Is the Chinese cosmetic unicorn Perfect Diary sustainable?

Perfect Diary, the Chinese cosmetic brand that has nerved some international peers in China, reported a growth of 6% in its net revenues for the third quarter in 2021. Although the rise, from 1.27 billion RMB ($198.84 million)  to 1.34 billion RMB ($209.79 million), from the previous year’s Q3 earnings is applaudable, behind the single-digit revenue growth is a persistently high investment in product promotions.

Daohong Yang, Chief Financial Officer and Director at Yatsen (Perfect Diary’s parent company) revealed that marketing expenses at Perfect Diary, for the third quarter of 2021, were 911.3 million RMB ($142.7 million), or 67.9% of the total net revenue. Though it was a slight year-on-year pick up from 67.5% in 2020, some have cast doubts on the sustainability of this business as nearly 70% of its revenue going for marketing is concerning for the business.

Born in 2017, Perfect Diary has grown into a unicorn of the Chinese cosmetic industry in just four years. Leveraging its online ecosystem, the brand has not only caught up with global peers, but even has shaken their status in the Chinese market thanks to its deep understanding of consumers at home.

The brand’s focus on digital marketing turns out to be a double-edged sword. On the one hand, the brand has gained more private traffic, with the introduction of its own virtual influencer Xiao Wanzi. In addition to developing its own KOL, Perfect Diary has been long investing in real KOLs. According to CBNdata, the brand had collaborated with more than 15,000 KOLs as of last November. Over 800 of which possess millions of followers, including one of China’s top live streamers, Li Jiaqi, who also goes by the name of King of Lipsticks.

While these engagements would undoubtedly contribute to the increase in revenue, the downside of this strategy is a considerable cost in exchange for online traffic given the competitive digital marketing landscape in China.

As the brand levels up from targeting university students and working-class women at home to a global audience, Perfect Diary also brings more high-profile celebrities as its brand’s spokespersons. Included are Zhou Xun, the internationally acclaimed Chinese actress, who also represents global labels such as Dior and Chanel. Following Zhou Xun, the endorsement of Troye Sivan, an Australian singer-songwriter, has also shown the brand’s ambition to win over global young consumers.

All these efforts would be inevitably financially draining for the business, showing the high-risk high-reward strategy that Perfect Diary executes in order to grow in the fiercely competitive cosmetics industry.

Although digital marketing remains a crucial strategy, particularly for cosmetic brands that market in China, it is a territory close to saturation with a growing number of players joining the race. As Perfect Diary is on its way towards a global entity, a sustainable growth strategy would be beneficial for the brand in the long term. To achieve healthy development, the brand would not only need to review its current marketing model but also distribute more attention to product innovation.

Whilst it is clear their current strategy has worked so far, moving to an international brand and the costs involved for ambassadors more universally could result in losses for the company. A careful and more considerate approach may be needed to develop the company beyond the limits of China.

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