Industry

The arena: China beauty, online-first

Yatsen Holding sits inside the largest, fastest-growing, and most online-native beauty market in the world — one whose economics have shifted decisively under it twice in five years. China is roughly 30% of the global beauty pool and was projected to reach US$68.7 billion in retail sales value by 2025, growing at a 10.0% CAGR that is three times the U.S. rate [1]. Inside that pool, the two sub-markets Yatsen plays in — color cosmetics and facial skincare — have different growth rates and very different unit economics, which is the single most important fact in this tab.

China's projected share of the global beauty market is set to rise from 21.4% in 2019 to 29.5% in 2025, accounting for nearly 60% of the global category's incremental growth in that window [1]. The two key engines underneath that growth are durable: a per-capita spending gap that still has room to close, and an online channel structure with no equal in any other major market.

What the industry actually is — two sub-markets nested inside one SIC code

The company's regulator-assigned industry label is "Personal Care Products," but that aggregates three quite different economics. Yatsen plays in two of them:

• Color cosmetics (lip, face, eye products — Perfect Diary, Little Ondine, Pink Bear at Yatsen) — trend-driven, lower gross margins, more sensitive to discretionary spend and "occasions" (work, dating, social gatherings) [2].
• Facial skincare (cleansers, serums, moisturizers — Galénic, DR.WU, Eve Lom at Yatsen) — daily-use, stickier customer loyalty, structurally higher gross margins, and a longer purchase cycle [3].

The China color cosmetics market was projected to grow to US$17.7 billion by 2025 at a 14.2% CAGR; facial skincare was projected to reach US$51.0 billion at a slower 8.8% CAGR — meaning skincare is roughly three times the size of color cosmetics, but color cosmetics is the faster-growing pool [4]. This is the structural reason every successful Chinese beauty company — Proya, Botanee, Yatsen — has spent the last four years rebalancing its mix toward skincare: it is a larger, stickier, higher-margin home base.

The growth gap between the two pools — color cosmetics decelerating from 18.4% to 14.2%, skincare accelerating modestly from 7.9% to 8.8% — tells you where China's beauty consumer is heading: from trying on a new look every weekend toward wanting a regimen that works. Yatsen's portfolio pivot is a strategic bet on this demographic transition, not a tactical product mix shift.

Why "Personal Care Products" undersells what the customer is buying

A market sized only in retail sales value misses the demand drivers. Three matter:

1. A per-capita spending gap that still has room to close. China's per-capita spend on beauty products was just US$27.7 in 2019 — versus US$96.6 in the U.S., US$152.8 in South Korea, and US$184.4 in Japan — which the CIC industry report described as a "long runway for further expansion" [5]. GDP per capita correlates almost linearly with beauty spend across China, Japan and Korea — and China's GDP per capita is still on a forecast 7.0% CAGR through 2025 [5].

2. A consumer base widening in two directions at once. The CIC report projected China's color-cosmetics consumer base would grow from 143.0 million in 2019 to 200.1 million in 2025 — a 40% expansion of the addressable pool [6]. Two age bands drive this: Gen-Z (then ~171 million) and Millennials (~232 million), who already accounted for 58.5% of China's beauty consumption in 2019 despite being less than 30% of the population, and over 70% of online beauty consumption [7] [8].

3. Lower-tier-city consumption growing faster than Tier-1. Beijing/Shanghai/Guangzhou/Shenzhen color-cosmetics consumption was projected to grow at an 11.9% CAGR, while Tier-3-and-below growth was projected at 14.3% CAGR, reaching US$9.5 billion by 2025 [9]. For a digitally-distributed brand like Perfect Diary, this expansion of demand into cities where there is no premium department store gives social-commerce-first players a structural advantage over the legacy multinational distribution model.

The channel structure: the most online-native beauty market in the world

If there is one fact about this industry that a newcomer must internalize, it is the channel structure. China is the world's largest e-commerce market — US$1.5 trillion in online retail in 2019, with 704 million online shoppers — and its e-commerce penetration of total retail (25.8% in 2019, projected 35.0% by 2025) was roughly three times that of the U.S. [10]. Within that, the beauty category is more online than almost any other consumer segment: e-commerce already accounted for 31.4% of China beauty sales in 2019, projected to climb to 42.6% by 2025, versus 21.9% in the U.S. [10].

And the channel mix inside "online" is itself evolving. Traditional shelf-based marketplaces (Tmall, JD.com, Vipshop) are being eaten by social commerce — Weixin, Douyin, RedNote, Bilibili, Kuaishou — which grew at an 82.1% CAGR from 2015 to 2019 and was projected to reach 47.3% of all online retail in China by 2025 (versus 3.7% in the U.S.) [11].

Yatsen calls this stack-shift "the seamless integration of social commerce and content-driven engagement" and describes deploying it through Douyin, RedNote, Bilibili, Weixin Official Accounts/Mini Programs/Video Channels — alongside the older Tmall/JD/Pinduoduo/Vipshop layer [12]. Importantly, the company also notes that 84.9% of FY2025 net revenue still came through direct-to-consumer channels rather than third-party distributors [13] — high DTC mix is the norm in this arena, not the exception.

In this industry, "distribution" is software, not real estate. Platform mix, KOL roster, livestream playbook, and traffic-acquisition cost are the operating system. A brand that can't operate fluently across Tmall, Douyin, RedNote, Weixin, and Pinduoduo will eventually stop growing.

Domestic brands have won the mass and mid-end

The single biggest structural change in this industry over the last decade is local: domestic Chinese beauty brands overtook western brands in the mass and mid-end segment in 2016 and have been extending the lead. Domestic brands held just 24.4% of mass/mid-end retail sales value in 2010; that share had reached 46.3% by 2019, versus 38.3% for western brands [14]. The CIC report calls out the Japan and Korea analogue: once domestic brands take a market, they tend to keep it.

Why? The CIC consumer survey reported that 99.5% of consumers had used a domestic color-cosmetics brand, and Yatsen's own filings credit the move to four factors: product quality has caught up via the ODM/OEM ecosystem, formula and packaging now meet global safety standards, digital-native marketing fits the Gen-Z/Millennial customer, and brands have built a "local identity" with which young Chinese consumers want to associate [15] [16].

The premium and prestige segment is a different story — there, multinationals (L'Oréal, Estée Lauder, Shiseido, LVMH) still dominate. This is exactly why Yatsen's acquisition strategy targeted prestige European/Asian skincare brands (Galénic from Pierre Fabre in October 2020, DR.WU's mainland China business in January 2021, Eve Lom from Manzanita Capital in March 2021) rather than building organically into prestige [17].

Unit economics: gross margin sits high, S&M intensity sits even higher

A China beauty income statement is shaped like nothing in the U.S. consumer-staples world. Yatsen reports a 78.2% gross margin in FY2025 — the kind of headline you'd expect to support fat operating margins [18]. It doesn't. The company also spent ¥2.85 billion (US$407.9M) on selling and marketing — roughly 66% of revenue — including ¥1.83 billion in advertising and brand promotion alone [19]. The arithmetic of this industry is: gross margin runs in the 70s, operating margin runs near zero or negative, and the swing factor is traffic acquisition cost.

Management names the problem directly: the FY2025 increase in S&M was "primarily due to … investments in new product launches across our brands as well as the higher traffic acquisition costs amid intensified competition" [19]. This is the cycle's most-watched line item: the price every brand pays Tmall, Douyin, RedNote, and the KOL ecosystem for one customer impression. When platform commissions and KOL rates rise, brand operating margins compress in lockstep.

The shape repeats: a 78% gross margin gets all the way down to a low-single-digit operating loss after the marketing line. In good years, the leverage flips and the operating margin pops; in bad years, brands burn cash funding traffic. Yatsen narrowed its full-year net loss margin from 20.9% in FY2024 to 2.2% in FY2025, and posted a non-GAAP net income margin of 0.2% — its first non-GAAP profit since 2021 [20] [21]. That non-GAAP turn happened because skincare mix lifted gross margin and headcount/G&A came down — not because marketing intensity eased.

Why skincare is the lever

Yatsen's CFO frames the mix shift directly: "with Skincare business, the gross margin, net margin are typically much higher than Color Cosmetics brands. So by doing that, we're going to be able to improve our margin profile" [22]. Skincare is the structurally higher-margin sub-category and has stickier customer behavior — two reasons every domestic brand operator in China is doing the same pivot.

Between FY2020 and FY2025, Yatsen's gross margin rose 1,390 basis points (from 64.3% to 78.2%) [23] [18] and the skincare share of revenue went from 3.8% to 53.0% [24] [3]. The two lines are not coincidence — they are the same line drawn twice.

The cycle: what just happened, and where we are now

This industry is cyclical by structure, even inside its long secular growth. The cycle's defining shock was COVID. Yatsen describes it bluntly in its FY2022 10-K: "as the zero-COVID policy continued to negatively impact consumer sentiment and demand for social gatherings, the color cosmetics market faced prolonged headwinds, with our Color Cosmetics Brands and offline stores experiencing challenges in such an environment" [25]. Two things compounded the shock: lockdowns destroyed the "occasions" (offices, restaurants, parties) that drive color-cosmetics demand, and the same period saw the rapid rise of Douyin as a beauty-discovery platform — which broke the ROI calculus on the Tmall/Weibo playbook Perfect Diary had built.

The recovery has had three stages, visible in the revenue path:

• 2020-2021: the peak of the color-cosmetics boom. Net revenue reached ¥5.84 billion in 2021, up 11.6% from ¥5.23 billion in 2020 on the back of Perfect Diary's KOL-led playbook; skincare was a rounding error at 3.8-14.6% of mix [42] [24].
• 2022-2024: the trough. Revenue fell every year — to ¥3.71B, ¥3.41B, ¥3.39B — as the color cosmetics market faced prolonged headwinds and Yatsen began executing the strategic transformation plan it launched in early 2022 [25]. The company recorded a non-cash goodwill impairment of ¥403.1 million in 2024 reflecting that period's stress [26].
• 2025: the turn. Net revenue rose 26.7% year-over-year to ¥4.30 billion, driven by a 63.5% jump in skincare and a 1.9% recovery in color cosmetics [27]. The CEO described Q4 2025 as "growth … significantly outpacing the industry average" with skincare reaching 61.1% of fourth-quarter revenue [21]. Q1 FY2026 followed with +22.5% revenue growth, an 80.2% gross margin, and skincare up 58.5% — but color cosmetics returned to negative growth (-5.0%) and operating expenses rose to 89.9% of revenue from 83.2%, pushing the operating loss margin back to 9.7% [28] [29].

The Q1 FY2026 print is a tell: the gross-margin lift is real and durable, but the marketing/traffic line can take it all back in a single quarter when platform costs rise. Management guided Q2 FY2026 revenue to ¥1.20-1.30 billion (10-20% growth) — a deceleration from Q1's pace, which signals they expect to lean in on marketing during product launches rather than chase short-term margin [30].

The five forces shaping this industry

Yatsen calls rivalry out directly: "We face vigorous competition from both domestic and international players in China in the beauty industry, including large multinational consumer products companies that own or operate multiple beauty brands. Competition in the beauty industry is intense" [31].

The ODM/OEM ecosystem deserves specific attention because it is a unique competitive feature of China beauty — not a generic supply chain. Domestic ODM/OEM and packaging partners (Cosmax, Intercos, Shanghai Zhenchen, HCP, Axilone, Qiaxing) can produce high-quality SKUs at fast lead times and "some of the shortest lead times" in the world, which makes the time from idea to shelf much shorter for a Chinese-domiciled brand than for a multinational [32]. This is the speed-of-iteration advantage that let Perfect Diary, Florasis, Proya and others overtake western incumbents in mass and mid-end.

Regulation: the floor under product launches

Cosmetics in China are regulated by the National Medical Products Administration (NMPA) under the State Administration for Market Regulation. The defining regulatory event of the last cycle was the State Council's Regulations on the Supervision and Administration of Cosmetics, promulgated in June 2020 and effective January 1, 2021 [33]. The regulation:

• Splits cosmetics into "special" (hair dye, freckle removal, whitening, sun protection, anti-hair-loss) and "ordinary," and requires special cosmetics to be registered before sale [33].
• Introduces "registrant" / "record-filing applicant" responsibility — the registrant takes the main responsibility for quality, safety, efficacy claims, adverse-reaction monitoring, and post-market safety reevaluation [33].
• Raises non-compliance penalties to as much as 30x the value of the concerned products for serious infractions (production without permits, unregistered special cosmetics, banned materials) [34].

This regime raised the cost and lead time of new product launches, favoring brands with established quality systems and scale R&D — a quiet structural advantage for incumbents over fly-by-night sellers.

A second regulatory layer matters: the E-Commerce Law (effective January 2019) governs how online platforms describe and sell product, and bans fabricated reviews / misleading promotion, which is enforced against beauty brands that buy fake livestream views and KOL impressions [35].

The macro overlay: US-China tariffs are a 2025 development to watch

US-China trade policy added a new variable to this industry's risk picture in 2025. Yatsen's FY2025 10-K notes: "since early 2025, the United States has implemented significant changes to U.S. trade policy with China, including by imposing additional tariffs on Chinese imports. China has responded by imposing, and proposing to impose additional or higher tariffs on products imported from the United States" [36]. The company also flags exposure on the inbound side — premium and luxury brands (Galénic from France, DR.WU from Taiwan, Eve Lom from the UK) use international ODM/OEM partners and import finished goods, exposing them to "unfavorable international trade policies, heightened tariffs and fluctuation in currency exchanges" [37].

For an industry whose mass-market base sells almost entirely into mainland China, the direct tariff exposure is modest. The indirect exposure is real: tariffs that compress Chinese consumer spending power, or RMB devaluation that lifts the cost of imported ingredients/finished goods, both flow through to margins.

R&D investment: the new arms race

Yatsen has committed to R&D expenses "consistently exceeding 3.0% of our total net revenues annually since 2022" — a high ratio for any consumer brand and explicit signal that the company is competing on science, not just SKUs [38]. FY2025 R&D was ¥137.3 million (US$19.6M), up from ¥109.3 million in FY2024; Q1 FY2026 R&D ran at 3.9% of revenue, up from 2.7% — meaningfully above the industry's mass-market norm [39] [29].

The arms race here isn't about novel chemistry; it's about credibility. Domestic brands that want to win the premium skincare consumer need a published clinical record, branded ingredient platforms, and academic partnerships. Yatsen's R&D footprint is built around its Guangzhou Cosmax JV manufacturing hub (operational since August 2023), a Shanghai global innovation R&D center (May 2024), partnerships with Sun Yat-sen University, and presentations at venues like IFSCC and the Asian Dermatological Congress [40] [41].

Peer set — and an important caution about which peers actually matter

The auto-selected peer set for this run pairs Yatsen against three Chinese-listed beauty operators and three multinationals. The Chinese set is genuinely useful — same end market, same regulator, same channel structure. The multinational set is a poor operating-model match (global manufacturing footprint, prestige-skewed mix, very different cost stack) but does establish the industry's high-water profitability benchmark.

Two takeaways from the peer table for a newcomer to this industry:

1. Gross margin is not the differentiator — every credible operator earns 70-78%. The differentiator is the cost line below it.
2. The Chinese peer who has best executed the same playbook is Proya — same arena, similar gross margin, but already converting it to 17.6% operating profit. Yatsen's investment case is essentially "we can become Proya": same playbook, two years behind.

KPI scorecard — the eight numbers to watch each quarter

Watchlist — six developments that would change the industry view

Bottom line

China beauty is a US$60-70 billion arena, the world's largest and one of its fastest-growing, with the most online-native channel structure on earth and a domestic-brand cohort that has already taken half the mass and mid-end. It is also a structurally low-operating-margin industry because of a 60-70%-of-revenue S&M intensity that platform commissions and KOL costs can lift at any time. The operators best positioned for this cycle are those that have already shifted their mix toward skincare — Proya, Botanee, and (now) Yatsen — because skincare gives them both a higher gross margin and a stickier customer to amortize traffic-acquisition cost against. Reading the rest of this report on Yatsen, keep four numbers in mind: 78.2%, 53.0%, 66%, 2.2% — the gross margin, the skincare mix, the S&M intensity, and the net-loss margin Yatsen just narrowed from 20.9%. The first two are the strategic lever; the third is the trapdoor; the fourth is whether the lever moves the floor.

References

1. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — China beauty market size — p.148
2. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Business Overview — Color Cosmetics Brands — p.80
3. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Business Overview — strategic transformation and Skincare Brands — p.79
4. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — color cosmetics and facial skincare sub-market sizes — p.148
5. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — per-capita spending and GDP-per-capita correlation — p.149
6. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — consumer base 143M to 200M — p.149
7. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — Gen-Z and Millennial beauty consumption share — p.150
8. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — Gen-Z/Millennial 70% share of online beauty — p.151
9. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — lower-tier-city color cosmetics growth — p.150
10. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — China e-commerce and beauty e-commerce penetration — p.151
11. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — China social e-commerce market size and growth — p.152
12. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Business Overview — Online Channels (Tmall, JD, Douyin, RedNote, Weixin, Pinduoduo) — p.85
13. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), MD&A — DTC channels 84.6% / 82.9% / 84.9% of revenue — p.121
14. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — domestic vs western brand market share — p.153
15. Yatsen Holding Limited — Final IPO Prospectus (Form 424B4), Industry — CIC Consumer Survey domestic-brand penetration — p.153
16. Yatsen Holding Limited — FY2024 Annual Report (Form 20-F), Business Overview — beauty industry evolution and Gen-Z preferences — p.79
17. Yatsen Holding Limited — FY2024 Annual Report (Form 20-F), Business Overview — Galénic, DR.WU, Eve Lom acquisitions — p.79
18. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), MD&A — gross margin 73.6% / 77.1% / 78.2% and pricing discipline — p.121
19. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), MD&A — selling and marketing expense ¥2.85B; advertising ¥1.83B; traffic acquisition cost — p.129
20. Yatsen Holding Limited — Q4 FY2025 Earnings Press Release, Full year 2025 — net loss margin 2.2% from 20.9% — p.4
21. Yatsen Holding Limited — Q4 FY2025 Earnings Call Transcript, CEO prepared remarks — skincare 61.1% of Q4 revenue, growth outpacing industry — p.2
22. Yatsen Holding Limited — Q4 FY2025 Earnings Call Transcript, CFO Q&A — skincare gross/net margins are typically much higher than color cosmetics — p.5
23. Yatsen Holding Limited — FY2022 Annual Report (Form 20-F), MD&A — gross margin 64.3% / 66.8% / 68.0% — p.122
24. Yatsen Holding Limited — FY2021 Annual Report (Form 20-F), MD&A — skincare brands 3.8% in 2020 to 14.6% in 2021 — p.107
25. Yatsen Holding Limited — FY2022 Annual Report (Form 20-F), Business Overview — zero-COVID and color cosmetics headwinds, five-year strategic transformation plan — p.85
26. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), MD&A — impairment of goodwill ¥403.1 million in 2024 — p.129
27. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), MD&A — net revenues +26.7% to ¥4.30B, skincare +63.5%, color cosmetics +1.9% — p.128
28. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release, Q1 2026 results — revenue +22.5%, gross margin 80.2%, skincare +58.5%, color cosmetics -5.0% — p.2
29. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release, Q1 2026 results — R&D 3.9% of revenue, operating loss margin 9.7% — p.3
30. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release, Business Outlook — Q2 2026 guidance ¥1.20-1.30B (10-20% growth) — p.4
31. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Risk Factors — vigorous competition from domestic and international players — p.20
32. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Business Overview — Supply chain and ODM/OEM ecosystem (Cosmax, Intercos, HCP, Axilone, Qiaxing) — p.86
33. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Regulations Relating to Cosmetic Products — NMPA, Regulations on the Supervision and Administration of Cosmetics — p.90
34. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Regulations Relating to Cosmetic Products — penalties up to 30x product value for non-compliance — p.91
35. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Regulations Relating to Online Trading and E-Commerce — E-Commerce Law — p.96
36. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Risk Factors — US-China tariff actions since early 2025 — p.50
37. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Risk Factors — unfavorable international trade policies, heightened tariffs — p.30
38. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Business Overview — R&D consistently exceeding 3.0% of revenue since 2022 — p.79
39. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), MD&A — R&D ¥137.3M in FY2025 vs ¥109.3M in FY2024 — p.129
40. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Business Overview — Cosmax R&D and manufacturing hub, Shanghai R&D center — p.78
41. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Business Overview — DR.WU R&D, IFSCC and Asian Dermatological Congress — p.80
42. Yatsen Holding Limited — FY2022 Annual Report (Form 20-F), MD&A — FY2020 / FY2021 / FY2022 revenue, COVID cycle commentary — p.124