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Estée Lauder Made Two Investments in Chinese Beauty Brands within a Year

Recently, New Incubation Ventures, the early-stage investment and incubation arm of Estée Lauder, announced a strategic investment in the Chinese fragrance brand Melt Season. This comes as Estée Lauder’s second investment in a Chinese beauty brand within a year, following their investment in CODEMINT. In recent years, major beauty conglomerates like L’Oréal and LVMH have been increasing their investments in the Chinese beauty industry, underscoring the significance of this market as the world’s second-largest cosmetics market.

Estée Lauder invested in Chinese beauty brands twice within a year

Verse China, the parent company of Melt Season, was established in 2020 and positioned itself in the realm of affordable luxury. On the product front, Verse China’s flagship brand, Melt Season, chose to enter the fragrance track and gradually expanded its product line to include categories such as fragrances and personal care. This strategy sets it apart from other domestic brands that enter the fragrance space from a spatial perspective.

Founded in 2021, Melt Season specializes in high-end salon fragrances. Currently, the brand has introduced two series: classic and haute couture, comprising a total of 10 perfumes. The classic series is priced at ¥980 per 100 milliliters, while the haute couture series is priced at ¥1280 per 100 milliliters.

To broaden its consumer scene, Melt Season has also launched fragrance candles and non-flame aromatic products, available for sale on the brand’s official mini-program, much like other high-end brands. The 90-gram fragrance candle is priced at ¥320, and a 50-milliliter size of perfume is also offered for purchase.

Reportedly, Melt Season’s fragrances react differently based on temperature, pulse rate, sebum status, air humidity, and other factors. Even if the same fragrance is applied, it manifests noticeable differences on each individual’s skin.

In March 2022, Melt Season had already completed an angel round financing of over tens of millions RMB led by Breeze Capital. This funding round will primarily be utilized for expanding the supply chain and resources for storefronts. Previously, Melt Season had also secured seed round financing led by One Capital.

New Incubation Ventures (NIV) stated, “We are thrilled to announce our inaugural perfume investment in China—Melt Season. Since debuting our first fragrance in 1953, Estée Lauder has been a frontrunner in the luxury fragrance realm. We are delighted to welcome Melt Season into this rich legacy. With our diverse, artistic fragrance portfolio, we continue to elevate our leadership position in the fragrance sphere by expanding this unparalleled collection.”

NIV is Estée Lauder’s investment incubation fund established in 2021, aimed at collaboratively nurturing emerging beauty brands and novel business models alongside visionary founders and entrepreneurs. This initiative serves as a viable means to curate a diverse brand portfolio and foster growth engines. Following its inception, NIV has made multiple investments in the global beauty industry. In March of this year, Estée Lauder, through NIV, invested in the UK fragrance brand Vyrao, the environmentally conscious skincare brand Haeckels, and the men’s beauty startup Faculty.

NIV has been making continuous moves in China as well. Melt Season marks Estée Lauder Group’s first investment in a fragrance brand in China and the second Chinese beauty brand they’ve invested in following CODEMINT.

In September this year, Estée Lauder made its initial investment in a Chinese beauty brand, CODEMINT, through NIV. This brand focuses on the concept of pure beauty and was founded by internet celebrity Zhou Yangqing in 2021, having received investment from the Korean cosmetics OEM factory, Cosmax, upon its inception. Currently, CODEMINT’s product line primarily consists of makeup items but also includes cleansing products, face masks, and beauty tools.

Global beauty brands continue to make ongoing investments in China

Apart from Estée Lauder, the investment activities of international beauty giants in China have reached a peak this year.

The global second-largest cosmetics market, China, has always been a focal point for these international beauty giants. As the impact of the pandemic recedes and the economic environment stabilizes, the strategic moves of these beauty giants in China are becoming increasingly frequent.

L’Oréal, the world’s largest beauty conglomerate, began investing in Chinese beauty brands last year.

On September 9, 2022, L’Oréal China’s investment arm, Shanghai Meicifang Investment Co., Ltd (Meicifang), announced a minority equity investment in the Chinese high-end perfume brand, DOCUMENTS. Of note, this marks MeiCiFang’s first venture investment in China since its establishment, supported by BOLD (Business Opportunities for L’Oréal Development), L’Oréal Group’s strategic innovation venture capital firm. This investment further confirms the significant position of the Chinese market within L’Oréal’s global strategy and hints at local Chinese beauty brands being a focal point for MeiCiFang’s future investments.

In September 2023, a year after investing in DOCUMENTS, the L’Oréal Group announced a minority equity investment in SHINEHIGH INNOVATION, a pioneering biotech company in China. This investment aims to establish a long-term partnership to collaboratively develop innovative and sustainable beauty solutions. It marks the L’Oréal Group’s inaugural open innovation investment in China through its subsidiary, Meicifang.

SHINEHIGH INNOVATION, founded in 2017 by renowned scientist Prof. Jiaheng ZHANG, is a Chinese startup focusing on advanced supramolecular chemistry. Their groundbreaking smart self-assembly technology facilitates the blending of previously unfeasible ingredients, leading to final products that boast enhanced effectiveness and sustainability. This collaboration will empower L’Oréal to harness the complete capabilities of raw materials, surpassing recognized constraints like incompatibility, instability, and delivery issues. This will pave the way for the creation of pioneering formulations for skin, hair, and scalp that offer an expanded array of advantages.

Apart from L’Oréal, another major player actively involved in the Chinese market this year is the French luxury goods powerhouse, LVMH.

On September 16th this year, Jiangsu Trautec Medical Technology Co., Ltd. (Trautec) announced the successful signing of its Series B financing, raising over 200 million RMB. The financing was led by the first RMB fund under L Catterton, a private equity fund owned by LVMH, and CITIC Securities’ global USD private equity fund platform, CLSA Capital Partners.

Established in 2015, Trautec is a technology-driven enterprise focused on synthetic biology research and production techniques. The company’s core operations involve the long-term development in the field of life health new materials, particularly in areas such as injury repair and tissue regeneration. They are dedicated to establishing a globally leading platform for synthetic biology industrial innovation.

Currently, Trautec has completed the large-scale and standardized production of Recombinant Collagen types I, II, III, and XVII. Among these, Recombinant Collagen XVII is the first transmembrane collagen independently researched and developed by Trautec on a global scale, achieving large-scale production and applicable use in the cosmetics and personal care field. On January 6th this year, Trautec’s Recombinant Collagen XVII obtained an INCI (International Nomenclature of Cosmetic Ingredients) name and was included in the international catalog of cosmetic ingredients.

Apart from Trautec, recently, L Catterton’s inaugural RMB fund, L Catterton RMB Fund I (Chengdu) Equity Investment Enterprise (Limited Partnership), invested in the Chinese foundation makeup brand, blankme. They acquired a 10.18% stake in its parent company, becoming its third-largest shareholder.

Apart from that, Japanese cosmetics giant Shiseido also made two significant investments in the Chinese market last year.

The first was in March 2022, where they invested in the Chinese beauty tech company, Perfect Corp. Perfect Corp a leading beauty tech company established in 2015, offering AR, AI, and SaaS solutions. Perfect Corp’s offerings include various beauty-related products and services such as makeup services, hair coloring services, nail services, men’s grooming, and personalized analysis. Among these, their makeup services feature AR virtual try-ons, AI skin tone analysis and foundation matching, and AI product recommendations. Their personalized analysis provides high-tech services like AI skin detection and facial analysis.

In August 2022, Trautec completed an A-round financing of nearly 200 million RMB, led by Shiseido’s investment fund, the Ziyue Fund. Shiseido China stated that this investment aims to strategically position itself in the early stages of innovative beauty biomaterials. They believe the Ziyue Fund’s investment is crucial during the developmental phase of recombinant collagen.

It’s evident that as the impacts of the pandemic gradually fade, the investments of international beauty giants in China have been increasingly frequent over the past two years.

Not just investing in brands, but also in the upstream ingredients

The growth in the beauty industry is significantly driven by acquisitions, leveraging outward brand acquisitions to attain growth. During challenging market conditions in recent years, the investments of beauty giants have appeared more cautious. In this crucial market of China, there have been some changes in the investment strategies of international beauty conglomerates.

One significant shift is observed in the investment entities themselves. Beauty giants are no longer solely investing directly but are establishing venture capital funds or setting up investment incubators within the local market.

Starting from 2021, there has been a trend of several beauty conglomerates setting up investment funds in China.

In August 2021, Shiseido announced a strategic framework agreement with domestic alternative asset management firm Boyu Investment, planning to launch the first international beauty group-specific investment fund in mainland China—the Ziyue Fund. Once the relevant regulatory filings were completed, the fund aimed to focus on investment opportunities in emerging brands and upstream/downstream technological service companies in cutting-edge markets like beauty and wellness. The A-round financing for Trautec in August 2022 was facilitated by the Ziyue Fund.

Similarly, on May 8th, L’Oréal announced the establishment of its first investment company in the Chinese market—Shanghai Meicifang Investment Co., Ltd. The company is located within the Fengxian District’s Oriental Beauty Valley in the core area of Lingang Nanqiao Science and Technology City in Shanghai. Its objective is to invest in innovative beauty technology, fostering high-quality development through open innovation in China.

This investment was supported by BOLD (Business Opportunities for L’Oréal Development), L’Oréal Group’s strategic innovation venture capital firm, focusing primarily on startups in the innovative beauty technology field. L’Oréal China is, to date, the only branch of L’Oréal Group that has established an investment company. In September 2022, MeiCiFang made its initial investment in China—DOCUMENTS. A year later, they invested in SHINEHIGH INNOVATION.

Indeed, LVMH also established its inaugural RMB fund, L Catterton RMB Fund I (Chengdu) Equity Investment Enterprise (Limited Partnership), which invested in the Chinese foundation makeup brand, blankme. While Estée Lauder did not establish an investment fund or company in China, it invested in Melt Season and CODEMINT through its incubation fund, NIV.

Establishing a fund allows for long-term, flexible, and cost-effective funding support. Unlike traditional bank loans, funds offer advantages such as lower thresholds, higher efficiency, and substantial funding. They also provide considerable flexibility in terms of fundraising timelines and scales, thereby enhancing the efficiency of capital utilization.

The second significant shift is that beauty giants are placing greater emphasis on certain startups and exercising caution when spending large sums on acquiring independent brands.

Investments by L’Oréal in DOCUMENTS and SHINEHIGH INNOVATION, Estée Lauder in Melt Season and CODEMINT, and LVMH in Trautec are examples of these giants investing in early-stage financing of startups. Moreover, they are no longer opting for complete acquisitions of target companies but rather acquiring minority stakes.

Compared to direct acquisitions of established independent brands, acquiring minority stakes in startups implies reduced risk. Acquiring a mature brand necessitates a longer investment return timeframe, and if the acquired company’s performance declines, it can adversely impact the entire conglomerate’s performance. Investing in startups, however, can yield returns in the short term.

The third significant shift is the increased focus on investments in the upstream raw materials segment, rather than solely concentrating on brand investments.

The beauty industry has heavily relied on mergers and acquisitions to expand its scale. Whether it’s L’Oréal or Estée Lauder, acquisitions have played a pivotal role in their growth and development. However, in the current economic climate characterized by a downturn in the macrocapital market and rising interest rates, increased corporate funding costs have made beauty giants more cautious in their investments. They’ve shifted from solely targeting brands to prioritizing upstream raw materials.

Investments by L’Oréal in SHINEHIGH INNOVATION, LVMH, and Shiseido in Trautec indicate a move towards investing in the entire industry chain to secure their supply chains and mitigate risks associated with rising costs.

According to third-party CVSource data, while in 2019, the average single financing amount for domestic beauty brands reached as high as 337 million RMB, by 2023, financing amounts for beauty brands were only in the range of millions or tens of millions. Financing scales for brand entities have continuously reduced.

Conversely, financing for upstream raw material companies in the industry has increased. Incomplete statistics show that over ten cosmetic raw material companies completed financing this year, including companies like Wuhan Hesheng Tech, Shenzhen 01Life Sci&Tech, SynMetabio, and Trautec.

In summary, in recent years, beauty giants have become more cautious in their investments amid challenging market conditions. They’ve shifted from direct investments to establishing venture capital funds or local investment companies, focusing on innovative technology and startups, and emphasizing investments across the entire industry chain. This trend reflects considerations for risk management, a demand for more flexible and cost-effective funding support, and a greater emphasis on emerging technologies and frontier markets.