Three areas of "consumption upgrade" happening in China
Subtitle: Why invest in China's consumption upgrade, where are the consumption upgrade happening, and how to win those markets
The trend of consumption downgrade in China has been widely discussed, but let's spare you the repetition. High saving rates and the rise of platforms like Pinduoduo (where cheap alternatives can be found) are increasingly quoted as evidence of consumption downgrade, and the economic hardship has simply made the demand for cheaper alternatives more pronounced.
Let's talk reality. Even in the absence of economic downturns, business models such as Pinduoduo, which trade volume for price and quality through optimized supply chains, are destined to succeed. The global market for such models is vast, and we can observe success stories like Shein, Zara, H&M, and Temu (which is estimated to reach $100 million in the USA this year). However, while Zara can create the wealthiest individual in the world, it cannot replace luxury brands like Gucci, Prada, or Louis Vuitton. The success of Pinduoduo cannot overshadow opportunities to invest in tomorrow's superstars in areas of "consumption upgrade" happening in China.
In today's post, we'll focus on the other side of the coin and explore representative categories where the "consumption upgrade" is happening. Decades ago, the reputation of brands and the scarcity of products may have been enough to persuade Chinese consumers to pay a premium. However, now, creating value-added and expanding customer bases requires different strategies.
Niche products with high technological, manufacturing, and design barriers
The market for soft-shell jackets is a case in point. Online sales of soft-shell jackets grew by 166% from 2019 to 2023, driven by the trending outdoor lifestyle among consumers. In 2019, the dominant sellers were mainly mid-range brands like North Face and Colombia, offering jackets priced at several hundred Yuan. However, by 2023, demand for high-end brands (those priced above 1500 Yuan per item) has exploded.
In the lower and mid-price ranges, many domestic brands have replaced mid-range foreign brands. For instance, the domestic outdoor wear brand "伯希和Pelliot" gained popularity through local celebrity endorsements and became the top-selling brand in the affordable price range in Q2 2023 across Tmall, JD, and Douyin.
This trend is not limited to soft-shell jackets alone but can be observed across various outdoor gear categories such as fleece jackets, mountaineering shoes, snowboarding & skiing equipment. Foreign brands still dominate the high-end range, a trend we have previously discussed.
The common denominator among these products is the need for professional design and technology. As a category transitions to mass production, supply chain and manufacturing costs can be reduced, but the development of patents and proprietary technology takes years of research and development, raising entry barriers and creating value-add.
According to BigOne lab's data on Xiaohongshu, a lifestyle social media platform, it is intriguing to find that consumers who prefer high-end outdoor wear brands like Arc'teryx also exhibit an interest in luxury brands such as Hermes, Ralph Lauren, and Aesop. What's even more interesting is that among the top brands followed by Arc’teryx enthusiasts, there is a significant affinity for HiPP, a German organic baby food brand known for its premium, natural, and wholesome products. Notably, a majority of these consumers reside in the wealthiest regions of China, such as Shanghai, Beijing, Jiangsu, Zhejiang, and Guangdong provinces. Additionally, a significant portion resides outside mainland China, with popular locations including the USA, Australia, Hong Kong, and Taiwan.
Let's just say that when consumers are ready to upgrade their standard of living, they are upgrading every aspect of it. I believe that, for businesses and brands, adopting a holistic approach by bundling products and marketing them as part of a lifestyle upgrade will become increasingly crucial to appeal to this group of customers. Simply selling a product won't suffice; instead, creating a compelling narrative of living with core values centered around natural, healthy, and professionally-made products will be increasingly appealing to consumers seeking a high quality of living standards.
In the following sections, you will go on to discover more stories about products and companies that create compelling reasons for consumers to pay a premium. These stories include:
how clothes dryers, ubiquitous in Western countries, are just beginning to penetrate the Chinese market led by Bosch and Siemens.
how a successful restaurant chain convinces its customers to pay premium prices for a kind of fish dish that’s usually associated with the low-end.
how an “invisible” service sector has quietly upgraded, largely unnoticed by the public eyes
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