Yatsen Holding, the Chinese beauty behemoth known for its trendy color cosmetics brand, Perfect Diary, has been undergoing a strategic transformation for the past year. The company, facing headwinds in the color cosmetics market, has been steadily pivoting towards skincare, acquiring brands like Galénic, DR.WU, and Eve Lom. While this move has been widely observed by analysts, the Q1 2024 earnings transcript reveals a fascinating undercurrent – a potential power shift within Yatsen's brand portfolio, where skincare is quietly becoming the dominant force.

On the surface, the transcript paints a picture of balanced growth, with total net revenues increasing by 1% year-over-year, driven by both color cosmetics (up 3.2%) and skincare (up 0.1%). However, a deeper dive into the numbers reveals a more nuanced story. The combined revenue growth of Yatsen's clinical and premium skincare brands - Galénic, DR.WU, and Eve Lom - was a robust 6.4% year-over-year. This outperformance suggests that the growth in the overall skincare segment was significantly hampered by the performance of Yatsen's mass-market skincare brands.

Furthermore, the transcript highlights Perfect Diary's struggle to regain its former glory, despite a successful repositioning effort and the launch of the popular Biolip Essence lipstick collection. While the brand holds the #2 spot for lipstick sales among domestic brands on Tmall and Douyin combined, this achievement comes against the backdrop of a stagnant color cosmetics market. The transcript even subtly acknowledges this, stating that online shopping festivals – once a major sales driver – are losing their influence, forcing brands to rely less on these events for growth.

This dwindling reliance on online festivals, coupled with the strategic closure of underperforming Perfect Diary offline stores, indicates a deliberate shift in focus away from the color cosmetics segment. While Perfect Diary remains a crucial part of Yatsen's portfolio, the company appears to be quietly but decisively pouring resources into its high-growth, high-margin skincare brands.

"This hypothesis is further supported by the company's R&D initiatives. The transcript details significant investments in both the Galénic Dermatology Research Fund and the DR.WU Acne Research Fund, demonstrating a commitment to scientific innovation within the skincare segment. Meanwhile, Perfect Diary's R&D efforts seem focused on expanding existing product lines like the Biolip Essence collection, rather than developing groundbreaking new innovations."

The transcript also hints at a potential future where skincare accounts for a larger share of Yatsen's revenue. Jinfeng Huang, Yatsen's CEO, specifically mentions 'optimizing our long-term cost structure,' a strategy more aligned with the premium pricing and higher margins typical of skincare brands. This focus on profitability further suggests a gradual but definite shift towards a skincare-centric business model.

Yatsen's Shifting Focus: Skincare vs. Color Cosmetics

The following chart illustrates the revenue breakdown between skincare and color cosmetics for Yatsen in Q1 2024.

This silent surge in skincare's influence within Yatsen's portfolio could have significant implications for the company's future. While color cosmetics, with its fast-paced trends and fierce competition, has traditionally been a volatile market, skincare offers the potential for sustained growth and higher profitability. The global skincare market is projected to reach $205 billion by 2028, presenting a vast opportunity for Yatsen's premium and clinical brands to capitalize on.

Furthermore, the increasing demand for scientifically-backed, high-quality skincare products in China aligns perfectly with Yatsen's R&D investments in Galénic and DR.WU. These brands, with their proven formulations and clinical backing, are well-positioned to capture the hearts (and wallets) of Chinese consumers seeking effective and innovative skincare solutions.

Yatsen's strategic transformation is far from complete, but the Q1 2024 transcript offers a glimpse into a future where skincare plays a leading role. This silent storm brewing within the company's brand portfolio could be the catalyst for a skincare tsunami, reshaping the landscape of the Chinese beauty market and propelling Yatsen to new heights of success.

"Fun Fact: Yatsen's founder, Jinfeng Huang, was inspired to start the company after witnessing the power of online marketing while working for Procter & Gamble. He saw an opportunity to build a beauty brand that resonated with young, digitally-savvy consumers in China, and Perfect Diary was born."