AVCJ Awards 2020: Deal of the Year - Mid Cap: Perfect Diary

Within two years of its formation, Perfect Diary had become China’s largest color cosmetics brand, trailing only LVMH and L’Oreal in overall sales. Its parent, Yatsen Holding, now trades on the New York Stock Exchange with a market capitalization of $12.4 billion.

The company is a striking example of a Chinese brand that has gained prominence on the back of an intimate understanding of local tastes and the effective use of online marketing and distribution channels. However, in the spring of 2018, when Rui Han, a partner at Gaorong Capital, first encountered Perfect Diary, the company’s future was uncertain.

“A brand-name VC fund had just torn up its term sheet for Perfect Diary, it was a very difficult moment. During that time, many financial advisors ignored the company and investors did not believe in its plans,” says Han.

Han describes that period as “the eve of the breakout.” Nevertheless, Gaorong decided to invest, leading a $100 million Series A round. Its reasons were threefold.

First, on an industry level, content related to makeup was increasingly popular on China’s emerging short video and live broadcast platforms, which was broadening the customer base. Second, on a deal level, Han found that Perfect Diary’s key data were consistent with industry indicators, while its long-term vision to be a two-in-one channel that combines brand and platform was credible.

Last but not least, Han had confidence in the founding team. Gaorong likes teams that remain true to their values and never compromise regarding consumer interests or the company’s long-term interests. Perfect Diary fit the bill.

“They pursue ‘ultimate or global optimal solutions’ instead of ‘step-by-step optimal solutions,’” Han says. “They resolutely invest in the right direction with no thought to short-term returns. When the business was enduring its most difficult period, it still insisted on introducing a management trainee plan, and the founding team set aside one day a week to teach these trainees.”

Hit factory

Yatsen added another brand to its portfolio with the acquisition of Shanghai-based Little Ondine in 2019. Within eight months it achieved the same level of monthly gross sales as Perfect Diary did in its first 12 months. A third brand, Abby’s Choice, launched in 2020. It took three months to reach the same sales target.

These three brands together serve more than 23 million customers. Gross sales reached RMB3.8 billion ($567 million) in the first nine months of 2020 – compared to RMB3.5 billion for the entirety of 2019 – with 90% coming through online channels. A fourth brand will be launched imminently. In October 2020, Yatsen agreed to buy skincare brand Galénic from Pierre Fabre, a French pharmaceutical and dermo-cosmetics group.

“Perfect Diary is not just building a brand, it is building a highway. It wants to be at the industry infrastructure level. Offline stores, WeChat groups, and the Tmall flagship are all pieces of infrastructure on this highway. The first brand, Perfect Diary, was just running on it as the first car. There would be second, third, and fourth cars, such infrastructure creates great value,” says Han.

The company’s success attracted more investors, with $700 million raised across six funding rounds ahead of a $616.9 million IPO in November 2020. Two rounds closed in 2020, starting with a $100 million Series D featuring Boyu Capital, Gaorong, Hillhouse Capital, Hopu Investment, Longhu Capital, Tiger Global Management and VMG Partners. The subsequent Series E was led The Carlyle Group and Warburg Pincus.

Hillhouse was the largest external shareholder at the time of the IPO with 13.7%. Gaorong and ZhenFund – which provided the angel round – held 8.4% and 9.5%, respectively.

Perfect Diary attributes its rapid growth to a digitally native direct-to-customer (DTC) business model new to China’s beauty industry. The company has an in-house team of over 200 engineers dedicated to technology and data. It has developed a digital infrastructure that comprises a database of customer insights, social marketing engines, and a user interface platform.

“From the early days of its establishment, Perfect Diary has continued to invest in infrastructure such as IT systems, content creation platforms, consumer communication channels, and supply chain systems. In terms of organizational structure, it has long been significantly different from traditional brand companies,” says Han.

Open dialogue

He believes there is a rare window of opportunity in retail. Through the development of online tools and community tools, brands can truly own consumers, while consumers have never found it easier to reach brands. The integration of brands and channels, and of goods and services, enables companies with the right set-up to subvert traditional consumption.

“Massive e-commerce platforms such as Tmall, JD.com and Vipshop have become default shopping destinations. More recently, disruptive and dynamic social and content platforms such as Weixin, Douyin, Kuaishou, Bilibili and Red have been playing an increasing role in consumers’ discovery and purchase of beauty products,” Perfect Diary observed in its IPO prospectus.

Perfect Diary’s revenue rose from RMB635.3 million in 2018 to RMB3 billion in 2019 and hit RMB3.3 billion for the first nine months of 2020. A net loss of RMB40.1 million in 2018 became a profit of  RMB75.4 million last year. It slipped into negative territory again with a RMB1.15 billion loss for 2020 through September, largely due to a substantial increase in sales and marketing expenditure.

This expenditure went towards promoting the two new brands as well as the rollout of offline stores. Perfect Diary opened 163 outlets in the first nine months of 2020, up from 40 in 2019.

This investment in a brick-and-mortar retail network represents another stage in Perfect Diary’s evolution. The company no longer wants to be just an online brand and platform; the focus is on integrating the online and offline experience. 

Pictured: Rui Han of Gaorong Capital

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• Topics
• Greater China
• Expansion
• Consumer
• Technology
• China
• TMT
• AVCJ Awards
• Gaorong Capital
• Hillhouse Capital Management
• Boyu Capital
• Hopu Investment Management
• Tiger Global Management