Appearances can be deceiving
China's cosmetic treatment market has been booming in recent years, thanks to the country's growing middle class and a generation of young people keen on looking as good as possible. But industry insiders pointed out that the industry's net profit margins are slim because of rising marketing costs. Still, venture capital firms and large companies in other industries have been more than willing to pour money into the business.
On the streets of Sanlitun in Beijing's Chaoyang district, it's not uncommon for pedestrians to catch the odor of hyaluronic acid, a chemical used in skin-care treatments, wafting from dozens of cosmetic treatment clinics that have crowded the area.
The clinics are there because there are clients willing to pay - and keep paying - for their services.
"It's like a drug addiction," an executive from a chain of cosmetic treatment clinics told Caixin Weekly on Monday.
"If a woman walks in, there is an 80 percent chance she will try the service. And once women try it, most will become clients for the rest of their lives," said the executive, who preferred not to be identified.
The cosmetic treatment industry capitalizes off the pursuit of beauty. In China, the industry has burgeoned over the last five years, averaging an annual growth rate of nearly 30 percent. By 2016, the domestic market was worth billions of yuan.
Even though the market has grown rapidly in China, it remains largely untapped, especially when compared with countries with mature cosmetic treatment markets such as South Korea, Japan and the US.
China's huge population and rapidly growing middle class give the industry tremendous potential, according to the report. The market is also being propelled by the generation born in the 1990s, which has come under the influence of online celebrities augmented by plastic surgery, fashionable clothing and immaculate makeup.
These groups are not only open to cosmetic treatments, but are also willing to borrow money to pay for them, offering the possibility of explosive future growth for the industry, the report said.
Slim net profits
However, the industry remains a sector that sits on inflated gross profit without generating much net profit, industry insiders noted.
For example, the gross profit margin of the cosmetic treatment companies listed on China's New Third Board averaged above 50 percent. But their net profits are lower than 15 percent, and are in some cases below 7 percent, Caixin reported.
The phenomenon is more evident in the unlisted small and medium-sized cosmetic treatment companies. "Only one-third of the companies are actually making a profit," an unnamed investor told Caixin.
And the small net profits are being eroded by surging costs in advertising because the industry relies heavily on marketing to win clients, analysts said.
It generally costs about 6,000 yuan (0) for cosmetic treatment institutions to acquire one client, according to a report published by Guosen Group. Expenses for marketing, sales and raw materials make up 50 percent, 20 percent and 10 percent respectively of an institution's total costs.