---
title: "Reflections on 'Consumption Upgrade' vs. 'Consumption Downgrade'"
description: "As the Spring Festival holiday draws to a close, offline consumption remains robust despite the pandemic, prompting discussions on whether consumption upgrade has been interrupted. The rise of Pinduoduo has challenged the traditional paradigm, but the reality is more complex, involving consumer threshold shifts and internal consumption differentiation."
author: "怪盗团团长裴培"
publisher: "New Distribution"
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published: "2022-03-04"
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# Reflections on 'Consumption Upgrade' vs. 'Consumption Downgrade'

> As the Spring Festival holiday draws to a close, offline consumption remains robust despite the pandemic, prompting discussions on whether consumption upgrade has been interrupted. The rise of Pinduoduo has challenged the traditional paradigm, but the reality is more complex, involving consumer threshold shifts and internal consumption differentiation.

Time flies, and the Spring Festival holiday is almost over. Although the impact of the pandemic has not disappeared, offline consumption across the country remains relatively strong, with entertainment venues bustling. It is foreseeable that "whether consumption upgrade has been interrupted and whether it will continue" will become a key theme in the domestic investment circle in 2022.

In fact, before 2017, there was basically no doubt about the concept of "consumption upgrade." At that time, Alibaba was talking about consumption upgrade, and JD.com was also talking about consumption upgrade, though they defined the path differently. However, the sudden rise of Pinduoduo broke the paradigm of "consumption upgrade."

There are various explanations for Pinduoduo's rise, with the most popular being: Alibaba focused too much on "consumption upgrade," neglecting lower-tier markets, and was thus defeated by Pinduoduo, which championed "consumption downgrade."

However, Pinduoduo's founder, Huang Zheng, disagreed with this conclusion, arguing that Pinduoduo also represented "consumption upgrade"—the upgrade for users in third-tier cities and below, as well as townships.

When discussing specific issues in any industry or business, we must avoid "concept-first" thinking. We cannot force reality into theories; instead, theories must conform to reality.

"Consumption upgrade" and "consumption downgrade" are indeed a pair of irreconcilable and eye-catching contradictions, but do they truly exist? Will the e-commerce market in the next 5-10 years be determined by one of these directions?

As the holiday draws to a close, it seems a good time to ponder this question—seeing the bustling crowds on the streets, and luxury stores alongside vintage and discount stores achieving impressive sales, which is winning: "consumption upgrade" or "consumption downgrade"?

This article cannot fully answer this question, but it attempts to provide some clues.

**The Real Reason for Pinduoduo's Rise: Is It "Consumption Downgrade"?**

The claim that "Alibaba focused on consumption upgrade and was caught off guard by Pinduoduo's consumption downgrade" contains some truth but is not the whole story.

Veteran consumers may recall that from 2008 to 2012, JD.com was the platform most representative of "consumption upgrade," while Taobao was often criticized for mixed product quality, low genuine product rates, and poor fulfillment.

Starting in 2012, Alibaba, relying on Tmall (formerly Taobao Mall), began a long process of branding, particularly dominating in profitable categories like apparel and beauty, thereby consolidating its market dominance.

When Pinduoduo was founded in 2015, its available resources, aside from WeChat ecosystem group-buying traffic, were only relatively fair traffic allocation rules that favored small and medium merchants.

As China's largest e-commerce platform, Taobao's e-commerce was actually split into two parts: Taobao, which generated buzz, and Tmall, which generated profit. **Both then and now, traffic allocation on Taobao's e-commerce heavily favored large merchants and big brands,** as shown in the table below:

**Traffic Allocation Rules on Taobao's E-commerce:**

(Source: Internet Monster Band)

It can be seen that although Taobao C-stores contributed over 50% of Taobao's e-commerce GMV until 2019, they received minimal traffic support. Alibaba's strategy was to support mid-to-high-end brands, i.e., "Taobao sets the stage, Tmall performs."

Moreover, in the brand e-commerce space, Alibaba prioritized flagship stores (brand-owned) and exclusive stores (operating only one brand), putting distributors and agents operating multiple brands at a disadvantage; white-label products lacking brand recognition were even worse off.

Merchants who couldn't get resources on Taobao's e-commerce tried JD.com, WeChat mini-programs, and WeChat business, but none met their needs:

- **JD.com is primarily a self-operated platform,** and since 2017, it entered a stable phase with limited growth; JD's advertising platform (JD Bubble) was less efficient than Alimama. Many Taobao sellers tried opening stores on JD, but results were mediocre.
- WeChat mini-programs attracted attention in 2017-18, **but the WeChat ecosystem lacked its own operations and fulfillment systems.** At that time, WeChat Channels had not yet launched, making it difficult for merchants to use video and live streaming, two highly efficient e-commerce advertising formats. WeChat also did not prioritize building an e-commerce ecosystem.
- **As for WeChat business centered on group chats and Moments, it was only suitable for smaller-scale brands** or private domain community operations. To this day, WeChat business remains a force to be reckoned with, but it is hard for it to become mainstream in retail e-commerce.

Around 2016, small and medium merchants were desperately seeking alternatives to Taobao's e-commerce, and Pinduoduo was the only platform that met all their needs.

Early Pinduoduo focused on white-label products, preventing small merchants from being at a natural disadvantage; operating around single SKUs (rather than stores) gave white-label products a strong competitive edge; the absence of a shopping cart shortened the transaction chain; and simple promotional rules saved time for both merchants and consumers.

Traffic allocation rules friendly to white-label single products, combined with WeChat group-buying viral marketing, were enough to create nationwide bestsellers.

Many still believe Pinduoduo's success lies solely in leveraging WeChat traffic, but this fails to explain why other WeChat-based e-commerce platforms failed (e.g., Taojiji) or lagged far behind (e.g., Jingxi).

In fact, **even if Taobao's e-commerce products could be freely shared to WeChat, it would be difficult to achieve Pinduoduo's success**—the latter could feed endless traffic to a white-label SKU, while the former had to consider the interests of many SKUs from big brands.

Comparison between early Pinduoduo and Taobao's e-commerce:

(Source: Internet Monster Band)

Pinduoduo's strong rise from 2015 to 2018 cannot be easily attributed to so-called "consumption downgrade" or entirely to capturing lower-tier markets. We must also consider the supply side: **Why could Pinduoduo merchants supply goods at such low prices? This should be credited to China's vast and efficient manufacturing industry.**

Not all factories have the capability to cultivate their own brands, nor can all factories OEM for big brands. For manufacturing enterprises that excel only in production and not in distribution, Taobao's e-commerce was once an important channel, but Pinduoduo gradually became a more important one.

The so-called "consumption upgrade/downgrade" is essentially a demand concept; manufacturing overcapacity is a supply concept—their combination gave rise to early Pinduoduo.

The problem is that as a commercial organization, Pinduoduo will eventually face the same issue as Alibaba: only big brands have the highest marketing budgets and provide the most revenue to the platform, which is the fundamental reason for Taobao's e-commerce "Tmall-ization."

Especially after Pinduoduo passed its traffic surge period and entered a stable growth phase, it had to consider increasing its monetization rate.

Therefore, starting in 2019, Pinduoduo launched the "Billion Subsidy Program," aiming to cultivate user habits of buying big-brand products on Pinduoduo at absolute low prices.

The price of the iPhone 11 during the 2019 Double 11 is a perfect example: Pinduoduo offered the lowest price online at 4,799 yuan, attracting a large number of new users and enhancing brand perception among existing users.

(Source: Tmall, Pinduoduo, JD.com)

JD's "Jingxi" and Alibaba's "Taote" (formerly Taobao Special Edition) follow the same basic approach as Pinduoduo: **connecting with China's vast number of unbranded (or white-label-only) manufacturing enterprises, allocating them a specific traffic pool,** and simplifying the complexity of opening stores, operations, and promotions.

In fact, today's Alibaba, JD.com, and Pinduoduo are all national-level e-commerce platforms serving all consumers; the claim that Alibaba and JD are in the "consumption upgrade" business while Pinduoduo is in the "consumption downgrade" business is completely unrealistic.

So why do we still discuss topics like "consumption upgrade vs. consumption downgrade"? Isn't it a false proposition?

The answer is simple: Although the "consumption upgrade vs. downgrade" proposition is less important than the previous two propositions ("centralization vs. decentralization," "content e-commerce vs. shelf e-commerce"), it still holds some significance and is a starting point for many people studying e-commerce.

Take the most direct example: manufacturing enterprises that primarily sell through Pinduoduo, Jingxi, or Taote—what should their next steps be?

- **If consumption upgrade is the mainstream, they should consider gradually increasing brand awareness,** i.e., improving product quality and average order value. Some will become future "big brands," and some will become OEM factories for domestic "big brands."
- **If consumption downgrade is the mainstream, they should stick to the current white-label path,** even pushing low prices to the extreme, without considering differentiation; the market for "big brands" would shrink in this scenario.
- If neither upgrade nor downgrade is mainstream, the situation becomes particularly complex. If investors and industry analysts in first-tier cities cannot judge the situation, small factory owners in third-tier cities and below will be even more at a loss.

Don't rush to conclusions. We will continue to delve into the topic of "consumption upgrade vs. consumption downgrade" in the future.

**Consumers with Rising Thresholds: Naturally Favoring "Consumption Upgrade"?**

Over the past decade or so, the most notable trend in the entire e-commerce industry, and even the entire internet industry, has been the rising threshold of consumers. They have been overstimulated by various marketing and promotional tactics, making them increasingly hard to fool; from the perspective of e-commerce platforms and merchants, this manifests as rising costs for customer acquisition and transaction completion.

Moreover, under the traditional "imitation + plagiarism" culture of domestic internet platforms, operations across major platforms have become increasingly homogenized, further raising consumer thresholds.

Take the 2019 Double 11 as an example: Tmall, JD.com, Pinduoduo, and Suning's promotional activities were almost identical. Full reduction, coupons, and live streaming originated from Taobao's e-commerce; red envelopes, billion subsidies, and mini-games originated from Pinduoduo, then were copied by all competitors.

Two years later, Douyin and Kuaishou also deeply participated in Double 11, and you'd find they used the same old tricks. **When you open a red envelope page or check in within a mini-game, you might not be able to tell which e-commerce app you're on.**

(Source: Star Data)

The exhaustion of traditional marketing tactics (at both platform and merchant levels) has shifted the main battlefield of brand marketing to social media, i.e., less blatant, personalized "seeding marketing." From 2017 to 2020, Xiaohongshu became the main venue for "seeding," especially benefiting women's apparel and beauty brands.

It's no exaggeration to say that **the rise of "new domestic" beauty brands, represented by Perfect Diary, was key to capitalizing on the "Xiaohongshu dividend."** This "seeding" trend, centered on consumers' personal experiences, gradually spread to Douyin, Bilibili, and Zhihu, becoming one of the main drivers of "content e-commerce."

At first glance, this personalized, content-driven marketing trend seems particularly favorable to "consumption upgrade," for the following reasons:

- "Personalized" brands certainly don't emphasize absolute low prices or cost-effectiveness, but rather uniqueness in function, experience, and culture. It's hard to imagine a Xiaohongshu socialite writing thousands of words of seeding notes for a white-label toy bought on Pinduoduo, but she might well do so for an authentic trendy toy from Tmall.
- The inevitable result of "personalization" is IP-ization, which requires massive annual marketing investment, because only brands that thoroughly occupy user minds over a long period can be considered IPs. Seeding Beijing Universal Studios on Xiaohongshu or Douyin is a matter of pride; seeding Wanda Theme Park might be embarrassing.
- Because "seeding" has proven effective, it quickly industrialized. Now, KOLs and even KOCs on major content platforms generally charge for "seeding"; marketing based on such paid content often raises explicit and implicit costs for brands, and only higher-end brands can best leverage it.

The problem is that **"consumption upgrade" is not only about consumers' willingness but also their ability**—seeing lots of seeding content on Xiaohongshu, Douyin, or Bilibili can arouse a young woman's desire to "upgrade," but does she have the financial means to satisfy that desire?

For young people in big cities (the core demographic that "new domestic" brands hope to capture), disposable income has continued to grow in recent years, but the growth rate has gradually slowed; to be precise, this generation's income growth is far behind that of their predecessors in the workplace. The next generation may be even worse off.

(Although less credible than before, Xiaohongshu seeding notes remain an important reference for consumers)

In this context, young people have to adopt two strategies to bridge the gap between "consumption willingness" and "consumption ability":

**The first strategy is to merely display consumption attitudes without actually increasing consumption.** This has led to a series of absurd phenomena such as "socialite group-buying groups," "more people showing off Ferraris on Xiaohongshu than national Ferrari sales," and "Prada vegetable market becoming a selfie spot for influencers." More and more young people are accustomed to showcasing lifestyles on social media that are far above their actual consumption levels.

For brand advertisers, this creates severe information asymmetry, disrupting advertising strategies. For example, in 2020, a large number of advertisers placed product placements on Bilibili, with results generally below expectations. Advertisers gradually realized that young people's need to "display consumption attitudes" often outweighs consumption itself.

**The second strategy is consumption differentiation: spend lavishly where you want to, and save aggressively where you don't.** This is a key reason why Pinduoduo and Tmall have both maintained growth over the past five years! For example, a young woman in a second-tier city might fancy a certain high-end perfume and plan to spend an extra 1,000 yuan on it; meanwhile, she must save 1,000 yuan elsewhere.

So, she'll buy power strips, towels, socks, slippers, and other standard items she doesn't care much about on Pinduoduo, then order the high-end perfume on Tmall. "Consumption upgrade" and "consumption downgrade" thus manifest in the same person, which we call "internal consumption differentiation."

It's easy to understand why the first wave of successful "new domestic" brands mainly belong to beauty (especially color cosmetics) and FMCG. Perfect Diary, Florasis, Genki Forest, and Zhong Xuegao—these successful "new domestic" brands all align with the aforementioned "displaying consumption attitudes" and "internal consumption differentiation" paths.

Take color cosmetics as an example:

- Color cosmetics have moderate unit prices and immediate effects, making them suitable for "showing off consumption" on social media. Of course, eating a Zhong Xuegao or buying a Pop Mart blind box has a similar effect on Moments.
- Women's quality requirements for color cosmetics are not as high as for skincare. For those wanting to "upgrade" in this area, trying a few new brands poses no psychological pressure; for those wanting to "downgrade," trying a few domestic brands is unlikely to cause significant negative effects.
- Color cosmetics are easily replaceable, and users have a natural drive to seek new products. Brands must continuously launch new products and market them, which in turn provides social media KOLs with a steady stream of marketing budgets.

Therefore, simply categorizing "new domestic" brands as "consumption upgrade" or "consumption downgrade" is unscientific and incomplete. The "new domestic" trend is an inevitable product of internal consumption differentiation, **a solution to the contradiction of "high consumption willingness/insufficient consumption ability" among this generation of young consumers.**

I believe this solution will gradually extend to more product categories.

(Currently, most successful "new domestic" brands are beauty brands)

For e-commerce platforms, "internal consumption differentiation" is a thorny challenge that is difficult to handle well. Frankly, centralized e-commerce platforms can accept both "consumption upgrade" and "consumption downgrade," but they are somewhat powerless against the prospect of "consumption differentiation." This is not hard to understand:

If the major trend is "consumption upgrade," then e-commerce platforms have enormous room to increase average order value and monetization rates, further improving operating leverage. Platforms like Tmall and JD, which have made extensive preparations for "consumption upgrade," will reap excellent rewards.

If the major trend is "consumption downgrade," although monetization rates are hard to increase, platforms can still expand their scale effects by pursuing extreme cost-effectiveness and "volume" sales of white-label hit SKUs. Even if white-label manufacturers create hits, their bargaining power relative to the platform remains low, and the platform may take a larger share.

If the major trend is "internal consumption differentiation," it means consumer behavior becomes harder to predict. Platform traffic allocation rules will become extremely complex, requiring interface and algorithm improvements to achieve "personalized recommendations"—but with regulators emphasizing user privacy protection, "personalized recommendations" is easier said than done!

In this case, **platforms can neither enjoy revenue growth from rising monetization rates nor cost reductions from enhanced bargaining power,** and can only respond to challenges as they come, struggling to find a balance.

This is the fundamental reason why we cannot be overly optimistic about centralized e-commerce platforms in the coming years.

**The Outcome of Consumption Differentiation: "Smile Curve" or "W-Shaped"?**

In the first chapter of this article, we discussed the classification of brands: "big brands" deeply occupy user minds and rely on brand keywords for conversion; "white-label brands" occupy less mindshare and rely on category keywords; "vertical brands" fall in between.

Roughly speaking, Tmall relies mainly on big brands, Pinduoduo mainly on white-label brands, and the "new domestic" brands that have risen in recent years are mainly in the middle (though they all aspire to become big brands).

So the question arises: under the major trend of consumption differentiation, what kind of profit distribution pattern will form among big brands, white-label brands, and vertical brands? We can propose at least two alternative answers: the "smile curve" and the "W-shaped distribution."

**Smile Curve:** Because consumers tend to spend lavishly where they care and save aggressively where they don't, with the former corresponding to big brands and the latter to white-label brands, a "smile curve" forms: big brands and white-label brands divide the vast majority of consumer budgets, leaving almost no profit space in the middle.

On the supply side, big brands have absolute bargaining power over supply chains, while white-label brands control their own supply chains; only middle brands are at a loss, creating a vicious cycle.

**W-Shaped Distribution:** In most mature economies, the market not only has big brands emphasizing brand identity and white-label brands emphasizing low prices, but also a wide variety of vertical brands, such as most DTC brands and designer brands. Vertical brands don't need to achieve "extremes" at the market-wide level; they only need to capture the pain points of a small group of consumers.

As Kevin Kelly, author of "Out of Control," said: "Anyone who creates a work of art only needs a personal brand and 1,000 true fans to make a living." If artists can do this, industrialized brands with scale production can certainly do so.

Some argue that China's overly large and mature manufacturing industry limits the development of vertical brands—because cost reduction is too easy, and copying is too easy, so most vertical brands will be defeated by white-label brands.

If this view were correct, there should be no vertical brands anywhere in the world, because Chinese manufacturing is already the world's factory, **and a large portion of Amazon and European/American independent site products come from China, yet vertical brands there have not been eliminated.**

Clearly, we cannot think only from the supply side; the fundamental factor determining any consumer brand lies on the demand side.

Our view is clear: whether future Chinese consumer brands form a "smile curve" or a "W-shaped layout" depends on the fairness of income distribution, especially whether the middle class can expand and consolidate.

In most developed countries, the social class distribution is "olive-shaped," i.e., small at both ends and large in the middle, with the middle class being the mainstream of consumption, and most of the top wealthy having recently risen from the middle class.

In this case, strong and diversified consumer demand can certainly form, and the territory for vertical brands will be broad.

Strictly speaking, **if the "olive-shaped" distribution pattern is relatively consolidated and the economy maintains steady and rapid growth, then "consumption upgrade" will become the mainstream,** and "consumption differentiation" will be short-lived—if most people have money and are confident about the future, what internal differentiation is there to speak of?

A young woman buying a 300-yuan lipstick no longer needs to save on power strips or slippers; a straight man buying a 2,000-yuan gaming mouse doesn't need to save on socks or towels. In this case, vertical brands will eat into the space of white-label brands because people are not so obsessed with extreme low prices.

The opposite of an "olive-shaped" society is the "M-shaped society" proposed by Japanese management expert Kenichi Ohmae in 2015, where, under insufficient economic growth and unfair income distribution, the middle class loses competitiveness, the rich get richer, and the poor get poorer.

As a result, the population distribution does not form a normal bell curve but an M-shaped curve spreading to both sides; the position that should be occupied by the large middle class becomes empty.

Clearly, **the "M-shaped society" will ultimately lead to "consumption downgrade," because the middle class, the most solid consumer group, disappears,** and the wealthy class has a lower marginal propensity to consume, only able to support a few big brands.

Our conclusion is that although "consumption differentiation" appears to be the norm in the short term (3-5 years), in the long run, it is only a transitional form.

Depending on the wealth distribution mechanism and changes in economic growth, it will either lean toward "consumption upgrade" or "consumption downgrade." The problem is that we cannot determine which direction it will take.

Source: Internet Monster Band (ID: TMTphantom) Author: Pei Pei, Band Leader

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