Deal focus: Bringing beauty to the masses

Xiao Hong Shu (Little Red Book) and Xiao Hong Chun (Little Red Lip) are Chinese e-commerce platforms with similar names and similar beauty-focused product lines that have attracted similar levels of interest from strategic players - and in GGV Capital, they have a common investor. But they address very different market segments: the former sells imported high-end beauty products, while the latter sells mass market domestic and Korean brands.

"Chinese users are becoming more educated about the variety of beauty products available online. As a result, Xiao Hong Shu targets mid to high-end users in top-tier cities, and Xiao Hong Chun addresses the mass market in lower tier cities," says Hans Tung, managing partner at GGV.

The VC firm backed Xiao Hong Shu last year and the company has since reportedly raised $100 million from a group of investors including Tencent Holdings. Xiao Hong Chun's first investors were BlueRun Ventures, LB Investments and Lightspeed China, before GGC came in to lead a Series C round earlier this year. Last week, the company received a further $63.85 million from Shenzhen-listed Huace Film & TV in exchange for a 35% stake. The investment values Xiao Hong Chun at $128 million.

The company was founded in 2015 by Zhixi Jiang, who previous employers include microblogging site Sina Weibo, Shanda Cloudary, and BlueRun. It differs from most other e-commerce platforms in relying on user-generated video content to promote beauty products. This content is supplemented by so-called key opinion leaders (KOLs) who host online shows and give feedback on specific products.

"Xiao Hong Shu also has many KOLs and it uses text messages rather than videos to attract followers," says Tung. "For Xiao Hong Chun, they are taking advantage of the smart phone penetration in the lower cities. People don't necessarily understand every beauty product but they will watch tutorial videos in order to catch themselves up."

The start-up claims to have attracted more than 2,000 users in less than one year, most of them female consumers aged 15 to 30. It is expected to leverage Huace's existing resources to develop more online media content, including live broadcasts and short-form and long-form videos. Huace is an established investor in overseas content, having previously backed Korean movie distributor Next Entertainment World.

In this respect, the Xiao Hong Chun deal can be seen as a way of tapping deeper into Chinese demand for Korean products, with entertainment and beauty at the forefront. "The post-1990s generation likes to watch shows relating to Korean pop culture, so you will see more purchases of products designed and made in Japan and Korea," Tung adds. "The luxury goods segment, which is usually dominated by European brands, isn't growing as fast, whereas demand for mass market products from Japan and Korea is growing rapidly."

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