BEIJING, July 14 (TMTPOST) -- The cosmetics industry is at a new turning point. This year, investment institutions left the domestic beauty track in a mass exodus, but major beauty brands continued to increase their investments in this sector.

Source: Visual China

On June 14, Funny Elves, a domestic beauty brand focusing on foundation makeup, announced that it had completed Series A funding of tens of millions yuan, which was led by Botanee, the parent company of Winona, and followed by Edge Ventures. It is the first domestic beauty brand invested by Botanee. A month ago, L'Oreal and Shiseido, two international beauty giants, successively set up their first China investment fund, aiming at $100 billion beauty market in China. In the past year, listed companies such as MARUBI, Botanee, Lily&Beauty and Bloomage Biotech have also launched relevant funds to invest in beauty and skincare.

However, affected by multiple factors such as pandemic-related lockdowns, logistics halts, and the rise in the price of raw materials, Chinese cosmetics consumption has remained depressed. According to consumer goods data in May released by the National Bureau of Statistics, total retail sales of domestic cosmetics fell by 11% year-on-year, which was the first negative growth in May in the past decade.

During China’s June 18 Shopping Festival, among the cosmetics and skincare categories on Tmall’s pre-sale platform, the top3 brands were all international brands, followed by PROYA and Winona with sales of 100 million yuan. Perfect Diary fell out of the top10 list of cosmetics pre-sale amount last year and its ranking this year dropped to 20.

The cosmetic industry in China is going through a difficult period, while beauty brands have become the most active Venture Capital in new consumption. What are these beauty brands that foray into VCs scrambling for?

What are beauty brands investing in?

In addition to Botanee’s investment in Funny Elves, what are Chinese beauty companies investing heavily in?

In May this year, S'YOUNG announced its equity investments in the female health and skincare brand Young Doctor. It was upbeat about the latter’s oral beauty brand Young Doctor and oral beauty market.

In April this year, Bloomage Biotech purchased a 51% stake in Beijing Yek Bioengineering Co., Ltd for 233 million yuan, and entered the collagen industry.

In May this year, Lily&Beauty said that it invested in the body care brand Kookie 8th, counter level high-end makeup and skincare brand Exacting in 2021, whose target customers are Generation Z, focusing on the incubation of start-ups in the large consumption field.

MARUBI has invested in more than 11 projects since last year, including men’s personal care brand dearBOYfriend. In February this year, skincare local brands such as Lanseral and YRNZHI also successively obtained primary market financing, including star institutions such as Plum Ventures.

Oral beauty, body care, cosmetics, men’s personal care... New consumer brands related to beauty and health are the ecological fields concerned by Chinese beauty brands.

More closely related to sales channels of beauty products are video and social platforms such as TikTok, Xiaohongshu and Bilibili, and short video and live MCN agencies with goods have become the second type of investment targets of these beauty companies.

Funny Elves, a cosmetics brand recently invested by Botanee, was formerly Meixi, a beauty MCN organization. It has focused on skincare since May 2020.

In May this year, L'Oreal, a big Western brand, announced the establishment of Shanghai Meizifang Investment Co., Ltd., the first investment company in Chinese market, committed to investing in innovative beauty technology. Shiseido has also set up an investment company Ziyue Fund in China, focusing on investment opportunities for emerging brands in frontier markets such as beauty and health and related upstream and downstream technical service companies. It also cooperated with Boyu Capital which has a keen business sense to jointly explore potential projects, with a registered capital of 501million yuan. The latter has invested in Perfect Diary of Chinese brands.

Three years ago, L'Oreal began to invest in beauty technology in Chinese market, and has implemented more than 30 projects, such as the synthetic biotechnology innovation enterprise Bluepha. The purpose is to test the water by forming limited partnerships and reaching innovative enterprises. Now it has set up an investment fund to become VC itself.

From acquisition, self-development of brands, trying LP, to joint incubation with VC institutions, focusing on beauty technology and innovation, the investment logic of European and American beauty giants in China is also undergoing a subtle change.

Skincare brands focus on foundation makeup

With cosmetics no longer being a darling to investors, why do beauty brands still flock to invest? If Western beauty giants value the potential of Chinese beauty market and new brands, what attracts Chinese brands?

Public information shows that Funny Elves invested by Botanee focuses on durable makeup products suitable for Asian skin. It has launched two product lines: fixed makeup powder and liquid foundation. The brand has its own R&D laboratory and international supply chain. The formulators are all from international front-line R&D institutions.

In fact, Botanee has made makeup products before, and its brand Winona has launched BB cream, isolation cream and other makeup products for sensitive skin. Now, its investment in Funny Elves may be more to enhance the competitiveness of cosmetics products.

Earlier, MARUBI and PROYA began to invest in Korean cosmetics and other cosmetics brands. The common features of these brands’ investing activities include increased investments in foundation makeup. 

The foundation makeup categories in China are growing rapidly, and local brands have the opportunity to break through. Dewy Lab, a pure beauty brand, has completed a ten million dollar pre-A round of financing, forming a matrix of three single products: powder, concealer and loose powder. The investors include Xiaohongshu. The sales of Blank Me, which specializes in foundation makeup, and Kiko, which owns hot-selling powder product, continue to grow at a high speed. Botanee invested in Chinese beauty brand Funny Elves for the first time, which is also attracted by the growth opportunity of the foundation makeup in cosmetics.

Source: FunnyElves Weibo Page

In 2021, Funny Elves made profits. Its online sales exceeded 200million yuan, and its revenue increased by 13 times year-on-year.

In 2017, MARUBI was upbeat about the potentials of the cosmetics market, investing in the Korean cosmetics brand “Passional Lover”, and listed the “cosmetics production and construction project” as one of the fund-raising investment projects for the company’s initial public offering. But in the following years, the performance of“Passional Lover” in cosmetics has been lackluster.

Over the past year, the revenue growth of MARUBI continued to suffer setbacks. Last year, the profit after deducting non-recurring gains/losses decreased by 56%, and in the first quarter of this year, the profit after deducting non-recurring gains/losses decreased by 40%. Since last year, MARUBI has invested 741million yuan into online sales, and launched the new product of“Passional Lover” PL invisible liquid foundation. In 2021, the “Passional Lover” brand achieved profits, with a year-on-year increase in revenues of 463.49%, and in 2021, the overall cosmetics revenue of MARUBI increased by 247.87% year-on-year, and the gross profit margin increased by 7.27% year-on-year.

Take TIMIGE, a cosmetics brand in which PROYA has a stake, as an example. Before being invested in 2019, it was only a professional cosmetics company. But it has developed rapidly in recent years.

Taking the cosmetic / highlight and concealer as the market breakthrough point, TIMAGE adopts the strategy of large single product and starts from the mid-range price of 200 yuan. In 2021, the revenue of TIMAGE was 246million yuan, with a growth rate of 103%. In the first quarter of this year, it turned loss into profit, becoming the second largest growth curve outside the PROYA brand under PROYA Group. On Tmall platform, during China’s 618 shopping festival this year, TIMAGE has also become one of the brands whose growth ranking has improved significantly. Its master high gloss cosmetic disk products have maintained the first total sales in the brand flagship store.

Companies starting from skincare brands may have found it difficult to cross from the skincare business to the cosmetics business, but now they are making it through investment. The investment layout of Botanee, MARUBI and PROYA all conform to this way, which gradually move from the main business to the market with more categories, seizing the blank branch of foundation makeup, and create new possibilities.

Chinese beauty industry is undergoing transformation

Domestic and foreign beauty enterprises have continuously established investment companies or invested in beauty tracks, which reflects that Chinese beauty market is undergoing a transformation.

One of the changes is that Chinese beauty brands are still in the era of consolidating the technology base, and are slowly advancing along the technological upgrading. The cosmetics industry has always been driven by marketing, and technology does not account for a large proportion. However, technology upgrading and beauty technology are expected to become the main battlefield of Chinese cosmetics brand competition in the next few years.

The reason why efficacy skincare products are so popular is that they have encountered the dividend in this process. In the first quarter of this year, Yetsen Global, the parent company of Perfect Diary, experienced a rare decline in revenue and the situation of cosmetic was weak, while skincare became its new profit growth point. In the field of efficacy skincare, local brands represented by Winona, Dr.Yu and Biohyalux also seized the bonus, holding the R&D patent of sensitive skin, with a significant growth rate and continued to lead.

Just as functional skin care products have become the focus of Chinese consumers in recent years, both Funny Elves and TIMAGE are exploring opportunities from the subdivided categories and the facial makeup with more emphasis on skin quality. They have set up their own R&D team to innovate the ingredients and formula system, trying to remove the stereotype of “emphasizing marketing rather than R&D”.

An unavoidable reality is that in the beauty industry, compared with the efficacy skincare with technical barriers, the threshold of cosmetics category is lower, but the ceiling is high, lacking more local brands that can enter international market.

The cosmetics industry pursues “beauty” and needs to constantly promote new products, while the repurchase rate is low, making it difficult for affordable brands to make profits. Investors who pay attention to the cosmetics track explained to TMTPost app that Perfect Diary can produce 40 SKUs a month. However, for a cosmetics brand, taking the cosmetics brand Maogeping , which is closest to major Western brands on the price and gross profit margin, as an example, the repurchase rate of skincare products is generally 30%-35%, and the cosmetics are usually only between 10% to 20%. This means that the cosmetics product line needs powerful innovation capability and OEM supply chain.

Perfect Diary

Compared with skincare products, cosmetics have higher requirements on the history, culture and artistic taste of brand content. Chinese cosmetics are generally traded for the market at low prices or parity. It has become a habitual thinking for young people to find affordable substitutes in local cosmetics for big brands. After spending a lot of money on marketing, the profit of Chinese cosmetics is reduced, and it is even more difficult to become a medium and high-end brand.

Chinese cosmetics brands are in a difficult period. Some enterprises have been busy promoting and selling goods without paying attention to the pursuit of brand premium and “high gross profit”. But small profits and quick turnover will not be the outlet forever. Domestic and foreign beauty brands with venture capital have brought more opportunities to local cosmetics enterprises. To a certain extent, major beauty brands have broadened their business and arranged investment, which has brought opportunities for the reshuffle of the domestic beauty market. However, most of them just learn from strong points and close the gap, which is ultimately a sideline.

A silent beauty “war” may be imminent, and the Chinese beauty market is set to experience great changes. Chinese beauty makeup brands need to move forward to build their own brand and grow their niche business.