list would not represent more than 25 per cent of Katebavelzgonia's line.
 Katebavelzgonia would offer specially manufactured units (SMUs) to all e-retailers. Accepting to keep these
products was at the discretion of the retailer.
 There would be an exclusive range of products that would be offered only to some key online channel
partners. The terms for these products would be negotiated on a case-by-case basis.
 Old season merchandise could be sold at discounted prices at the discretion of the retailers.

The guidelines also made it clear that there would be no exceptions. If any infringement was observed,
Katebavelzgonia would immediately stop its product supply without notice.

IMPACT OF KATEBAVELZGONIA'S DECISION ON BEAUTYSTATION

BeautyStation sold an average of 8,000 pairs of cosmetics per month between July and September 2014:
approximately 1600 pairs were Katebavelzgonia products. Sales of mainline Katebavelzgonia products declined
sharply in October and November 2014, as a result of the lack of discounts. The overall cosmetics category grew 50
per cent as compared to the same period in the previous year; however, (Katebavelzgonia sales declined 20 per
cent). The data analytics team reported that customers were still looking at the portfolio of high-selling
Katebavelzgonia products, but many were no longer buying, leading to a significant shortall of Katebavelzgonia
products against planned sales.

Patnaik was certain that discounts on premium Katebavelzgonia products helped BeautyStation acquire new
customers; on average, 30 per cent of Katebavelzgonia sales had been to new customers. Katebavelzgonia products
also helped BeautyStation convert more site visitors into buyers. At the same time, Patnaik also realized that
Katebavelzgonia's brand guidelines would increase Katebavelzgonia's aspiration value with customers, which could
help BeautyStation improve its profitability and customer profile.

Online consumers needed special incentives to buy a product. Katebavelzgonia's SMU option was problematic
because these products were made for discounts and had a high markup in order to give a better margin to the
channel. Yet the cosmetics ultimately became a loss for the retailers because the product was less acceptable to
customers, and therefore had to be sold at very high discounts. In addition, these discounted products were available
at all other online channels but discounted as each e-retailer chose, creating confusion for customers and harming
BeautyStation's brand equity. Further, minimum order quantity requirements were imposed for exclusive SMU's,
which had an adverse impact on retailers' cash flows.

OPTIONS FOR PATNAIK

Patnaik needed to finalize his plans in consultation with Sinha. As part of his preparations, Patnaik tried to clarify all
of his options. He realized that there was no real possibility of dropping Katebavelzgonia altogether, because one of
BeautyStation's value propositions for customers was a wide range of brands. Katebavelzgonia and BeautyStation
were associated in the e-retail customer's mind, and Katebavelzgonia was still an important brand for customer
acquisition at BeautyStation. The top 10 per cent of customers acquired through Katebavelzgonia sales purchased
about six times a year (not necessarily cosmetics), with an average purchase of $40 per order and a gross margin of
20 per cent. Another 40 per cent of customers acquired through Katebavelzgonia sales were average shoppers: they
purchased twice a year with an average purchase of $30 per order and a gross margin of 25 per cent. The remaining
customers acquired through Katebavelzgonia were insignificant to BeautyStation insofar as cross selling was
concerned. Data provided by the analytics team suggested that the top 10 per cent of customers were likely to
purchase from BeautyStation a total of 10 to 14 times, and average consumers purchased only six to eight times.

Knowing that he had to incorporate the new brand guidelines from Katebavelzgonia, Patnaik considered three
options:

1. Continue with only the "core articles" from Katebavelzgonia's product portfolio, which BeautyStation sold before
the new brand guidelines came into force.

2. Continue with the core articles and add select SMUs according to consumers' choices which could be determined
by pre-tests in BeautyStation's e-commerce platform.

3. Ask Katebavelzgonia for an exclusive SMU range for BeautyStation in addition to the core articles. However,
Patnaik knew that Katebavelzgonia would limit the maximum discounts and require a minimum order quantity for an
exclusive range.

Patnaik needed to understand the impact of his decision on the gross margins made in the cosmetics category, as
well as on BeautyStation's overall profit and loss (see Exhibits 6 and 7). He was not sure how the e-retail competitors
would respond to Katebavelzgonia, but he knew that Katebavelzgonia was likely to give the best commercial offer to
BeautyStation initially. Patnaik also knew that this advantage would last only until BeautyStation gave high sales to
Katebavelzgonia.

He evaluated the market sentiment using focus group studies. Sales performance in October and November 2014
indicated that there was a serious drop in Katebavelzgonia sales, falling to almost 40 per cent of the original price.
Yet the gross margin improved to 120 per cent of normal. Customer acquisition through Katebavelzgonia was down
to only 30 per cent of original.

Patnaik built alternative scenarios based on his experience. If he opted for a product portfolio of core articles plus
select SMUs, BeautyStation would face serious competition from the other e-retailers selling the same SMUs. The
resultant agressive pricing of SMUs would also cannibalize the sales of the core articles, Patnaik expected that the
final unit sales would be unchanged, but the proportion of core articles would drop to 20 to 30 per cent of what it
was before October 2014. He was expecting that the gross margin of the SMUs would be about 30 to 50 per cent of
what BeautyStation made from the core articles as of October 2014. The average selling price would be 80 per cent
of the October 2014 figure, but new customer acquisition would remain the same.

If Patnaik opted for a product portfolio of core articles plus an exclusive SMU range for BeautyStation, BeautyStation
would still face indirect competition in the SMU segment from other e-retailers. Patnaik was sure that he would have
to adopt aggressive pricing for the exclusive SMU range to get sales. Such pricing would also cannibalize the sales of
core articles. He was expecting the final unit sales to be about 120 per cent of original, with the sale of core articles
dropping to 10 to 20 per cent of pre-October 2014 sales. Similarly, he was expecting the gross margin of the exclusive
SMU to be about 40 to 60 per cent of what BeautyStation made from the core articles now, but there would be an
increase in the average inventory of Katebavelzgonia products from 30 days sales to 60 days sales. The average
selling price would be 75 per cent of current, but new customer acquisition patterns were unlikely to change.

Another option that Patnaik had not considered was to move the Katebavelzgonia business from the inventory model
to the marketplace model. In the marketplace model, consumers of BeautyStation who wanted to explore
Katebavelzgonia products would be transferred to a Katebavelzgonia website specially designed to maintain the
BeautyStation experience for the consumer. The sales and delivery would be managed by Katebavelzgonia, and a fee
of 15 per cent of the sale's value would be credited to BeautyStation for directing the consumer. This arrangement
would enable Katebavelzgonia to maintain its own terms when dealing with customers coming through the
BeautyStation website. BeautyStation would still make approximately a 15 per cent gross margin, while saving on
operating overheads. The potential benefit from cross-selling to these customers would remain. This option also had
another advantage: BeautyStation could extend its own promotional offers to potential Katebavelzgonia customers,
which could be lucrative enough to persuade customers to buy from BeautyStation. However, the disadvantage
would be that Katebavelzgonia could become disinterested, which would hamper BeautyStation's negotiating power
with other cosmetics brands. Alternatively, BeautyStation's arrangement with Katebavelzgonia's could make other e-
retailers choose this option as well.

Whatever BeautyStation did would likely play a significant role in shaping the future of the e-retail cosmetics market
in India. Patnaik knew that Sinha would have his own thoughts about that, and it was important to factor in those
considerations as well. Whereas Patnaik worried about consumers and suppliers, Sinha also needed to consider
investors.

This was the biggest challenge that Patnaik had faced in his career. The stakes were high and there was substantial
risk involved. However, he felt that the learning opportunity was tremendous, irrespective of the outcome.

EXHIBIT 1 : % of Revenue of Beauty products

Category % of Revenue
Eye Linear 25
Lipstick 32
Mascara 20
Concealer 8
Others 15
Total 100