Master Class: Yatsen Founder David Huang

SHANGHAI — At 37, David Huang has in just five years built one of China’s most impressive beauty companies.

A Procter & Gamble protege and Harvard business school graduate, Huang founded Yatsen Holding, ushering in a new era for beauty in China, one in which a homegrown company — with its affordable but value-driven products and a nimble direct-to-consumer omnichannel business model — is giving multinational firms a real run for their money. Topping over $800 million in revenue last year, this “internet L’Oréal” as some have taken to calling the company, saw earnings rise 42.7 percent year-over-year in its most recent quarter. 

Yatsen listed on the Nasdaq at the end of 2020 with three brands: flagship makeup line Perfect Diary, Huang’s first foray into the sector; higher-end cosmetics Little Ondine, and mass skin care brand Abby’s Choice. Since then, the company has been moving out of its mainstay in mass and into higher price points while also making a more aggressive play in skin care. Last year, it bought French pharmacy brand Galénic and the mainland China business of dermatologist label, Dr. Wu.

Earlier this year in March, it announced moves in two opposing directions. It would be launching an even more affordable cosmetics label, Pink Bear, but also acquired Eve Lom, the luxury British skin care brand, from Manzanita. Huang spoke to Beauty Inc at his Guangzhou, China, headquarters, sharing what led him to beauty, how he sees the business evolving in the year ahead, and the underlying philosophy that steers this quickly expanding portfolio.

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How did you end up working in the beauty industry? 

David Huang: Somehow, it was fate and I could say it really exceeded my expectations. I did my undergraduate at Sun Yatsen University in Guangzhou and right after, I joined Procter and Gamble. In 2007, they recruited around 11 management trainees and I was the only male. I was placed into the CMK business unit or consumer market knowledge. It’s like the eyes and ears of P&G. It studies the change of the consumer’s needs and translates it into all of P&G’s decisions.

Those three years transformed me from a guy who knows very little about the beauty category into someone really focused on consumer needs, who can understand their desires and their tension. I’ve done a lot of in-home visits, focus groups and consumer interviews. Basically I’ve talked to, I can’t quite remember, but at least 10,000 consumers face-to-face. A group would be around six to eight people but everyday, we would work with eight to 10 groups. That was the first step.

In 2010, I applied for business school. I went to Harvard for an MBA and for my first year, I had my summer internship in China. At the time, I was facing the choice either to go to New York and be a banker or come back to work in China. I got an offer from Bank of America for investment banking in the consumer sector and also a consulting summer internship for McKinsey. But I thought coming back to China is important for me. So I came to Shanghai and joined McKinsey for the internship.

There was a three-week gap after that internship ended before I went back to school, so I decided to take another internship, which is in venture capital for IDG. They were looking at the beauty sector, however, and there was one deal called Unifon. They were looking at the potential to invest in that company.

They realized that at IDG in the whole organization nobody had beauty experience before and there was only an intern called David who worked at P&G for three years. They asked me to go to Changsha and meet with the founder. After three days in the due diligence process, I decided to drop out and join that company.

Unifon was the first generation of internet incubated brands. In the end, I spent five years from 2011 to 2016 there. When I joined, the company’s revenue was around $8 million and when I left it was $300 million. I was learning how to create a brand almost from scratch and how to build a brand on the e-commerce model and how to do business with Alibaba, and, at the time, Jumei and VIPshop. The five years journey was life changing.

When I left it was right when the company decided to go public. Most of my options were vested except for a small portion. I was thinking should I wait for a few years then retire and enjoy life? But I thought the opportunity for new brands on a different business model was going to change the entire beauty dynamic and I founded Yatsen one month after Unifon. I left in May 2016 and founded Yatsen in June 2016. My career, except for a two-months internship at McKinsey, all of my experience has been in beauty. It’s the only industry I know.

How would you describe Yatsen’s model?

D.H.: The offline experience was something we needed to disrupt. That’s why we have over 200 stores self-owned. In the beauty industry, not a lot of people are doing self-owned stores, but we believe the self-owned store is the best business model to create something exciting or something new for the consumer journey.

Looking at all the facts and consumer feedback, we got a lot of confirmation and confidence. For example, when we decided to do offline stores, there’s a feeling of freedom. We want customers to freely explore all those products and gain more knowledge about how to put on makeup. This is very important because a lot of consumers, if you go to Chanel or Dior, they have this pressure. They can’t stay 30 minutes or an hour in there. We want to give them the best products in an environment they don’t feel pressured to buy.

Once, I went to act as the beauty adviser in-store. One young girl had her backpack with her and when she spoke her voice was so quiet. She was probably from a tier-three or tier-four city and was in a first-tier city to study or something. She asked the staff, could you introduce me to some lip colors? After, when it came time to pay instead of using WeChat or Alipay, she took out a 100 renminbi note and it was really crumpled. [Mobile payments are the heavily favored option in China and cash is very uncommon now in cities.]

At all our stores, we have a cash POS because some consumers may not use WeChat or Alipay. I was thinking at the time if she went to Dior or MAC or even Sephora, she will feel pressure. But in a Perfect Diary story she can enjoy the consumer journey of becoming more beautiful without any pressure.

A Perfect Diary store. Courtesy

Another scenario we thought a lot about was how consumers will spend a lot of time searching for knowledge. With online private traffic [and our Xiaowanzi program] using our consumer data and its precision, we can understand earlier that if, say, you are like me and are working overnight a lot, here are the things that can help solve your skin challenges. The time spent searching is brought down. I might also know if your skin is sensitive or not, what your your skin type is, your general age range. Although our system may not see everything because there are privacy disguises built in, they will be able to know this person will be suitable for this. It’s a customized situation.

If you look at post-90 or post-95 generation, they are around age 20 to 25. They are in university or starting work, the life pressure they face is extremely high — dating, family, work, in all aspects of life. But the underlying emotional driver for the consumer is confidence and self awareness. This value is what the brand needs to explore and solve. With Xiaowanzi, the relationship is not sales and consumer, it’s not adviser and client, it’s more like a friendship or companion. I will stand by you and if you have anything, you can talk to me. I may not be able to solve everything but on your beauty journey, I can help you.

China is known mostly as a skin care market. Is that idea outdated? How do you see the opportunities in skin care versus color? 

D.H.: Color cosmetics, if you just look at the market size right now in China, is around 30 percent of the total market. Skin care is still around two times as big. But if you look at the European market, you see the gap between makeup and skin care is smaller. We think this is a growth market and also like the overall beauty market.

Going back to the new generation of consumers, the Millennials, Gen Z and Gen A, even though they’re just 29 percent of the population, their beauty spending is around 59 percent, so they are highly involved in this and also newly into makeup. For skin care, they got involved earlier.

Some of the products, the boundaries are growing a little more gray. If you look at a primer with UV protection or makeup products with skin care benefits, the boundaries are not that clear. We believe makeup will continue to grow, taking more share, mainly driven by the new generation of consumers and longer regimens and higher prices.

The deep dive to understand the motivation of the consumer is something we believe the whole industry is not doing enough. The reason we can grow so fast is we always stand by the consumer. We always co-create products, we always brings something to wow the consumer. We are not just creating another lipstick or eye shadow palette.

Perfect Diary products Courtesy

Recently, you moved into the high-end space and further into skin care with the acquisitions of Eve Lom and Galénic. What was behind those decisions? Did you consider also creating a premium skin care brand in house? 

D.H.: I think we do both. We do either self incubation or acquisition. For example, Pink Bear is something we incubated and other brands will launch in the coming quarters. Either way is fine, but the only criteria we look at is if we are not going to create something better, newer or distinctive enough compared to what the market has to offer, we’re not going to do it.

If nobody in this industry is doing it, then we will invest and incubate. If there is some technology we need to invest in or acquire, we will buy it. We are working with a few R&D institutions in Japan, France and Switzerland and we are looking at the fundamental research into skin science, immune system science. When we figure there’s the technology or ingredients or new solution framework, which is going to help the consumer provide a lot of skin benefits, we will acquire or co-develop to get into that technology.

Some of the brands, they have the R&D resources or the patent that will be the core asset. Galénic is an example of that because it was owned by Pierre Fabre. This brand already has over 40 years of history and they continuously did a lot of fundamental research. But this technology was not really well known by a lot of consumers. It’s not only the brand Galénic or the consumer base or the story, it’s about the technology, the formula, the patent.

Eve Lom was bought by Yatsen in March. Courtesy

Galénic Courtesy

What kind of challenges do you anticipate in entering the premium luxury space, which is new to the company?

D.H.: Usually business expansion is either same category price up from mass makeup to masstige makeup and luxury makeup. Or horizontal expansion from mass makeup to mass hair care or mass skin care — that’s very logical. But we are doing a diagonal expansion. Business-wise, outsiders have trouble understanding: “Why do high end?” “Your core competency is mass makeup.” “The customer is totally different.” “What gives you the confidence?”

Yatsen is the most focused on the consumer. The three years I spent with P&G talking to the consumers really taught me that everything goes back to wow your consumers and the rest will just happen. If you think about from the consumers’ point of view, all business issues can be solved. If the starting point isn’t the consumer, but the business, all the problems that can happen will happen. [For example,] how do you integrate an international brand acquisition? French or British culture does not easily fit with Chinese culture.

The customers we serve are in the tens of millions. Everyday we see 1.2 billion to 1.3 billion data points — everyday. We have 300 to 400 people in our IT team. These will give you facts, and in the cleansing space, the fact we found is the brand they most recognize is Eve Lom. The one they like to use the most is Eve Lom. Perfect Diary customers, for skin care, are using Estée Lauder or La Mer. It’s not because they don’t have money that they buy Perfect Diary. It’s not because they can’t afford Chanel lipstick that they buy Perfect Diary. They buy what they think is the best value.

The reason why is not because of the business opportunity, it’s the consumer — front and center. They are convincing me I need to do this. The power is from the consumer. The outsiders, too, will also think why do direct retail? It will most likely fail. But I opened 200-some stores and I proved it. It’s not because I listened to some expert or business guru, the data tells me.

What are your consumers telling you now then?

D.H.: The attention young consumers give to innovation and science far outstrips previous generations. Information access is not a problem. They are so smart that if you cite some scientific studies, they will look up the studies themselves to read it.

With the shift in regulations on animal testing this year, many cruelty-free brands are now expanding into China on top of the acceleration in brands entering the market because of China’s faster COVID-19 recovery. What do you think it means for competition? 

D.H.: We think that more brands serving the Chinese customer overall is a positive influence, but in terms of competition, it’s not a concern. Because when Yatsen started from day one — Estée Lauder, L’Oréal, LVMH — were all huge companies here. It’s not like they weren’t here already. It wasn’t a wide open space. Amorepacific brands were also extremely popular in China. Overseas, indie brands and some brands that haven’t been in China will come to China and increase the numbers slightly in the market. But it’s not nothing to something. It doesn’t change a lot.

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