This article is from the IDG Capital WeChat account (ID: idg_capital) From a speech by Yan Yisheng, partner at IDG Capital, at the 'New Consumption Era Summit' hosted by IDG Capital.

Is 'consumption upgrade' really a false proposition? We will examine this from four levels. First is political drive. Under the pull of the '12th Five-Year Plan' which made expanding domestic demand a key strategy, consumption accounted for 64.6% of China's economic growth in 2016, becoming the most important driver of economic growth.

The second level is economic drive. On one hand, China's urbanization rate has been increasing year by year, reaching 57.4% by last year. On the other hand, China's per capita disposable income has maintained a rapid annual growth trend, and it is higher than the GDP growth rate.

The third level is changes in population structure, mainly three factors.

First, the expansion of the upper-middle class and the affluent class. Middle and high-income groups have become the mainstream of consumption, with growth rates far exceeding the industry average; the upper-middle class and affluent class will become the main consumer groups in the next five years.

Second, the new generation, including post-80s, post-90s, and post-00s, has become the main consumption force, with consumption growth rates far exceeding China's average consumption growth rate, and their proportion of the total economy will increase year by year. What are the consumption characteristics of young Chinese people? They have a higher proportion of higher education, stronger brand awareness, and their cognitive ability is three times that of the previous generation. They are more likely to become brand advocates and have a more international perspective.

Third, the rise of consumption in third- and fourth-tier cities. Due to the rising cost of living in first- and second-tier cities, many college students from third- and fourth-tier cities are returning, and manufacturing enterprises are moving to third- and fourth-tier cities, so this return of people has boosted consumption in third- and fourth-tier cities. From overseas shopping data, it can also be seen that among the top 20 cities, there is not a single first-tier city; almost all are third- and fourth-tier cities. Therefore, the rise of consumption in third- and fourth-tier cities will become a major driver of the economy in the future.

Finally, the fourth level is technological drive. The popularity of mobile devices has made traffic fragmented; coupled with the niche and personalized demands of consumers, the decentralization of channels, and changes in product demand logic, these all place new demands on consumer companies. Therefore, the occurrence of consumption upgrade at this point in time has its historical reasons.

Consumption upgrade is not only not a false proposition, but the transformation that China's consumer market is about to undergo is unprecedented and sweeping.

Since Ma Yun proposed the 'New Retail' concept at the end of last year, the entire industry has been discussing it, but basically no one is clear about what New Retail really is and what direction it will take in the future. Let's talk about our understanding of New Retail: The dividend of mobile internet began to gradually disappear last year, and e-commerce growth began to slow down; after years of turbulence, the real economy fully recovered last year. We believe that looking forward, it will definitely be a full integration of online and offline.

So what does online have and not have? What does offline have and not have? Online has digitalization, customer data analysis, browsing path tracking, and consumer profiles, but lacks offline service experience, after-sales, and social scenarios. If online and offline can be connected, helping offline improve consumer experience and merchant efficiency, we can better meet consumer needs.

We believe that the next wave of New Retail will be driven by giants, as seen from Alibaba's acquisition of Intime Retail, investment in Bailian and Sanjiang, and launch of Hema Fresh, to JD.com's layout of convenience stores.

Second is our judgment on new brands. We believe that the era of 'price-driven purchasing' is nearing its end. In the future, people will increasingly value brand and quality, and be more willing to try and accept new brands, including local brands, while existing brands on the market cannot well meet the needs of the new generation.

We predict: New-generation entrepreneurs will create a batch of brand-new brands in the next 10-20 years, replacing the old ones; China will see a batch of truly international new brands with market value exceeding 10 billion US dollars.

Third is the transformation of services. If brands are upgrades and replacements, services are from nothing to something. IDG Capital has invested in the fitness chain 'Leke', the medical beauty chain 'Meidaila', the white-collar apartment 'Chengjia', co-working spaces 'Kr Space' and 'Tech Temple', etc. These demands did not exist or were rare five years ago. Now, services have become the main driving force for China's consumption growth, accounting for 51% of the total consumption growth last year. Consumers have shifted from 'buying products' to 'enjoying services'. So our third judgment is: China will also see a batch of new service companies driven by consumption upgrade with market value exceeding 10 billion US dollars.

Fourth is about restructuring. As mentioned earlier, the popularity of mobile has led to traffic fragmentation, and because of the niche and personalized demands of consumers, new requirements are placed on consumer companies. Consumer companies need to restructure their original design processes, supply chains, marketing methods, sales channels, and CRM, etc. Note that the entire consumer logic and decision-making has changed.

Fifth is the transformation of new media. We believe that new media will become the main channel for future marketing and promotion, and we will usher in an era of pan-entertainment.

Sixth, the new generation has become the main entrepreneurial group. This group better understands the new generation's dual demands for quality and spirit. They will become the decisive driving force for consumption transformation, thereby creating a batch of great world-class new retail, new brand, new service, and new media companies. This is also the area we focus on.

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