Perfect Diary was the poster child of China’s digitally empowered new consumer economy, the darling of the capital market, and a digital marketing case study. But there are many untold stories about this seemingly overexposed brand.
Photo from CFP
By LOU Qiqin
Once upon a time, HUANG Jinfeng set out to raise a unicorn named Perfect Diary to become a mighty marketing machine and the poster child of China’s consumer economy. By 2017, and still less than two years old, Perfect Diary was the third biggest makeup brand in China, behind L’Oreal and LVMH. Darling of the capital market, and a case study in digital marketing, sales had increased eight-fold by 2020, and so did profits.
Today, it is almost impossible to navigate China’s many photo-sharing and short video platforms without encountering the Perfect Diary hashtag. Innovative marketing was key to the brand’s dizzying rise, but questions are now being asked about the substance behind the pizzazz.
US-traded shares in Yatsen, the parent company of Perfect Diary, have gone from a February high of US$25 (160 Chinese yuan) all the way down to the current US$3. Jiemian News talked to Huang Jinfeng who shared a very different perspective of a story that has been told many times before.
Jiemian: It took Perfect Diary less than five years to go public, but the shares of your company have since shrunk from US$25 to US$3, and in the Singles Day shopping spree, perfect diary ranked only the fourth among domestic makeup brands, do you think the company has run into obstacles?
Huang: I would say Perfect Diary is still growing. It takes about 10 years for a brand to fully mature. Perfect Diary is barely five. Growth might appear to be slowing but our base is much larger. We are getting bigger.
We are attracting more customers, customers with spending power. We’ve ventured into high fashion. We have a much wider range of products, and we are opening more stores.
Perfect Diary had to become a fashion brand before we started making lipstick. Eyeliners and mascaras are functional tools. Lipsticks are fashion statements. But we don’t want to be just fashionable. Perfect Diary should mean sleek technology and great service. Almost half of our customers buy in person, from brick-and-mortar stores. We wouldn’t be able to reach them if we had remained online-only.
Jiemian: But what do the customers really think of Perfect Diary, do they accept it as a fashion brand, or is your makeup still a functional tool to them?
Huang: In 2019 when Tmall asked Gen Z about their favorite domestic brands, we came second to Huawei. Customers are sophisticated these days. They have used all kinds of fancy foreign products but still like us. So, first of all, they see Perfect Diary as a good brand: inexpensive, but definitely not cheap.
We might be the most popular domestic makeup brand but we are still very far from the most popular of all makeup brands. Less than 10 percent made Perfect Diary their first choice. We’re famous, but we’re certainly not glamorous, not yet.
We didn’t work on our brand image at all until 2019 - we focused on products. And we made some excellent choices. Customers remembered the products but not necessarily the Perfect Diary brand. We started to change that in 2020 with a revamped visual and a stable of A-list celebrities as brand ambassadors. We’ve made some progress, but it will probably be another one or two years before we get there.
Creating an image is both science and art. Building a brand is a long, organic process. Many things cannot be accelerated, such as bonding with customers.
A useful measure of success is how likely it is that a customer recommends a product to someone else. We call it NPS (net promoter score) in marketing theory. Another method is to check how many more positive words are associated with a brand. The more the better.
Jiemian: Many say Perfect Diary burned money fast to launch its IPO which turned out to be quite successful. That stimulated the market and investors started following suit, pouring money into the "new consumer economy".
Huang: It was never easy for us to raise money. In August 2017, I met eighty investors before finding someone willing to give us anything. In January 2019, it was, again, a hard fight. We were shooting for a 2-billion-yuan (US$300 million) valuation but no one believed it, even though we made a billion in sales the previous year.
People like to say that Perfect Diary burns money like crazy. It’s complete nonsense. Perfect Diary made 1.5 billion yuan in 2019. That made back all the losses of the previous three years. How is that burning investors’ money?
I’m always against expanding in haste before the business model is ready. Plus, there is no “winner takes all” in the makeup business. The biggest player takes up about 10 percent of the market, no matter how much money is burned.
Jiemian: The capital market cooled down to consumer startups in 2021. Do you think it’s bad for brands?
Huang: No, I think it’s the best time for them. Because only investors who truly understand the consumer market have remained. As a startup, you want to work with people who actually know what they are doing.
Startups can be held hostage to capital and with flawed business models imposed upon them which lead the companies to nowhere but failure. Capital doesn’t make industries. Great companies make industries.
The market is so much better than five years ago when I got started. Back then, no one was enthusiastic about a small domestic makeup brand. It’s quite the opposite these days. I’m very confident that a lot of great Chinese brands will be born in the next 30 years.
Jiemian: But in this year’s Singles Day sales…
Huang: It’s because big international brands gave out big discounts this year. I saw a 360-yuan lipstick that was sold at 120. If buyers are given the choice between a 120-yuan foreign brand or a 90-yuan Perfect Diary, many choose the foreign brand.
That’s why the brand image is crucial. It’s the only way to compete. Domestic brands are still weak from this perspective.
Jiemian: So when foreign brands start doing what domestic brands have been doing all along, domestic brands don’t really have an advantage?
Huang: Brand image is important but isn’t built overnight. Consumers are smart. I have faith in them. You can spend a lot of money on social media but you are still not guaranteed a good outcome, but investment in products is always worth it.
Product is king. Great products make great companies. Great companies make great industries.
Yatsen has another two makeup lines, Abby's Choice and Pink Bear, and has bought a few high-end skincare brands including EVE LOM and Galenic, inviting comparison to L’Oreal.
Jiemian: What is Yatsen’s plan for all these competing brands? Will Yatsen be China’s L’Oreal?
Huang: A single brand may fall in and out of favor but a portfolio can probably stay on trend for a long time. Some companies start a second line hoping to replicate the success story of their first, but this rarely works out because the market has moved on. Many of us in the team learned the hard way earlier in our careers, so we decided that Yatsen would do it differently.
Different brands follow different paths and it’s hard to get every single step right. But at least we can build the infrastructure that benefits all. By infrastructure, I mean our supply chain, marketing machine, distribution channels and product experience. It’s like we built the road for Perfect Diary. Other brands can run on the same road, but we don’t just focus on the road ahead. We envision a highway and build it.
Since we built a highway, we want more cars on it. Either we start new brands, or we buy existing ones. The latter is faster. Most of our supply chain, marketing, and IT processes can be directly adapted to new companies. Of course, it takes some reconfiguration but it’s fast reconfiguration.
There are many exciting goings-on in R&D. Some may transform the entire industry. It’s a great time to be in cosmetics. I’m going to apply our R&D directly to the Chinese market. Big international brands don’t prioritize China. It’s not their biggest market, but it is mine.
Our team has always been very diverse. Many of us have studied overseas and worked abroad in multinational corporations. We can work with anyone.
We don’t want to be L’Oreal. What worked for L’Oreal decades ago doesn’t work now. We will find our own path. I will mobilize the best R&D teams to make life better for my customers. In the next five years, well over half the growth in the cosmetics world will come from China. So yeah, we’ll focus on that.
Jiemian: What worries you the most at the moment?
Huang: The IPO changed the team’s plans. I thought it would take ten years to go public, but the pandemic changed everything. We were losing money in Spring 2020. The market was panicking and inside the company, there was a lot of talk about downsizing. Six of our seven warehouses were shut down. Our contract manufacturers were facing huge financial shortfalls. It cost us over a hundred million to prevent a total supply chain meltdown.
We decided that instead of scaling down, we were going to expand. We would open 200 stores, spend a billion on new factories, and pour resources into IT and R&D. We went public to raise the money.
I could have downsized Perfect Diary, tried to turn a profit, sold it, and retired. But that’s not what I want. There was a period when our market cap was above 100 billion yuan. I could feel the team was a little too self-absorbed. We are playing the long game. That’s why we chose to advance when everyone else was retreating.
Jiemian: Despite everything you say, R&D takes up only a small fraction of Yatsen’s revenue.
Huang: It’s not just about percentages. It’s also about absolute value. You need to look at it by product. We make about 1 billion from skincare and spend 200 million of that on R&D. That’s 20 percent.
Jiemian: Perfect Diary is best known for is its army of influencers and heavily filtered photos. What will happen to Perfect Diary when clicks can no longer be bought so cheaply?
Huang: Perfect Diary became a hit in less than a year, not because we bought clicks, but because we sell great products at affordable prices. We are obsessed with products, we just don’t shout about it.
If a product is bad, more clicks only spread bad publicity. On the other hand, customers find good products by word of mouth. We spent 18 months on product development before all the web traffic maneuvering. It’s a tactic, not a strategy. Web traffic is crucial, but it’s not the only thing we are obsessed with.
Yes, we pumped up web traffic, but we also saw higher conversion rates, more repeat purchases, and better reviews, because customers love our products.
