Ep. 79: Perfect Diary (Yatsen Group): Cosmetics Ecommerce Superstar and China’s L’Oreal for the Digital Age?

In Episode 79 of Tech Buzz China, Rui and Ying talk about a company that aspires to be “China’s L’Oréal” for the digital age: Yatsen Group, owner of smash hit cosmetics app Perfect Diary (完美日记) among other brands. Though we at Tech Buzz have never directly covered the company, we have mentioned it, including in Episode 70 with Lauren Hallanan; as well during last week’s Q3 Market Trends call (link available through Dec. 9) with BigOne Lab’s Mengyao Ren. Yatsen recently listed on the NYSE, and it’s got a nearly $12 billion market cap.

Listen and follow along with us as we explore Yatsen’s founding story, their evolving strategy, reasons for their success, and the role of clever marketing. We’ll also talk about how the company’s various tactics speak to the evolution of China’s content ecommerce ecosystem. Finally, listeners will hear from Mark Tanner, the founder and Managing Director of Shanghai-based marketing and research firm China Skinny.

Yup, Rui is still researching and writing on ByteDance for her ebook. You can get updates on it and to our other work by subscribing to her newsletter, at techbuzzchina.com. Be sure to also check out the Tech Buzz China YouTube channel, which has some video-only content. Our transcripts are available on our website, as well as at pandaily.com and supchina.com.

If you enjoy our work, please do let us know by leaving us an iTunes review (drop us a note saying you did, and we’ll send you an Extra Buzz newsletter subscription), and by tweeting at us at @techbuzzchina. We also read your emails, at rui@techbuzzchina.com and ying@techbuzzchina.com.

Thank you to our teams at SupChina and Pandaily, and especially Caiwei Chen, Kaiser Kuo, and Jason MacRonald.

Full Transcript

[00:00]So today’s episode is on the newly listed Yatsen Group, which IPO’ed just two weeks ago on the NYSE under ticker YSG. It wasn’t the most hyped IPO… but it was still pretty hot. The company priced at the top of its range, raising over $600mm, and immediately saw a 75% boost on its first day of trading. It’s since come down from that price, but it’s still a nearly $12Bn market cap company. Not bad for a company that was founded in 2016.

Not bad at all. But you might be scratching your head and asking yourself – what is the Yatsen Group? Have Ying and Rui ever mentioned it before? How come you don’t remember ever hearing about the company? And you’d be kind of right, because we really haven’t focused on this company much, although we have had speakers who have mentioned it, such as Lauren Hallanan a few months ago in our Episode 70 on Livestreaming Ecommerce, and more recently, this week on our Q3 Market Trends call with BigOne Lab’s Mengyao Ren.

[01:07]But even when they did, it wasn’t under the name Yatsen Group. That’s because more likely than not, you were hearing about one of their brands instead, and probably one in particular, their most successful and biggest brand to date: Perfect Diary, or 完美日记. Yeah, Yatsen also owns two other brands, Little Ondine and Abby’s Choice, but those are less than two years old, so unless you are a cosmetics super fan, a 彩妆控, then you definitely haven’t heard of them.

That explains, though, why the company decided to go public under the parent entity Yatsen Group. Named after the founders’ shared alma mater, Sun Yatsen University in Guangdong province, which itself is named after the revolutionary leader Sun Yatsen, Yatsen Group doesn’t just want to be known for one brand, of course. It wants to own a whole portfolio of awesome brands, like the company we reference in the title of this episode: L’Oreal.

Yup, that’s pretty much been how the company has been covered in Chinese media. Yatsen’s tagline is usually — China’s L’Oreal, but for the digital age. In today’s episode, we’ll see just how close to being true that is, and what exactly is so special about this company, if anything at all.

[02:47]Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network by SupChina! We are a biweekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech.

Tech Buzz China is a part of Pandaily.com, an English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Ying Lu.

And I’m your other co-host, Rui Ma. By the way, we launched, or maybe re-launched is the better word, our YouTube channel! Subscribe to us to get the latest episodes and also some YouTube-only content that we’ll be putting up, like our investor webinar with Big One Labs on Q3 China Market Trends. Extra bonus, Big One actually shares some very timely data on Yatsen on the call. Be sure to log in — the webinar will only be up for one week!

Finally, we are, as always, still looking for more reviews on Apple Podcasts! Send either of us a screenshot of your review, and we will gift you a free three month subscription to our Extra Buzz newsletter. You can send me an email at ying@techbuzzchina.com. Several of you have already claimed this, and we love it when you do. Thanks so much!

[04:20]Alright, so let’s start with the founding story, which is pretty easy to find, since the company is so new, and has honestly been pretty fantastic with PR since the very beginning. So, let’s go with Yatsen’s so-called 灵魂人物, or key man, Huang Jinfeng 黄锦峰 AKA David Huang. David is Yatsen’s chairman, CEO, and controlling shareholder, and main founder. He owns 28% of the company, so he’s worth $3Bn. And he’s only 37.

As we now know, every one of the founding team graduated from Sun Yatsen University. David studied international commerce and trade there, and graduated in 2007. He joined P&G, that’s Proctor and Gamble, the American multinational consumer goods corporation, straight out of school, and worked there for three years as a market research manager. And that’s where he learned how to work with data, apparently, because data analytics is an important part of the biz and something the company cites over and over in its prospectus as enabling it to predict consumer trends.

It seems that he truly excelled at his job. Because even today, if you search online for guides to getting a marketing job at P&G China, you’ll probably be led to one of his old blogs, titled “我眼中的宝洁CMK,” or “P&G’s Consumer and Market Knowledge Division in My Eyes.” In it, he explains with clarity how the company thinks about how to conduct market research and use data.

[05:51]I mean, everyone uses data these days, but it is true that 6% of Yatsen’s employees work in data analytics, which is apparently higher than the industry average. So the company does take it seriously. Anyway, after P&G, it seems that then the startup bug caught him, because he then left the comforts of working for an MNC and joined a domestic face mask brand, UNIFON, or 御泥坊, for a year, before going to Boston for an MBA at Harvard Business School.

And we don’t know for sure, but it looks like sometime in the middle of his MBA, in late 2013, he went to Bob Xu at Zhenfund, one of the top seed funds in China, and talked about starting a company. Bob was super interested, but felt that David was still lacking experience, and so told him that he could give him $1mm then and there, because the young man had a good shot and was exactly the type of foreign-educated but locally-savvy entrepreneur he liked, but that if he were being honest, David should probably go and continue working at Unifon for a few years more before striking out on his own.

So, timelines get a little murky here, but according to the IPO prospectus, David didn’t leave UNIFON until 2016, and at least as of his departure, he was the company’s COO. In fact, he’s often listed as one of its cofounders, though UNIFON’s history is not that straightforward, the brand had made a few big pivots since its true inception date, so I don’t think that title is really accurate. But all you have to remember is that UNIFON is one of the earliest domestic DTC skincare products in China, and so before Perfect Diary was an ecommerce darling? There was UNIFON.

[08:01]And it has continued to do fine. It’s not a big company or anything, but it’s listed in China, and currently has a market cap of about $1bn. It’s also profitable, albeit mildly, and had the distinction of winning investment from Xiaomi’s Lei Jun after just a 5-minute chat. Our point? It was kind of a big deal in this niche, and for sure having five years of working experience here was one of David’s biggest selling points.

So since David had already gotten Bob’s blessing three years earlier, he went and pitched Zhenfund again in 2016, when he was really ready to start the company for real. According to Zhenfund, after talking for less than an hour face-to-face, only 15 minutes elapsed between the CEO Anna Fang receiving David’s business plan and her sending him their termsheet.

Super high conviction bet there! I mean, it’s not like David was just going there with a powerpoint. He’d apparently already put together a team of 20, including 2 other Yatsen University alumni as well as his wife, and everyone was working full-time already without any funding secured. And the intention was clear. They were going to create a domestic Chinese L’Oreal. You know, the $200Bn market cap multinational cosmetics giant.

That seems to have been the goal from the very beginning. But why the focus on being a domestic Chinese brand? Well, that’s pretty easy to answer, and we might as well take a little detour here. It’s because by then it was starting to be obvious that domestic brands could resonate emotionally with certain customers, and it was quickly becoming a plus, not a minus.
[09:50]Yeah. If we were restricted to using two hashtags to describe Yatsen’s offerings, they would be #DTC and #Chinesebrand. You see, there is a lot of hype in English about Perfect Diary’s digital DNA. Which isn’t to say that’s not how it’s known in China too, but there, there’s also a lot more chatter about the company’s status as a leading domestic brand, or 国货 guohuo.

In fact, that was really one of the core value propositions of UNIFON 御泥坊, its brand story* was about how there was this little town in Hunan province whose residents had discovered that the mud around the area had these amazing restoration powers for their skin, so much so that the imperial palace began asking for it. You know how western and luxury brands are really good at crafting brand origin stories with hundreds of years of history. For a long time, China was pretty lacking on this front. But then Chinese brands learned to storytell too. So here we are.

Yeah, brands like UNIFON were really playing up their Chinese-ness, and it was good timing to do so, because for the past decade, there’s been rising nationalism in China, especially amongst youth. And by the way, that’s only been accelerated by the trade war. Not surprisingly, some brands said that the younger their customers are, the more they are drawn to domestic brands. That extends to food as well, with brands like Three Squirrels, which we covered back in Tech Buzz Episode 48, seeing tremendous support from this demographic.

[11:23]But back to 2017, the first year of Perfect Diary’s existence. The market is actually not as friendly as it is today to local brands. And by the way, even today, with China in covid recovery mode and support for domestic brands as high as it’s ever been, the number for those preferring local brands is just barely over 50%. But in 2017? Lower. So unfortunately for Perfect Diary, a not-so-great product launch and less enthusiasm for domestic brands meant that it was pretty far away from knocking it out of the ballpark. Follow-on investment was looking not so easy to get.

Luckily for David and team, the partner they had to impress at Zhenfund this time was Dai Yusen 戴雨森, a co-founder of Jumei, once upon a time China’s biggest online cosmetics platform and a publicly listed company on the NYSE. Yusen was concerned about the lackluster launch, but not overly so. This team definitely had a chance to become China’s L’Oreal, he thought. So Zhenfund continued to invest, holding onto its 10% ownership into the IPO. It is the second largest shareholder behind Hillhouse.

Right, so even though Zhenfund really did take a lot of risk initially, and Yatsen didn’t start off as being a hot deal, but eventually it did get Hillhouse, which has been going into early stage the last few years. But even the Hillhouse partner who invested said the same thing about the company – the numbers weren’t good, but David was impressive. So this was purely a bet on the founders.

[13:11]I mean, let’s again go back to 2017 and consider what was happening at the time. There were already quite a few DTC or at least Taobao / Tmall-only cosmetic brands in China. Remember, David’s old company UNIFON was one of the more successful ones in this space. And international brands were also very dominant. There wasn’t abundant room for Perfect Diary to grow.

So, as we mentioned, Perfect Diary didn’t do that great its first year. In 2018, however, it changed tactics. Or it didn’t change tactics so much as saw an opportunity, and that opportunity was Xiaohongshu, AKA RED, a content ecommerce platform that we’ve covered in the past on Tech Buzz, way back in Episode 31. In fact, some folks will call Yatsen the first IPO of the Xiaohongshu ecosystem. An exaggeration, surely, but not completely unwarranted.

This is not an episode on Xiaohongshu, so we won’t go over it here, except to say that one way of describing it in the West has been “Instagram and Pinterest sprinkled with a dose of Taobao.” And 2018 just so happened to be the year of Xiaohongshu. Seriously. I mean, that’s the year we covered it here on Tech Buzz as well, and as luck would have it, Perfect Diary went all in on Xiaohongshu at just the right time, right around early 2018, after seeing that its customers were sharing their experiences with the product on the platform.

[14:43]I mean, their strategy* was solid but wasn’t all that special. They would provide the influencers with all the talking points, but then give the influencers autonomy on how to present the content in their own voice, so as to maximize the feeling of authenticity. It was also super good at identifying nano-influencers, so folks who didn’t have that many followers, but who had a great relationship with their fans and had their trust. And this was super effective, and quickly catapulted Perfect Diary into the top seller in its category on Tmall. In 2018, for Singles Day, it was the undisputed #1 in domestic cosmetic brands and second overall. It broke through 100mm RMB or about $15mm in sales in less than 90 minutes. In 2019, it would smash its own record by getting to $15mm in sales in just 13 minutes, and then of course remaining as the category #1 for much of the year as well.

Sure, there are tricks — including lots of pre-sales that happen — and crazy promotions, in order to achieve those kinds of numbers, all of which we’ve talked about on our episode on Singles Day, Episode 29. But that doesn’t really diminish Perfect Diary’s run-away success. So besides being great with KOLs and relatively early to leverage Xiaohongshu, what else did the brand do right? Well, its many awesome collaborations, for one.

One interesting thing to note about Perfect Diary … although it is a guohuo or domestic brand, it actually collaborated the most often with non-Chinese IP. Why’s that? Well, it’s quite consistent with the brand’s own origin story right? The brand’s self introduction goes something like this — a Harvard-educated founder meets a trendy designer in exotic London, and conspire to bring the best of Western cosmetics back to Asia, spawning the creation of Perfect Diary.

[16:57]No, really, that is the brand legend, even though we know that isn’t how it happened at all. But the collabs are still cool. For example, Perfect Diary worked with the British Museum to do a palette inspired by Majolica ceramics. They also launched a series of lipsticks inspired by classic paintings from the Metropolitan Museum of Art in New York City.

And my personal favorite was an eyeshadow collab with the Discovery Channel invoking the colors of wild animals. That campaign was probably the first time I took a serious look at Perfect Diary, actually, and was like, these guys are marketing geniuses. The whole thing looked pretty upscale and sophisticated, but at just $30, was cheap enough to buy on a whim.

OK, so it’s not like super, super cheap, but for those of you who don’t buy cosmetics, a similarly sized YSL Yves Saint Laurent palette will cost you 3 to 4 times as much. And while Perfect Diary doesn’t advertise this per se, it’s well known that they use the same ODMs as the big brands. Remember from our last episode that ODM stands for Original Design Manufacturer, and for Yatsen, their top 3 ODMs Cosmax, Intercos and Aidofec count Estee Lauder, Dior, YSL, and other premium international brands amongst their clientele.

In order to have as much of a smooth workflow as possible with these various ODMs, Yatsen hires quite a few on-site representatives — that is, 驻厂代表, so as to facilitate easier communication. While this is pretty common, Yatsen seems to have done this to a greater degree than its MNC competitors, or at least that’s what many suspect as being the reason behind one of its greatest feats — the launch of nearly 1,000 SKUs on its Tmall store in just one year, which is like twice as high as some of its foreign competition.

Because Yatsen does everything through ODMs though, of course there are some folks who are like, why not just invest in the ODMs? I believe that the Chinese cosmetics market will grow, but how do I know that Yatsen will be the winner? We hear that a lot. And it’s not untrue. I mean, don’t think someone else can’t do to Perfect Diary what Perfect Diary has done to the international brands. You can easily find clones of Perfect Diary products at even more reduced prices. But the packaging and product can look virtually identical.

[19:27]So this is where the quality of the ODMs will matter, hopefully, because these are products people are putting on their faces, after all. But it’s also why the marketing and branding really matter. In addition to online influencers, Yatsen has also spent big bucks on celebrity endorsements. We aren’t gonna name them all here, but there’s been a ton of them, especially ones favored by Gen Z and younger millennials, and these endorsements have been very, very helpful. But …

And there’s always a but right? Because I think we’ve given you a pretty good idea of what Yatsen, and specifically its first brand Perfect Diary, has been able to accomplish. But things are not all so rosy. For one, the company lost money this year after eking out a tiny profit last year. For the first 9 months, it lost $169mm USD on net revenues of $481mm. That’s a negative 35% net margin.

And growth has slowed down. Although it’s just a 4 year old company so I think a 73% year-on-year growth seems still pretty good. It’s just that a lot of people are more concerned about the fact that after doing so well in the 2018 and 2019 Singles Day extravaganzas, Perfect Diary didn’t even make it into the Top 10* for Alibaba’s cosmetics and skincare category this year.

[20:58]Well, to be absolutely fair, it was #9 last year, and the category does combine skincare and cosmetics, and skincare dominates in terms of GMV, so it’s not too weird that Perfect Diary didn’t make it. But what we just said should also give you some pause. Because Yatsen obviously knows that the skincare category is bigger — David worked at UNIFON after all — and so it’s launched a new brand called Abby’s Choice that has skincare as a big component, in addition to makeup. But if you look at the Tmall Singles Day best sellers of the last 4 years, foreign brands have done increasingly better, not worse. So is there reason to think Yatsen will buck the trend? No idea, but they’re up against some very, very stiff competition.

Right, and even when you look at the cosmetics sub-category leaderboards, while it’s true Perfect Diary did come out at #1 at this year, for eye shadow and lipstick, well, the cost of those wins might have been substantial. The data is better for the JD-created June 18th Shopping Festival, which is quickly becoming the other big day to watch for consumer brands, so we’ll look at that. This year Perfect Diary took the crown at #1, beating out Florasis, or 花西子, a fast-rising local brand that ended up at #2. But if you look at the detailed numbers, it doesn’t look so great. Apparently Perfect Diary had to discount goods by more than 60% in order to move that much volume, whereas Florasis got to #2 with just 13% off.

[22:34]And if you attended our investor webinar with BigOne Lab this week, you’ll know that the latest data doesn’t look great either. Tmall GMV in Q3 shows that Perfect Diary is declining, whereas Florasis is gaining. Of course this is just Tmall, and there are still other channels, such as Douyin, which just went independent, and for Perfect Diary it’s estimated that about 15% of its sales is from private traffic such as its own WeChat mini program, but Tmall is for sure its biggest channel still, for most brands really, and still should the one to watch, if you want just to have one number to chew on.

One of the reasons people are citing is because Perfect Diary was slower than other brands to invest heavily in short video and livestreaming. Supposedly, because the brand was so successful on Xiaohongshu, it didn’t experiment as aggressively on Douyin, etc., and lost out on some of the early traffic to those platforms to its competitors. I don’t have exact data to be able to quantify this, but the shift from Xiaohongshu to Taobao livestreaming and Douyin short videos was indeed really, really fast so I wouldn’t be surprised if that happened.

Secondly, the brand has been accused of being a little too clever with its marketing. Anything from selling $12 lipsticks that people realize later is actually much smaller than they expected or is normal-sized, to having lots of what people have complained are fake reviews, paid fans and spambots. The latter really isn’t exclusive to Yatsen though and plagues many consumer platforms and brands in China, so it’s not that alarming.

[24:15]Yeah, it sucks, but such aggressive marketing and sales tactics are commonplace. The government is coming in with some harsh regulations on this, especially around ecommerce livestreaming, but it won’t be that easy to eradicate. Still, I think the biggest problem is going to be the competition. We already mentioned Florasis, the company nipping at Perfect Diary’s heels, but also there is just the increasing cost of acquiring customers online. Online sales accounted for over 86% the revenues, but Yatsen has already been building offline stores and acquiring customers that way.

Yatsen began the stores in 2019 and already has over 200 stores in 90 cities in China, an increase from 40 stores just a ryear ago. I’ve never been inside of one but the photos look pretty cool. The story goes that Hillhouse’s Zhang Lei, Yatsen’s biggest institutional shareholder, told David to definitely build offline stores during a ski trip together in 2018. Except that it shouldn’t be any old store, but a place where girls could “quickly become beautiful.”

Not sure what that means, maybe the many makeup counters they have at these stores, showing girls how to use the products they want to buy. But investors, that’s where a lot of money will be invested. Offline experience stores. Well, that and acquisitions. Yatsen’s already announced the acquisition of a French brand and is close to acquiring another Chinese skincare brand. I mean, this is literally out of the L’Oreal playbook. The company has made a ton of acquisitions over the years.

[26:01]Will it really become China’s L’Oreal though? We thought– it’s way too early to tell. So we wanted to ask some industry experts and see what they thought. We asked Mark Tanner from Shanghai. Mark, why don’t you introduce yourself?

Hi I’m Mark Tanner and I’m the founder and Managing Director of Shanghai-based China Skinny. We do a lot of market research, market strategy, new product development in China, which often involves looking at best practices in market, evaluating and auditing other brands, as well as clients’ brands, and obviously with the success of Yatsen and some of their brands such as Perfect Diary we’ve done a lot of audits of how that’s succeeding in the market in China.

We subscribe to the China Skinny newsletter actually and really enjoy reading it. It’s great for consumer trends, and since so much is e-commerce these days, there’s a bunch of that as well, so go to chinaskinny.com to sign up. OK, so Mark. The question that everyone always asks about Yatsen. It’s not the most original question but we’d be remiss if we didn’t ask it. Do you think Yatsen can be the L’Oreal of China?

I think in the short term Yatsen becoming the next L’Oreal is a bit of a long shot. They are effectively just a marketing company who does a bit of contract manufacturing but obviously with the IPO they’re going to invest some of that in growing the depth and breadth of the company such as offline, they’re acquiring some great companies from abroad that will bring in some R&D, intelligence, and expertise. But if you look at the way Chinese companies operate, they’re incredibly nimble, they’re not prepared to fail, and they’ll try new things. I think that approach will help them in the medium term to really grow and really take on some of the bigger beauty players. But they do have a long way to go. But never write off a Chinese company. They’re incredibly ambitious and have some great traits.

[28:14]OK, so we’re not crazy here, we think it’s too early as well. Funny that you call it just a marketing company that does a bit of contract manufacturing. We’ve definitely heard that characterization. Since you’re the marketing expert here, do you have some more detail to offer on exactly how Yatsen got to its current level of success?

I think a lot of Yatsen’s success can be put down to just really understanding the market, the channels and the landscape and really adapting and trying new things that play on that understanding. They were really early with a lot of trends in China, such as the KOL movement, they were quick to jump on that, particularly the grassroots Key Opinion Consumers. They’ve used about 15,000 KOLs since the beginning, so very effective at that. I think another thing that’s really important is they aren’t dependent on platforms such as Alibaba and JD. They’ve used them really well to build awareness and create trials, but they’ve really won a lot of them over and created loyal customers that bypass that middle man or middle platform and really gained a lot of market intelligence and customer ownership and obviously have much higher margins as a result. So overall they’ve really adapted to the Chinese landscape and will appeal to Chinese consumers as a Chinese brand but with an international angle, both with their partnership with the likes of Discovery Channel and National Geographic, etc. and also some of the OEMs that do the manufacturing. So really a very modern, contemporary company that’s playing to the trends and I’m sure will continue to do so.

[30:09]OK, thanks Mark! I think the point about platforms is really important, although I don’t think they’re quite as independent as they claim. If you read the prospectus, the 23mm DTC customers they claim includes Tmall store customers, and aren’t all customers through private traffic ie 私域流量 via WeChat mini programs and self-branded sites like you’d expect. In fact, that kind of traffic, like we said earlier, is estimated to be only about 15%, and even the prospectus says matter-of-factly that Tmall accounts for the majority of its revenues, although it didn’t offer a more detailed breakdown than that.

Yeah, but the industry doesn’t consider Tmall a marketplace, only JD and VIPshop, so technically Yatsen is correct, even though when I visit Tmall I really don’t see how it’s not a marketplace. Maybe a better indicator would be to see how effectively Yatsen can grow that private traffic. And it’s certainly trying to do so with WeChat group chats and chatbots, but that could backfire, as some customers are already finding it too spammy. What we do know is that its share of sales through private traffic is in-line with other leading DTC brands in China for now. And who knows? Maybe China and the West will stay divergent in this respect, maybe the DTC brands continue to grow on top of Tmall and never become really independent.

I agree the ecosystems are indeed very different, you can review our episode 75 on e-commerce SaaS for that. Although I’m pretty bullish on the independent private traffic ecosystem. But anyway, back to the topic at hand let’s summarize what we learned today. Yatsen Group was founded in 2016, and is trying to be the L’Oreal of China, but for the digital age. Which means that they began with launching DTC brands, and their first one, Perfect Diary, which focuses on cosmetics, pretty much single-handedly propelled the company to an IPO last month on the NYSE, where it’s sitting pretty at a market cap of $11Bn.

[32:31]They’ve both acquired and re-launched as well as created new brands from scratch since then, Little Ondine, Abby’s Choice, and Galenic Paris, if you’re curious, but most of its 23.5mm DTC customers are devotees of Perfect Diary, which was designed for Gen Z. Perfect Diary’s claim to fame is that it uses the same ODMs as the major brands like Estee Lauder or YSL, so you’re getting high quality products and exquisite packaging, but of course at a lower price. Like half or less, for mass appeal. Oh, and they’re super trendy and launch a ton of products, like this constant stream of new SKUs.

So founder-CEO David Huang had already worked at both P&G and a successful local DTC skincare brand previously, so he had a good idea of what he was doing. It still wasn’t easy, though, since the category as a whole is very, very competitive. However, Perfect Diary’s speed of launch, innovative collaborations, and savvy digital marketing really made it stand out. Specifically, it invested heavily in working with influencers on Xiaohongshu AKA RED, a really popular content-powered ecommerce platform. It claims to use lots of data. It mentions data analytics as a key competitive advantage a bunch of times in the IPO prospectus. Anyway, by the end of 2019, the company was nearing half a billion dollars of revenue.

But we’re seeing some brand fatigue. Or something, because it seems to be ceding some market share to domestic competitors like ColorKey and the slightly more upscale Florasis, at least on Tmall, its biggest channel. And while growing nationalism as well as improved branding and product quality have made local Chinese brands much more palatable to consumers, especially younger ones, foreign brands still present very stiff competition, especially when it comes to skincare. The quality factor and brand name are still there. People are careful about what they put on their face!

The path to L’Oreal is going to require a lot of investment. Yatsen is building out its own manufacturing facility in a JV with one of its top ODMs, and it’s also opening hundreds of offline experience stores, same as we’ve seen many DTC brands do here in the US. And if it wants to be a multi-brand big company like L’Oreal, it’s also gotta make some acquisitions, which is what it’s doing. All of this is expensive, which is why the company is pretty unprofitable at the moment. But it’s got some big believers. Hillhouse, for one, is its largest institutional investor and seems to believe in its L’Oreal dreams.

[35:20]I don’t suppose Hillhouse would tell us even if it didn’t. And however you look at it, Yatsen does have a lot of challenges in front of it. 3 Squirrels, the DTC snack brand we covered in Episode 48 still seems still to be doing OK, but Handu*, or r in Chinese, one of the early successes in apparel DTC brands, hasn’t. In 2014*, it was the best-selling apparel brand on Tmall, not just for Single’s Day, but for the entire year. This year though, it’s nowhere to be seen and has scrapped plans for an IPO.

Yeah, at least for the apparel category, we already see that offline brands who have re-oriented themselves to the new e-commerce landscape are the real winners. It seems that it’s easier for the old offline brands to learn how to sell online than for the new digitally native brands to learn how to manage supply chains and provide customer service. Will this also happen in the cosmetics and skincare industry? I mean, is there any reason to suppose it can’t?

Offline brands vs. DTC aside, Chinese brands are moving up the value chain. Really, they are. Yeah there are still going to be a bunch of unpronounceable direct-from-factory brands on Amazon and Wish and whatnot with questionable quality, but there are going to be more and more of these genuinely very well designed, very well thought out brands who have, well, not top top, but better and better quality.

What do you think? Have you bought any Yatsen products? Been to one of their stores? Have a point of view on the company going forward, one of their competitors, like Florasis, or the trend of rising domestic Chinese consumer brands in general? Do you agree with what China Skinny’s Mark Tanner said about Yatsen being basically a marketing company? Reach out, email us, tweet at us, and let us know!

[37:28]Thanks for listening and don’t forget to write us that review for your free Extra Buzz subscription. Have any questions or suggestions? Email us! We really enjoyed putting this together, and we’re always open to any comments or suggestions. You can find us on twitter at thepandaily, at techbuzzchina, and my personal Twitter account is YINGLU2020.

And my Twitter is spelled RUIMA. Tech Buzz China by Pandaily is powered by the Sinica Podcast Network on SupChina. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Caiwei Chen and Kaiser Kuo. Thank you for listening!