China Consumer

Nobody’s perfect

Why Yatsen’s shares have struggled since New York IPO

Yatsen-w

A slowdown for C-beauty brands

In April, when China was in the middle of one of its many Covid lockdowns, Huang Jinfeng, the chairman and chief executive of beauty retailer Yatsen, went to Japan. He told 36Kr that he had a burning question during his trip: “In times when Japan’s economy went through a recession, what did they do to keep the business moving?”

But speculation was rife that another motive for Huang’s journey was that he was hoping to meet Masayoshi Son and that the Softbank boss might buy a stake in the C-beauty (‘China beauty’) firm, boosting its embattled share price.

Yatsen’s New York-listed shares have been on a tumultuous ride since an IPO in late 2020. After racing to a peak of $24.55 in February 2021, they had plunged to a low of $0.39 by the end of May this year, before staging a limited recovery to reach $1.13 this week.

Instead the spotlight in the sector is being taken by rivals, including Bloomage. The producer of hyaluronic acid saw net profits increase from Rmb361 million to Rmb473 million in the first half, with a roster of clients including Estee Lauder, L’Oreal and Unilever.

The first half was more of a disappointment for Yatsen’s local rival Shanghai Jahwa, which has ranked consistently as China’s largest manufacturer of skincare goods, making products under a slew of brands like Herborist, Maxam and Dr. Yu. Jahwa is still the largest beauty brand by sales, although revenue dropped 12% to Rm3.7 billion during the period. Net profit went down 45% year-on-year to Rmb158 million too.

It blamed the slowdown on the lockdowns around the country, which have created inefficiencies in the supply chain and prompted lower spending from shoppers. Yatsen, which reported a net loss of Rmb550 million over the period, made similar comments about its own business (it has reported six consecutive quarterly losses).

Yatsen’s flagship brand Perfect Diary had been touted as one of most successful C-beauty brands. But it has struggled to keep a sure footing after an initial period of spectacular growth, when it focused on livestreamers to promote its products. After 2020 it started to expand its offline presence but the strategy hasn’t delivered the returns that company bosses hoped. Instead Yatsen has been retreating, with the closure of 58 poorly performing stores. More outlets will be closed in the months ahead, it says.

Critics say that too much of Yatsen’s early success relied on heavy discounting and other promotional tactics that delivered a quick but short-lived impact on sales. Another challenge is that investors now have much more insight into how it grew its underlying business so rapidly, including confirmation of the massive spending on marketing (Yatsen still spends a much higher proportion of sales on marketing than local rivals and foreign brands, leading to questions about the sustainability of the strategy).

In a bid to broaden its reach, Yatsen has purchased higher-end skincare brands like Britain’s Eve Lom and France’s Galénic. Sales in this premium segment have been growing, the company highlighted in its earnings call last month. Better performance in its skincare business, where gross margins are higher, has offset some of the losses in cosmetics, it said.

But critics reckon that Yatsen needs to do more to revamp its portfolio of products in China. The influx of newer C-beauty brands like Colorkey, Leemember and Chioture, which sell goods at cheaper prices than Perfect Diary, has taken market share from incumbents, for instance. “In the past, Perfect Diary appealed to consumers because it was perceived as the ‘cheaper alternative’ for cost-conscious consumers. But as the price disparities narrowed, it quickly lost its appeal to those shoppers,” says Duojiao TMT. “As more Perfect Diary substitutes appear, the company ends up competing on price because of its lack of other competitive advantages. That’s a vicious circle and it becomes very easy to lose money.”


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