Click to read the original article for details In the investment business, there is no one-size-fits-all framework; it is always about correcting mistakes and refining in practice. Today, I want to share with you a recent shift in Uncle Feng's consumer investment philosophy—the breaking of the "value-for-money only" prejudice, and new thoughts on the trend of consumer brands "pricing high." Before we dive in, as usual, let me share a few key points:

  • Previously, everyone believed in "value-for-money only," which was driven by the application of new supply chain technologies and the improvement of product capabilities. Before consumption upgrading, the market went through two stages: "satisfaction of durable and essential consumer goods" and "popularization and branding of optional consumer goods." During this period, coinciding with large-scale domestic industrialization, how to make products cheap was the biggest competitiveness for merchants and the core demand of the market.
  • Entering the consumption upgrading stage, changes in the market, supply chain, and demand bring opportunities for products to "price high." Specifically, the Chinese consumer market is gradually moving past the era of "value-for-money only," and people's demand for goods is continuously upgrading, manifested in three aspects: products are more beautiful, better, and have stronger spiritual added value.
  • The severe "involution" in the consumer goods industry also makes "pricing high" one of the inevitable trends. Since 2018, the average growth rate of total retail sales of consumer goods in China has fallen below double digits. With overall growth slowing, it is not enough for brands to focus on one point and continuously polish cost performance; you must make your products more beautiful, better, and with stronger spiritual added value to ensure a longer lifespan. This is actually the process of a brand "pricing high."
  • You certainly cannot raise prices without reason. "Pricing high" means how expensive to sell? Actually, it is a benchmarking issue. The significance of benchmarking for pricing is that your brand is compared with whom, and you are similar in quality but relatively cheaper, which determines the reasonable value in consumers' minds. Because of the generation of multiple added values, the brand's benchmark shifts, leading to a shift in price range, and upward pricing can be accepted by consumers. The following is a detailed analysis, hoping to bring you some inspiration. Welcome entrepreneurs and industry experts to continue communicating with us. Also welcome students with industry backgrounds and interest in consumer investment to join us (hr@freesvc.com). A Prejudice Broken? Recently, Fengrui invested in a Chinese trendy boutique brand called "Duanmu Liangjin." This is an original designer brand focusing on designing and crafting handbags and fashion accessories with wood as the primary material. Its product prices are similar to PRADA, slightly cheaper than LV. Initially, when my investment colleague mentioned this project to me, I firmly refused to look at it. I have always tended to believe that it is difficult for brands in China to escape the "cost-effective" persona. China's supply chain capabilities are too strong, and in such a competitive environment, local brands find it hard to set prices very high. Therefore, making a local luxury brand is basically hopeless. In fact, at that time, I had a prejudice against "pricing high" for brands in China. However, my colleague was very persistent. After about half a month of persuasion, I was dragged to meet the founder. Unexpectedly, after the meeting, it was "really good"! We immediately had investment intentions. But when the project was brought to internal discussions, it was still not favored. Many investment colleagues raised objections or doubts. So, colleagues were arranged to experience it on-site, in three batches. Every time before going, everyone was full of doubts, but when they came back, they were carrying big bags and small bags. Statistics show that before investing, everyone had spent a lot of money at the "Duanmu Liangjin" store. Everyone loved their designs and products, and buying was very enjoyable. This incident was a lever for me. In fact, over the past few years, although not as obvious as this time, my inner prejudice against "pricing high" has been constantly impacted by reality. Let me give another example. Since 2020, the consumer field has been very hot. At the end of the year, several leading brands in sub-sectors we had previously invested in came to me one after another. Without exception, they were all about to raise funds and wanted to hear my advice, such as what kind of institutions to find and roughly what valuation to set. Considering the hot consumer market at the time, the numbers I gave them were, frankly, slightly higher than my expectations. "If you raise funds according to this method, this valuation might have hope." Unexpectedly, I was soon "despised" by the CEOs. It turned out that the verbal quotes they had received earlier were already 1.5 to 2 times the numbers I gave. At that time, I was quite touched because these brands' product prices were not low, but they were all sought after by both consumers and investors. I began to ponder whether my previous framing of consumer brands on "cost performance" was blind and outdated. This also became an opportunity for me to have a more systematic update of my thinking on consumption changes in recent years. How Was the "Value-for-Money Only" Prejudice Formed? First, let's look at how the previous "value-for-money only" prejudice was formed? Because it was indeed the case before. We can roughly divide the development of China's consumer market into three stages: The first stage is the satisfaction of durable and essential consumer goods. The most typical are housing and some essential appliances and furniture, meeting basic family living and life needs. The second stage is the popularization and branding of optional consumer goods. Optional consumer goods mean that you can live without them, but having them will improve your life experience. The third stage is the consumption upgrading, category upgrading, and digital upgrading stage we are in these years. To a large extent, "cost performance" is a product of the first two stages of consumption development. Whether buying home appliances, clothing, or some essential products in daily life, people usually pursue "good and not expensive, and with a brand." Why can it be "good and not expensive"? Behind it is actually the joint promotion and promotion of the application of new supply chain technologies and the improvement of product capabilities (including raw materials, design, function, etc.). In the first two stages of consumption development, coinciding with large-scale domestic industrialization, how to make products cheap was the biggest competitiveness for merchants and the core demand of the market. A most typical example is the impact of logistics development on costs. Although from the data of the logistics industry's proportion of GDP, China's logistics development seems to still have a certain gap with developed countries such as the United States and Japan (according to data from the National Bureau of Statistics, from 2018 to the first half of 2020, China's total logistics cost/GDP values were 14.8%, 14.7%, and 14.2%, respectively. In developed countries, this ratio is stable at around 8%-9%). But from another industry commonly used indicator, "ton-kilometer" (the cost of transporting one ton of goods per kilometer), China has already surpassed the United States. Take the bottled water we drink as an example. In the early years, water was not sold online because the gross margin of water is not high, and logistics costs could account for 20% of its price. But now, like Nongfu Spring, using nearby water sources and packaging plants, distribution costs have been greatly reduced. This is why our brands can achieve "good and not expensive." Another example is the clothing industry. With the development of industrialization, the "cost performance" of clothing has been greatly improved. But it must be pointed out that although consumers are buying more and more clothes, the clothing industry is struggling to survive. According to data from the National Bureau of Statistics, from 2011 to 2017, the retail sales of clothing goods nationwide increased year by year, but the growth rate slowed year by year. In 2018, the retail sales of clothing goods nationwide were 987.04 billion yuan, a year-on-year decrease of 4.8%, and the retail sales of clothing goods experienced negative growth for the first time. This brings us to our key question—entering the third stage of consumption upgrading, is "cost performance" still the most core demand of the market? Not entirely. Consumption Changes: Opportunities for Products to "Price High" Brought by Changes in Market, Supply Chain, and Demand In the consumption upgrading, category upgrading, and digital upgrading stage we are in these years, that is, the third stage, what changes will occur in the mass consumption environment and consumption concepts? This determines how we should adjust our understanding of consumer brands. 1. Consumption Environment and Demand First, look at the macro level. On November 3, 2020, General Secretary Xi Jinping's explanation on the drafting of the "Recommendations of the Central Committee of the Communist Party of China for Formulating the 14th Five-Year Plan for National Economic and Social Development and the Long-Range Objectives Through the Year 2035" was made public. The drafting group believed that from the perspective of economic development capacity and conditions, China's economy has hope and potential to maintain long-term stable development. It is entirely possible to reach the current high-income country standard by the end of the "14th Five-Year Plan" and to double the economic aggregate or per capita income by 2035. To achieve "doubling per capita income," it requires an average annual growth rate of 4.73% over the next 15 years. This is not a difficult goal to achieve. Therefore, we can basically predict that by 2035, most cities in China may reach the current level of Beijing and Shanghai. Everyone is familiar with the Engel coefficient, which refers to the proportion of food expenditure in total consumption expenditure of residents. That is, the higher a family's income, the lower the proportion of income used for essential consumer goods. So, assuming the goal of "doubling per capita income" is successfully achieved, it means that at the entire social level, the proportion of expenditure on essential consumer goods will continue to decline. Another basic logic is that when your income doubles, your expenditure will certainly not be less than now. If you maintain the same standard of living, it is likely that your expenditure will also double. Where will the extra money be spent? In fact, it is still spent on goods and services, that is, you will tend to pursue brands and quality, but not necessarily pursue pure cheapness. This is easy to understand. If you compare with your student days when you had no income, your consumption level after work will definitely rise. Undoubtedly, the things you buy are "better and more expensive." Another example: from drinking purified water to developing to sugar-free sparkling water, coffee, and fresh fruit tea, the price you are willing to pay and your feelings are definitely different. When the consumer market gradually moves past the era of only cheapness and enters the consumption upgrading stage, people's demand for goods is continuously upgrading, manifested in three aspects: 1) Products are better: health, raw materials, freshness, wellness, etc. 2) Products are more beautiful: appearance, function, suitable for showing off, etc. 3) Products have stronger spiritual added value: environmental protection, fun, personality, etc. And these all mean that goods have the opportunity to "price high." 2. Cross-Industry Application and Development of Supply Chain Technologies Of course, behind consumption upgrading are not only changes in the consumption environment and demand, but also the development of new technologies and the application of cross-industry technologies that make everything possible. Let's take convenient food as an example. Affected by home isolation during the epidemic, from January to May 2020, the consumption of convenient food in China increased by 1.5 times, and in February, when the domestic epidemic was most severe, the consumption of convenient food increased by 21.3 times. Convenient food took advantage of the situation to open the market. Do you still remember the instant noodles we ate as children? Generally, there was a vegetable bag, an oil bag, and a seasoning bag, priced at about two to three yuan. At that time, the vegetable bag used drying technology, cutting and blanching, then drying with hot air below 100 degrees. The characteristic is low cost, but the effect of reabsorbing water is not good, so after soaking, the vegetables often taste bland. What was the hottest convenient food in 2020? Luosifen (snail rice noodles). In the previous part, we mentioned that people's demand for goods is higher, including characteristics such as richer raw materials and more suitable for showing off. Traditional instant noodles have no highlight after soaking, but Luosifen has more highlights. A pack of Luosifen contains as many as seven or eight seasoning bags, and some even have 11 bags. After a simple operation, it comes out with full color, aroma, and taste, with real ingredients, and taking pictures to show is not shabby at all. In addition to the increase in the number of seasoning bags, many convenient foods now use improved technology and no longer use drying technology. Whether vegetable bags or meat bags, they use freeze-drying technology. Freeze-drying is carried out at low temperatures, so substances such as proteins and microorganisms will not denature or lose biological activity. Therefore, after soaking, the taste and appearance are still highly restored. These can be achieved mainly due to the huge changes in the supply side of raw materials. Only when the supply chain develops to a certain extent can cross-industry application and development of technology be achieved. In summary, changes in the consumption environment and demand, as well as the cross-industry application and development of supply chain technologies, make it possible for consumer brands to "price high." Severe "Involution" in the Consumer Goods Industry Makes "Pricing High" One of the Inevitable Trends In the previous part, we introduced the conditions for consumer brands to "price high." But in fact, for many consumer brands, "pricing high" is not a choice but a way of survival and development. The hottest internet term in 2020 was "involution." Academic circles and internet circles are complaining about their own "involution" without limits. In fact, in the consumer goods field, involution also exists and is severe. Data from the National Bureau of Statistics shows that since 2018, the year-on-year growth of total retail sales of consumer goods in China has fallen below 10%. In 2018, it was 9%; in 2019, 8%; in 2020, affected by the epidemic, it was -3.9%. It can be seen that since 2018, the average growth rate of total retail sales of consumer goods in China has fallen below double digits. If you can find a sub-sector with a growth rate above double digits, it is a very good direction. Then, with limited overall growth, the competitive landscape brands face in categories also begins to change. That is, brands face a shift from competition in the incremental market (how to make the cake) to competition in the stock market (how to divide the cake). When "involution" occurs, to get more cake for your brand, focusing on one point is definitely not enough. The so-called focusing on one point means that your brand is only outstanding in one link. But now, as the industry shifts to medium and low-speed development, you cannot take advantage of the overall vigorous development of the industry. To ensure competitiveness and gross profit, you either rely on extending the industry chain links to achieve and accumulate, at least more than two links; or you effectively use changes in the industry chain to achieve unique innovation, such as self-heating small hot pot in the convenient food field. That is to say, when "involution" occurs, it is not enough to focus on one point and continuously polish cost performance; you must make your products more beautiful, better, and with stronger spiritual added value to ensure a longer lifespan. This is actually the process of a brand "pricing high." Two Questions About "Pricing High" 1. How Expensive to Sell? How expensive to sell is actually a benchmarking issue. At the beginning of the article, we mentioned the newly invested Chinese trendy boutique brand "Duanmu Liangjin." Customers of "Duanmu Liangjin" often benchmark it against PRADA, so its pricing as a Chinese luxury brand stands. We also just mentioned that the clothing industry is not easy, but China still has a clothing brand that sells not cheap—China Li-Ning. Because customers benchmark it against Nike and Adidas, as a national trend, its quality and design are not inferior to international big brands, but the price is 10%-20% cheaper than Nike and Adidas, so consumers are willing to pay for its "high price." From these two examples, we can see that the significance of benchmarking for pricing is that your brand is compared with whom, and you are relatively cheaper than whom, which determines the reasonable value in consumers' minds. Then the next question is: how to establish the benchmark in consumers' minds? In other words, why should users let you be expensive? 2. Why Should Users Let You Be Expensive? After setting the benchmark for product pricing, how to make consumers accept your pricing? In real life, there are many price increases that are complained about and not accepted by consumers. Frankly speaking, you certainly cannot raise prices without reason. Where is the value of your "expensiveness"? This brings us back to the three aspects of demand upgrading we just mentioned: products are more beautiful, better, and have stronger spiritual added value. Because of the generation of multiple added values, the brand's benchmark shifts, leading to a shift in price range, and upward pricing can be accepted by consumers. Take Heytea as an example. One of the major changes Heytea brought to the industry is reflected in raw materials: it changed tea powder to tea soup, fruit flavoring to fruit, and creamer to milk... achieving raw material upgrading. So it sells expensive, and consumers pay for it. Take Saturnbird as an example. In addition to the cool, high-end, and beautiful packaging, Saturnbird's category upgrading is mainly reflected in technology. Its star product is freeze-dried coffee powder in mini coffee cups, and the key innovation is super instant solubility. Users pour the coffee powder into ice water or milk, and immediately get a delicious cold brew or latte. The realization of taste restoration and convenience is due to Saturnbird applying freeze-drying technology to coffee. Compared with Nestle's well-known three-in-one instant coffee, which costs less than one yuan per sachet, Saturnbird's small cup costs about three or four yuan, and two or three yuan during promotions. But thanks to taste and convenience, users are willing to pay for it. It should be pointed out that "expensive" does not mean the opposite of "cost performance." While pricing high, with the increase in sales and the development of the supply chain, brands can achieve better cost performance while pricing high. If we follow this line of thinking, "becoming expensive" has a path to follow, but one point needs to be reminded to brands. There are many ways to accumulate emotional appeals. The younger generation, who have not experienced material scarcity, are also willing to pay for the satisfaction of emotional needs. However, it is not feasible to forcibly give offline products spiritual added value. Why do I say "forcibly"? Take IP as an example. Generally speaking, historically successful IPs have time and story accumulation, and will definitely go through a process of emotional appeal accumulation. Hello Kitty, created by a cartoon character company rather than originating from a certain anime or film work, is probably the only exception. Whether it is consumer goods or cultural and creative products, the most core thing is to find something that allows users to establish and accumulate emotional appeals, and then better attach it to products and services. Source: Fengrui Capital (ID: freesvc) -END-