New channels, new concepts, new products, and new supply chains – all indicate a brand-new logic of consumption investment in China.
Antitrust, reform in education, real estate and medical care policies, Common Prosperity... all of these show that China is undergoing earth-shaking change. These changes have brought large uncertainty, making many investors afraid to invest in Chinese projects and companies. However, over the next decade, China sure will become the world's largest economy. How to better understand the opportunities and risks of the Chinese market and deal with certainty and uncertainty is a crucial problem. EqualOcean launched a series of research, China's Future Investment Watch, hoping to provide clues for global investors.
In 2020, an 'investment cult' appeared in China's consumption sector, with significant funds being brought into the area, including both domestic and foreign capital. According to the Institution of International Finance (IIF), the total debt globally rose by USD 24 trillion and hit a historical high. The stock markets grew by 16% in market capitalization, with China’s A-share market going up by 34%. The viral secondary market, especially in certain sectors, reshuffled the investment direction in China.
Followed by some domestic brands' IPOs, which all went far beyond their issue prices, capital was spurred to follow. Also, with the fastest rebound from the economic downturn, China became the main support of the global supply chain and cross-border business, especially e-commerce, which achieved massive growth, thus becoming the hottest property for investments.
All the indicators are proving that China's consumer goods market has entered a new era, one which we call 'new consumption.' Here we discuss why it is new and what we think about it.
New medium, new channel
As we discussed in the previous article, the evolution of new mediums has reshaped the consumer goods market in China. Short-video and life-sharing platforms dominate the young population. Whichever brands have not tried to reach out to customers in this way are about to be ruled out.
Not only do these platforms serve as a medium for brands connecting with customers, they also supply the channel for them to sell products. Many channels are integrated into the new media. When you are scrolling on these platforms, you get interested in the products people are sharing and then add them to the shopping cart – this is how those mediums become channels.
However, this traffic dividend wouldn't last too long, for many reasons – including those we discussed in the previous article. This new channel will be a must for brands to reach out to customers under this new consumption wave, which client acquisition being so time-sensitive in this changing market.
New concept: To the extreme
Best price – most cost-effective
With the Z-generation taking up more of the consumer base in China, the logic for money spending has been changing. Compared to the previous generation of consumers that only focused on the prices of products, the younger population tends to value the combination of quality and price. They compare similar products among different platforms and chose the one with the best combination.
Xiaomi, a top mobile phone manufacturer in China, started the 'best price' strategy in the electronics sector, followed by other domestic brands like Huawei, OPPO, Vivo… They aggressively ate into Samsung's market share by producing mobile phones that have lower prices but similar qualities and even better design.
The same story is playing in the consumer goods market as well, with tons of new brands that run 'best-price' strategy entering. Perfect Diary (Chinese: 完美日记) (YSG:NYSE), a domestic cosmetic brand, bit into the beauty market in China with lipsticks and eye shadows at 20% of the prices provided by international brands. In the highly profitable cosmetic market, Perfect Diary chose to break this pattern and yielded part of the return to customers.
Hey tea (Chinese: 喜茶), a beverage brand in China that competes with Starbucks, has similar or even lower retail prices compared with the latter, but much higher costs. For example, the plastic cups Starbucks use are one-time items, but you can always keep the cup from Hey tea for further use. More than that, the contents – the beverage itself – has sufficient add-ons that bring extra value to consumers. Hey tea only asks for double mark-up, while traditional beverage brands, like Starbucks, usually have markup rates of 10x. These are examples of going to the extreme in a cost-effective strategy, using the best price to acquiring customers.
Also, under which trend, not only newly established brands but also many traditional domestic brands revived in recent years. Benefited from the advanced supply chain system, brands in China are able to access the manufacturing centers in many sectors and provide the best quality at the lowest price. Customers are being more logical nowadays, realizing that domestic brands can be trustable just as international brands. Pechion (Chinese: 百雀羚), a traditional domestic beauty brand from Shanghai, achieved over 10 times previous sales after being ignored for years. Worrier (Chinese: 回力), a shoe manufacturer that was founded near a century ago, resurged after being overlooked for a while with over 100,000 pairs sold on a single e-commerce platform and embraced by many Hollywood celebrities.
The logic also speeded the development of the group buying model. Represented by Pinduoduo (PDD:NASDAQ), which has users that reflect the Z-generation’s spending power. The community group buying platforms also became more popular. Plus, the logistics systems in China have been reaching a more convenient stage, especially over issues affecting the final step – movement from a local facility to door (called 'the final mile delivery') – have been upgraded for more timely services.
Best product – consumption upgrades
More than going extreme on prices, consumers are tending to pursue 'best prices' at the same time, which refers to a higher requirement on certain consumer goods. It is a typical example of a consumption upgrade, which happens at the same time as 'best-price choices.' Many brands that are targeting 'extreme' image stood out, either on outlook, functions, concepts, or quality. It is seemingly just as a book name suggests – Only the Paranoid Survive – from Andy Grove, former CEO of Intel.
Products need a best value proposition, which is based on a new demand from younger generations that was previously neglected to some extent. New consumption urges new brands to deeply understand customers' needs and appeals. To be specific, customers' concepts are changing from 'value for money' to 'value-added meaning,' from 'function satisfaction' to 'emotional satisfaction.'
For example, customers are tending to choose products with the best-designed outlook among all brands that have a similar quality, even though the price might be higher, represented by Apple's electronics and Dyson's home appliances. Not only international brands, but domestic brands in China are also trying to tell the same story. DUANMU (Chinese: 端木良锦), a luxury brand that sells bags with specialized materials, like high-end wood, leather, and silk. They also have extremely fine but traditional design that expresses the concept of 'a View, a China.' The brand is as expensive as Prada, Chole… but has attracted a large number of affluent people and raised over ten million in capital.
Furthermore, with an increasingly health-conscious population, healthy food and beverage are standing out. Genki Forest (Chinese: 元气森林), a flavored zero beverage Chinese brand, already deployed its business both domestically and internationally. The star product, flavored sparkling water that benchmarks zero Coca Cola, has beat the latter and ranked top in China's soda market, even with prices double those of Coca Cola. The reason behind this is that Genki Forest used a healthier and more expensive sugar substitute than Coca Cola Zero, which meets with the wellness demand of customers from the younger generation. It went extreme to find the best combination of flavor and health with the best ingredients used, which successfully made it the most-sold zero soda in China.
New product: to be different
The growth of retail sales of consumer goods in China has dropped below 10% since 2017. The figures reported 9% in 2018, 8% in 2019 and -4% in 2020. There are barely any micro-segments that can reach double digits now, which means the competition among brands has changed from incremental market to stock market. In other words, as we illustrated in the previous article, after tons of new brands showed up in the market from 0 to 10, they entered into a new stage building themselves from 10 to 100. After finish baking the pie, they are now trying to divide the pie.
Customized, personal, and differentiated products will be the way to survive and get big.
For example, self-heating has been using in the military and served as emergency food for decades, but the creative combination with popular Chinese food, like hot pot, rice dishes, ramen, …, make self-heating food first become delicious. Many brands with supreme tastes becoming famous, like Zihaiguo (Chinese: 自嗨锅), which raised five series in two years; Mo Xiao Xian (Chinese: 莫小仙), another self-heating food top player, attracted over CNY 10 million capital and ranked second in the market right after the hot pot giant, Haidilao (Chinese: 海底捞), which also deployed in the self-heating hot pot market.
Ramen Talk (Chinese: 拉面说), a convenience food brand that makes fresh ramen with rich ingredients. With aproduct very different to traditional cup noodles with tasteless vegetables inside, Ramen Talk introduced new technologies to dry ingredients without losing any taste, as well as creating the hand-made noodles themselves. By doing this, Ramen Talk bit into the market rapidly with people saying the food is even better than you can taste in physical local restaurants, even though the cost is much higher than the normal convenience food, priced around USD 10 per serving.
Saturnbird (Chinese: 三顿半), a coffee brand that started making super instant coffee in 2018 with unique design and fresh flavor, reshaped the entire coffee market. In China, the coffee machine is not always set up in offices; however, coffee is becoming more and more popular among young professionals. Fresh-brewed coffee is hard to get when people are busy at work, but traditional instant coffee does not taste good for them anymore. This previous blank the market was discovered by Saturnbird, which creatively uses cold extraction and intelligent drying technology to retain the original coffee flavors, providing natural and premium tastes just as the fresh-made coffee. Even though every pod is sold at USD 1.5 to 2, dozens of times more expensive than traditional instant coffee, it was able to win over the market.
The examples we listed discussed one thing: under the new consumption environment when all the dividends in the market have been almost fully extracted, going different and being unique will be the way for brands to survive and stand out afterward.
New supply chain: Comprehensive network
With the entire consumer good market moving into a lower-speed stage, it will be hard for brands to ride the wave of the entire market dividends. As we've emphasized many times, brands that have unique and creative points in products will survive. More than that, efficient and supreme management through the entire supply chain is set to be another competing factor.
The supply chain system in has long been in the leading position worldwide, especially since the pandemic. Nowadays, the upgrade and digitalization of the supply chain are becoming the top priority for Chinese consumer goods brands. The competition among brands has changed from single components, like products and supply chain to the efficiency and effectiveness of the entire 'supply network.'
The new supply chain – or, as we say, a new supply network – should form a closed loop around the data chain, which uses digital tools to connect all elements on the chain and can also include the integration of online and offline sometimes. Brands can know who is buying their products, when the purchases occur, how many returning customers there are and which are the best-sellers. This provides an efficient way for brands to revise their selling strategies and product manufacturing.
Chinese brands are likely to stand out this way, as the digitalization of the entire chain tests the strength of the supply chain itself, which China is leading. Many direct-to-customers (D2C) brands entered the spotlight. For example, SHEIN, a Chinese D2C e-commerce fast fashion brand that targets overseas customers, utilizes a digitalized 'supply network', which enables it to track activities on the entire chain, from manufacturing to customer-end. It uses the strategies of producing a limited amount of every single product before collecting the customers' purchasing behaviors to save costs, and then expanding the production scale after perceiving the best sellers. The use of the digital supply chain squeezed out the distributor line and connects customers and brands directly, and makes it easier for brands to manage the strategies in all chain components, including manufacturing, inventory, customer acquisition, selling and marketing to run the optimal solution. By using this strategy, SHEIN beat all the traditional fast fashion brands in the US and ranked top based on market share.
Of course, it is not easy to achieve a comprehensive network digitalized and integrated. But apparently, this will be a strong barrier for brands equipped with this capacity, and this is the definite trend under the new consumption wave. Large efforts need to be put in to integrate the front and back-end, from the manufacturing, inventories, products, services, experiences, and the entire efficiency.
After all, we believe that the combination of new medium, new channel, new concepts of customers, new products and new supply chain all shaped new brands in China.
This 'new' consumption is conveying a whole new logic in consumption investment in China – that understandings the customer is the key to success nowadays, and is reflected in the ways we discussed. By digging into the real demands of customers and understand the new concepts and values they hold, brands are able to design differentiated products, through new mediums and channels allowing them to rapidly disseminate. And when the products meet the needs of customers, they sell themselves. Afterward, by utilizing the digitalized supply chain system, brands can quickly get feedback from the very front end, getting to know the customers' demands further, and make certain revisions at the very back end to make the entire loop more efficient.
Of course, the traditional large retail and consumption brands will still be the long-lived kings in the market as they are mostly equipped with the best, most comprehensive systems, while the digital era nowadays gives great opportunities for small and young brands to grow. The question is what the future for those new brands is, and how to achieve economic scale effect.
The consensus for the brands surviving under the new consumption wave is that they must either achieve something that others haven't or can't and link everything into a closed loop. 'The difference between ordinary and extraordinary is that little extra. Whichever brand is equipped with those little extra can win.
EqualOcean operates offices in Beijing, New York, and Shanghai. We welcome investors interested in the Chinese market to contact us via (contact@EqualOcean.com) or visit our offices. We believe the exchange of views will make you have a clearer prediction of the future.