The diversification of media platforms has also added to the industry's financial burdens, the report said.
"We cannot ignore Baidu because it's a search engine with a monopoly, but new media such as Weibo, WeChat and mobile applications have become important channels for attracting traffic," Ma Dongsheng, vice general manager of medical beauty company Ever Care, told Caixin over the weekend.
Ma noted that the company also spends a lot on traditional media like TV.
The cosmetic treatment company Arsmo serves as a good example of how these expenses impact the bottom line. In 2015, the company spent 23.17 million yuan on promotions, representing 78 percent of its net profit, the Caixin report said. In 2016, promotional costs increased to 111.77 million yuan, while its net profit tumbled to 23.67 million yuan.
Investors who are lured in by the gross profit bubble generally propose measures such as cutting expenses to improve the net profit margin, said Sun Changmin, former chief financial officer of cosmetic treatment company Munion.
"But those measures wouldn't have much impact because it's nearly impossible to slash promotional spending," Sun said.
Sun explained that companies compete ferociously for experienced plastic surgeons.
"To retain talent, hospitals offer high salaries or ways to help surgeons avoid paying taxes," Sun noted. "If investors sought to manage the organization in a regulated way, they would need to be willing to pay more of their unpaid taxes, which sometimes amount to tens of millions of yuan."
Industry consolidation
Financial institutions remain willing to pump money into the cosmetic treatment industry, despite its slim net profit. Currently, no single player has come to dominate the market.
Investors believe that through mergers and acquisitions (M&As), the industry will consolidate around a few well-established chains with high standards and high-quality services, which will in turn attract more clients, Caixin reported.
With this in mind, some leading venture capital and private equity firms such as Sequoia Capital, Matrix Partners China, Fosun Group and IDG Capital have jumped on the bandwagon, investing in cosmetic treatment mobile applications, beauty equipment suppliers and surgery clinics.
Industry newcomers also include conglomerates whose main businesses have nothing to do with cosmetic treatment, according to media reports.
For example, clothing maker Lancy marched into the market in April 2016 when it acquired a 30 percent stake of South -Korean medical beauty group DMG in a deal valued at 25.2 million yuan.
Lancy also plans to allocate 700 million yuan to establish three cosmetic treatment hospitals and 30 clinics in the next two years.
In July 2016, the real estate corporation Suning Universal Group announced plans to create China's largest cosmetic treatment empire. The company has established a 5 billion yuan fund, while also spending 1.4 billion yuan on M&A deals for cosmetic treatment institutions.
Suning Universal is confident in its plans to expand into the cosmetic treatment industry.
"The cosmetic treatment industry remains in an early stage of development, and we believe our company's accumulated management experience and talent training systems can be transferred [to the industry]," a Suning Universal spokesperson was quoted as saying in the Caixin report.
But traditional players have a different view.
"Those newcomers have an edge in capital, but what matters more in the industry is an experienced team," Ma said.
Hu Dazhi, vice-general manager at Mylike's Internet Department, agreed.
"Managing hospitals is different than managing restaurants and hotels, where investors can quickly copy their experiences," Hu said.
