YATSEN Color Cosmetics Continues to Decline
- Chaileedo Press
- Apr 29, 2023
- 5 min read
YATSEN, once known for its colored cosmetics brand Perfect Diary, has seen its makeup decline year on year and its skin care rise.
On the evening of April 26, YATSEN (NYSE: YSG) released its 2022 annual results report. According to the announcement, YATSEN achieved revenue of 3.71 billion yuan ($536.7 million) in 2022, gross margin for the year increased 1.2 percentage points year-over-year to 68.0%, and Non-GAAP net loss narrowed 53.8% year-over-year.
In November 2020, YATSEN, the parent company of the famous beauty brand "Perfect Diary", was listed on the New York Stock Exchange after only four years of its founding. In addition to Perfect Diary, YATSEN E-Commerce's beauty brands include Little Ondine, Abby's Choice, Galenic, DR.WU, and EVE LOM.
From the financial report, the narrowing of net profit was due to a series of "cost reduction and efficiency improvement" on the one hand, and a significant increase in revenue from the skin care business on the other.
YATSEN skin care business grew strongly. 2022 skin care business achieved revenue of 1.24 billion yuan ($ 179.4 million), up 45.2% year-on-year, accounting for 33.5% of total revenue. Its three mid-to-high-end skin care brands' net revenue increased 99% year-on-year in 2022.
On the other hand, the color cosmetics business is still declining. 2022 annual color cosmetics revenue was 2.4 million yuan ($347.2 million), down 36.5%. According to YATSEN in its earnings report, color cosmetics sales were impacted by the following factors: continued weak market demand for color cosmetics products, increased industry competition from domestic and international brands, a decrease in the number of offline experience stores, and our decision to limit discounts and promotions as our brand building strategy is geared towards sustainable growth.
Color cosmetics continue to decline
CHAILEEDO found that the profitability of the color cosmetics segment, which helped make it famous, has been declining year by year according to the financial reports of YATSEN in the past three years. And, the color cosmetics part of the company's revenue ratio is also declining year by year. According to the data, in 2020, the net revenue of the color cosmetics section of YATSEN was 4.92 million yuan ($ 711.8 thousand), accounting for 94%. In 2021, the net revenue of the color cosmetics section fell to 4.87 million yuan ($704.6 thousand), accounting for 83.4. In 2022, its percentage even fell to 65.2.
The iconic brand in the color cosmetics segment of YATSEN is Perfect Diary. Once the Perfect Diary product layer was all the rage. Just one year later, the brand broke 100 million yuan ($14.5 million) in sales during Chinese Double 11 Shopping Festival in 2018. From January to December 2019, Perfect Diary took the top 1 in the color cosmetics category in the Tmall annual promotion. In the 618 shopping festival in 2020, Perfect Diary won the top 1 in the color cosmetics category on the JD platform.
There are many reasons for the loss of the color cosmetics part of YATSEN. One of the more striking ones is the brand's excessive investment in marketing. The data shows that from 2019 to 2021, the marketing expense ratio of YATSEN climbed from 41.27% to 68.59%, and the proportion of marketing expense to revenue was 41.27%, 65.20% and 68.60% respectively. The high marketing investment has directly led to the decline in overall net profit. 2018-2020, YATSEN R&D expenses are only 2.641 million yuan ($382.1 thousand), 23.18 million yuan ($3.35 million) and 66.51 million yuan ($9.6 million).
In an interview with China Entrepreneur, the founder of YATSEN said that the main reason for the company's marketing expenses of 4.006 billion yuan ($579.6 million) in 2021 is that industry-wide competitors have increased their marketing investment resulting in higher marketing expense levels.
Scaling back operating expenses
Since 2022, the cosmetics industry as a whole has been under pressure to move forward. According to data from the National Bureau of Statistics, retail sales in the cosmetics category were negative for nine months throughout 2022, with the cosmetics category in year-over-year decline throughout the fourth quarter. For the year as a whole, China's beauty retail industry declined 3.2% year-on-year, the lowest level in the past five years.
Clearly, last year was more of a challenge than an opportunity for most beauty companies. Against this backdrop, in May last year, YATSEN firmly proposed and began to promote its "New Five-Year" strategic transformation plan, steadily promoting "fat reduction and muscle building" and shifting to high-quality development.
Judging from the company's fourth quarter results, the effect of YATSEN's transformation strategy of "reducing costs and improving efficiency" is more obvious. The financial report shows that during the reporting period, the company's operating expenses fell 47% year-on-year, benefiting from the optimization of revenue structure and efficiency improvement, the company's gross margin continued to rise, and the gross margin in the fourth quarter steadily increased to 71.1%, up 6.1% year-on-year and 2.1% year-on-year.
According to the financial report, in the fourth quarter of 2022, Yat Sen's total operating expenses decreased to $792.9 million from $1.49 billion in the same period of the previous year, down 47% year-over-year; while sales and marketing expenses decreased to $535.2 million from $1.08 billion in the same period of the previous year, and the sales and marketing expense ratio decreased to 53.2% from 70.7% in the same period of the previous year.
In response, Yang Donghao, Director and CFO of YATSEN, said, "The phased results of the company's strategic transformation have been verified by the market. With three consecutive quarters of positive net cash flow from operating activities, we are confident that we will further realize our strategic transformation plan this year." The financial results show that YATSEN E-Commerce generated net cash from operating activities of 110 million yuan ($15.9 million) in the fourth quarter. As of December 31, 2022, the company had 2.63 billion yuan ($380.5 million) in cash, restricted cash and short-term investments.
Skincare segment becomes major growth curve
And, YATSEN, which lost in the color cosmetics segment, turned to the skin care segment.
The financial report shows that the company's skin care business achieved revenue of 470 million yuan in the fourth quarter of 2022, up 42.4% year-on-year, accounting for 46.9% of total revenue, and the skin care business grew by more than 30% for three consecutive quarters. For the full year of 2022, YATSEN's skin care business recorded revenue of 1.24 billion yuan ($179.4 million), up 44.8% year-over-year, and accounted for 33.5% of total revenue. In other words, the performance of YATSEN's skin care segment now accounts for more than 30%.
It is worth mentioning that YATSEN has also continued to increase its investment in R&D to ensure continuous product innovation. On the same day of the above-mentioned earnings release, YATSEN also simultaneously announced the company's new Chief Scientific Officer, Cheng Jing, who was previously the Vice President of Research and Development at Estee Lauder Group's Asia Pacific Research and Development Center. The financial report shows that the company's annual R&D investment in 2022 will total 130 million yuan ($18.8 million. The R&D expense ratio continued to increase from 2.4% in 2021 to 3.4% in 2022, with the R&D expense ratio continuing to rank in the top tier of global levels. As of December 31, 2022, YATSEN E-Commerce had applied for 174 patents worldwide, 43 of which were invention patents (some of which were in the process of being transferred).
At the earnings meeting, YATSEN stated that its transformation strategy is divided into three major steps: first, improve gross profit margins and achieve positive operating cash flow. Second, continue to adjust the category structure, increase the proportion of skin care, adjust the channel structure and improve operating efficiency. Third, achieve profitability and the company enters a new growth phase across the board. "At present, we have completed the first two steps, and for the third step, we have completed the first half of the step. Next, we will focus on building a new growth model."
From this point of view, YATSEN has transformed from a "color cosmetics company" to a dual race track company of color cosmetics + skin care. From the current financial report data, YATSEN E-commerce skin care category performance is also relatively bright. In the future, whether the "New Five-Year" strategic transformation plan will be successful or not is still to be tested by the market.
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