Today we're going to explore how to do business when the economy is down and consumption is downgrading. Let's start with a conclusion: consumption downgrade definitely exists, but we need to understand its logic. Today, many Chinese middle-class consumers are deliberately reducing unnecessary spending due to asset liabilities and uncertainty about future expectations. However, without major economic fluctuations, the income reduction for ordinary Chinese people hasn't reached the point where they can't afford to eat. As I mentioned in a previous video, a notable feature of a mature society is abundant supply. Because the Engel coefficient is low enough, consumers are no longer limited by scarcity; scenarios become the core decision variable. You might not feel it strongly, and doing business as usual might seem fine, but you just feel it's not as easy as before. This is partly due to individual perception; the internet has been working to eliminate information asymmetry, but China's market is huge, and industry changes don't cool down overnight—they happen gradually. If you look at a 5-10 year cycle, you can clearly see the changes in China over the past decade. Returning to today's topic, first, three types of businesses will do well during an economic downturn: First, luxury goods will do well; a lot of capital is no longer used for investment, so wealthy people holding such capital will spend it on consumption. Second, products with good quality-to-price ratio will do well; many middle-class people are falling in status but don't want to lower their quality of life, so they prefer products with unchanged quality but affordable prices, even substitutes for big brands. Third, products that provide emotional value will do well; in an affluent society, people are more willing to pay for cheap emotional value. First, let me share my personal view: what is consumption upgrade? Consumption upgrade is not about increasing income, but about increasing people's choices. Note that this understanding is crucial; if you don't understand that the essence of consumption upgrade is not income increase but choice increase, you won't understand why consumers aren't buying your products in today's economic environment. Since consumption upgrade is about increasing choices, does consumption downgrade mean choices decrease? Actually, no. Supply is always there, but the consumer's logic changes from eating and using the most expensive to eating and using products with better quality-to-price ratio. What does this mean? Let me explain. We can use a popular term from Douyin: "delicate poverty". What is delicate poverty? It refers to people who are well-educated, have seen the world, and have eaten and used good things. It's impossible for them to go back to consuming cheap, inferior goods. Once people experience good things, they can't downgrade to worse experiences. If they really can't afford it, they'd rather not consume. Although the economic environment is bad, China's Engel coefficient is actually not high. Consumers are just smarter and more picky, choosing products with better quality-to-price ratio. What does better quality-to-price ratio mean? Simply put, it's high-quality substitutes with the quality of big brands but at ordinary prices. You can understand it as: they optimize their consumption structure due to life pressure. Note, it doesn't mean they stop buying good things. During Japan's Heisei era, the lost 20 years, Japan's GDP grew only 1.2% annually, but luxury bag sales didn't decrease. Some statistics show that Japan became the world's largest luxury market in those 20 years, accounting for 30% of global luxury sales. Were these all bought by the rich? Actually, no. A large number of luxury goods were bought by young women who were just starting their careers and living in delicate poverty. Why is that? There's a logic about consumers' face, substance, and body. Face: in society, you need to meet people, so these people still need to maintain basic class needs. The other day I went to Tianjin's MixC mall; Adidas and Nike had no business, but Arc'teryx and Descente had queues just to enter the store. I sighed, who says Tianjin's economy is bad? But even if high-end stores have queues, don't be fooled. When they consume daily necessities that don't require social interaction and products that don't affect their bodies much, they pay special attention to quality-to-price ratio. For example, in food and beverages, they definitely prefer healthier, more natural, additive-free products. This is what I want to say—the contradiction of consumption. After saying this, let me talk about emotional consumption. Liang Ning, in his new book "True Demand", mentions a formula: Product value = functional value + emotional value + investment value. Today, many young people are not not consuming; it's just that in their consumption logic, functional value and investment value are not as important as emotional value. I strongly suggest friends who make products to study KKV, this grocery store. Its product development logic targets single women or women with children, providing various emotional value products for their life scenarios. Its product concepts, packaging design, specifications, and product forms all make you feel full of emotional value. I looked at some of its private label product pricing; gross margins are at least over 50%. What inspiration does this give us? As Suzuki Toshifumi said in "Retail Philosophy", today is the era of consumption saturation. When consumers no longer buy because of hunger, making rice balls tasty is more important than making them cheap. So for future business, if you are a brand, focus on the polarized groups: either high-income or low-income; alternatively, either do emotional value or do quality-to-price ratio. In general, it's about doing both ends, not the middle. Products that are mediocre will only get worse in the future. The second suggestion is: if you are a distributor, quickly transform your business from a price-difference model to a service model. Price difference focuses on the gross margin of each single product, including the combination of product margins. But the internet will gradually eliminate all information asymmetry in the coming years; you can't earn more price difference from products, and even most products will become negative margin. Service looks at what value-added business you provide to customers; you earn reasonable profit from your value-added services, so the better and cheaper your service, the higher the barrier. Those doing B2b understand this; the platform doesn't earn from product price differences but from providing one-stop supply chain services. The cost of warehousing and distribution, how much to add, how much to earn—profit comes from high turnover under scale, not high margins under information asymmetry. Third, if you are a retail enterprise, whether you do discount stores, snack membership stores, or convenience stores, I think it doesn't matter. What matters is: you need to see the consumption structure of the city's population, and provide value of more, faster, better, and cheaper for their buying, browsing, and stocking behaviors. Of course, you might say someone is already doing this? Yes, there is no industry in China that isn't oversupplied, and retail is no exception. But many retail formats, in meeting demands and behaviors, usually only satisfy one or two grid dimensions. But today's consumers want it all: they want it fast, better, cheaper, and even more. The more demands you can satisfy for consumers, the higher your competitive barrier will be.