Click 'Read the original text' for details. There is nothing new under the sun, and consumption upgrades are not a new trend. What is happening in China today—convenience stores, home goods, coffee startups, and flexible supply chains—all occurred in Japan in the 1970s and 1980s. The rise of local consumer brands often accompanies consumption upgrades. In 1972, Japan's 100-yen store chain Daiso was founded. The same year, Tokyo saw its first FamilyMart convenience store. Two years later, Tokyo opened its first 7-Eleven. In 1980, Japanese coffee chain Doutor opened in Tokyo, and it has since grown into Japan's second-largest coffee chain after Starbucks. In the 1980s, IKEA conquered many countries but lost to local home furnishing brand Nitori in Japan. Additionally, Muji and Uniqlo were born in 1980 and 1984, respectively. Consumption upgrades do not mean expensive; the biggest opportunity is localization; 'cost-effectiveness' is a replicable model, and good brands satisfy consumers' emotional appeals. This article is from WeChat public account: Fengrui Capital (freesvc), 'Fengrui Report 13: Understanding China's Consumption Upgrade, Look at Japan 40 Years Ago', author: Huang Hai.

  1. Why Benchmark Against Japan? Globally, internet entrepreneurship and investment are recent phenomena of the past 20 years, but consumption upgrades are much older. They have existed for 40 years or more. The consumption upgrade China is experiencing now, seen as novel, has occurred in countries like the US and Japan. Both the US and Japan are populous and manufacturing powerhouses that later became consumer powers. From a micro perspective, when economies reach similar levels of development, similar companies emerge. This is the significance of studying consumption upgrades in other countries. In this report, we summarize and analyze Japan's consumption upgrade in the 1970s and 1980s, hoping to provide insights for the current upgrade. Why choose Japan over the US? Compared to the US, China and Japan share more similarities in the causes and processes of consumption upgrades. China and Japan have similar urban structures: many cars, narrow roads, and dense commercial establishments, which provide opportunities for consumption-related business models. The US has a sparse population, convenient driving, and lower commercial density. Lifestyle and consumption habits are also similar. For example, matcha, which Fengrui invested in, originated in China, spread to Japan, and is now popular again in China. Beyond cultural and geographical similarities, China and Japan also share economic development trends. Both countries experienced over a decade of rapid economic growth, with GDP compound growth rates around 10%. Japan entered a high-growth period in the 1950s, surpassing Germany in 1968 to become the world's second-largest GDP. In 2010, China overtook Japan to become the world's second-largest economy. With GDP growth, Japan and China successively hosted the Tokyo Olympics, Osaka Expo, Beijing Olympics, and Shanghai Expo, actively integrating into globalization. Opening up also meant many foreign brands flooded into Japan and China, forcing local consumer brands to compete globally, and consumers left the era of material scarcity. In contrast, the US had virtually no foreign brand 'invasion' during its consumption upgrade. After over a decade of economic development, both countries transitioned from high-speed to medium-speed growth. Japan's turning point from high to medium speed was in 1975. The 1974 oil crisis caused negative growth that year. From 1974 to 1990, Japan's annualized growth rate fell from about 10% to about 5%. China, after 2012, entered the 'new normal' with GDP growth around 6-7%. China's current economic growth rate is similar to Japan's from 1975 to 1985. When the economy enters the medium-speed stage, consumption upgrades truly begin. Going from scarcity to having is not a consumption upgrade; it's just 'I've just eaten my fill' or 'I've just used something good.' After material abundance, consumers become 'unfazed' by many things, losing novelty. Consumption aesthetics need upgrading, and spending structures need optimization. Most of the Japanese consumer companies we know today were founded between 1970 and 1980. In 1972, FamilyMart, Daiso, and Nitori were established. In 1974, Tokyo opened its first 7-Eleven. In 1980, Muji was founded. In 1984, Uniqlo was founded. Per capita GDP is an economic indicator often discussed in consumption upgrades. After per capita GDP reaches $8,000, many magical changes occur in the business world. Japan reached $8,000 per capita GDP around 1978; China did in 2016. In the late 1970s, consumption accounted for about 55-60% of Japan's GDP; in China, it's about 35-40%, showing that our consumption demand has not been fully released. In a rapidly developing, thriving society, consumer preferences are relatively uniform. When economic growth slows, class gaps widen, and demand diversifies. Some buy low-priced products, others luxury goods. Consumer geography and needs become increasingly diverse. For example, Japan's best-selling instant noodles fall into two categories: those priced above 700 yen (about 42 RMB) for health-conscious consumers, and those below 300 yen (about 18 RMB) for the lower middle class. These target different needs and demographics, and both are profitable. It's hard to summarize Japanese consumers then and Chinese consumers now in a few words, but interestingly, Japanese youth in the 1970s and 1980s are very similar to China's post-90s generation. They were born during the middle of rapid economic growth, with relatively superior living conditions from birth. Therefore, they have strong consumption desires, are bolder in spending, and seek personalization. Quick question: In the process of social differentiation, which type of company has a better chance to grow: those focusing on affordable luxury or those focusing on cheap products? Based on observations of Japan's consumer industry and society, we summarize four laws of Japan's consumption upgrade:

First, localization. Japanese society is deeply influenced by the West, but from the 1970s, many local brands emerged, winning against international giants and becoming household names.

Second, individualization. The consumption unit shifted from family to individual, consumption style from conformity to self-expression, and convenience stores rose.

Third, 'better and cheaper'. Consumers' ability to judge value and price increased, supply chain efficiency improved, retail channels shortened, and cost-effectiveness increased.

Fourth, consumers' psychological and emotional appeals gradually became the dominant force in social consumption. This is seen in the pursuit of 'small happiness': in the early 1970s, large items like home appliances were largely popularized, products became smaller, and consumers desired instant joy at low prices. Additionally, the spiritual attributes of products increased: consumers began to value the spiritual satisfaction from added value.

  1. The Biggest Opportunity in Consumption Upgrade is Localization Consumption upgrades are often accompanied by the rise of local consumer companies. Both China and Japan experienced a phase of foreign brands flooding the local market. Over the past decade, brands like Pizza Hut, KFC, McDonald's, and Unilever grew rapidly in China. In recent years, foreign brands have slowed, and local consumer companies have emerged. This is a process of one rising while the other falls. Japan had a classic case of a local company defeating an international giant. IKEA entered Japan in 1974, but its products didn't meet local needs, and it gradually lost to local brand NITORI. In 1986, IKEA withdrew from Japan, only re-entering in 2006. The core reason for IKEA's failure in Japan is that the Japanese home furnishing industry has strong local attributes. In terms of sales channels, most Japanese furniture stores are small because of compact urban layouts and limited land. Nitori's stores in Shanghai are in inconspicuous spots in shopping malls, about 4-5 floors, 500-1,000 square meters. In contrast, IKEA opens stores of tens of thousands of square meters in Europe and the US, which extend customer dwell time; food alone accounts for about 10% of IKEA's sales. IKEA's large-store format has a long history and is unlikely to be completely overhauled for one overseas market, leaving an opening for competitors. Additionally, in supply chain management and production efficiency, Japanese furniture companies have much lower production costs than overseas companies. Once, Japanese traditional handmade production lagged behind IKEA in supply chain management, but Japanese companies learned from IKEA's supply chain methods, reduced costs, and gained price advantages. In product style, although both IKEA and Nitori are minimalist, Nordic minimalism often uses dark blue and dark gray, while Japanese style is mainly wood tones. Based on Nitori's victory over IKEA, local companies can find opportunities in sales channels, supply chain management, and product style. Will IKEA face the same situation in China? Twenty years ago, IKEA entered China when local production capacity, entrepreneurial teams, and capital were insufficient to challenge it. Now, after 20 years, the possibility of being defeated is smaller. However, China's furniture market is at least a trillion yuan. IKEA's 2017 sales in China were 13.2 billion yuan, only about 1% of the market. So local companies still have a large remaining market to compete for. Besides furniture, China has local categories like dumplings, roujiamo, rice wine, and tea. Especially tea. Based on cultural and resource advantages, influential local tea brands may emerge. Excellent consumer brands have a longer window period, not as short as internet trends—usually 3 to 6 months. If you invest in live-streaming products or ride-hailing apps now, it's likely too late; the battle is over. But in the consumer sector, there may still be a 5-10 year window. Japan has passed its consumption upgrade window, but companies born during that period still have significant influence and maintain high growth, with very high ceilings. The biggest opportunity in consumption upgrades is localization. Japan saw the rise of local brands in the 1970s and 1980s, and we believe China will too, and the window is now.

  2. Aim at Single People's Wallets The second lesson from Japan's consumption upgrade is individualization. Since the 1970s, the trend of individualization in Japanese society has become more pronounced. In Japan, nearly 20 million of the 100 million population live alone. The faster pace of social development has spawned small-quantity, high-frequency individual consumption behaviors. This trend has driven the birth and growth of many new consumer companies. The first manifestation is the rise of convenience stores. In the early 1970s, Japan introduced the convenience store model from the US, and local brand FamilyMart (1972) and American brand 7-Eleven (1974) quickly rose. In Japan, convenience stores went from emerging in the 1970s to becoming a core retail format in just over 20 years. Today, convenience store retail sales account for about 10% of Japan's retail market, close to the proportion of e-commerce in China's total retail. A key reason for this status is that, unlike supermarkets that mainly serve families, convenience stores cater to individuals, who are accustomed to buying small quantities frequently. Beyond the individual perspective, data shows that from 1973 to 1995, the rapid growth of convenience stores in Japan paralleled per capita GDP growth. In 1973, the first 7-Eleven opened. In 1987, when Japan's per capita GDP was about $20,000, 7-Eleven surpassed 3,000 stores. In 1995, when per capita GDP peaked at around $40,000, 7-Eleven exceeded 6,000 stores. The second manifestation is the popularity of vending machines. In Japan's 1970s consumption upgrade, vending machines played a role similar to China's current food delivery, meeting consumers' quick dining needs. Japan's vending machine boom began with the 1970 Osaka Expo. That year, the expo attracted 64.22 million visitors, a record. Vending machines in the venue were crucial in feeding the massive crowds. At the time, there were only 1 million vending machines nationwide. By 1975, that number had reached 3 million. Growth continued until 1990, when it stabilized at 5 million. With about 100 million people, that's one vending machine per 20 people. So, the question arises: if one vending machine per 20 people is a reasonable density, should China, with 1.3 billion people, have over 50 million vending machines? Japan's convenience stores started in 1973, and our current economic development is similar to Japan's in the 1970s and 1980s. How high is the ceiling for convenience stores in China? As a retail format that meets individual, small-quantity, high-frequency needs, convenience stores definitely have space in China, but it's unlikely they will become as dense as in Japan. One reason is that the internet has a strong impact on business in China. If you open a 5,000-square-meter O2O fresh food store with half-hour delivery within 3 kilometers, it can basically replace convenience stores and vending machines. Additionally, individual consumption trends will deeply affect the restaurant industry. Japan's largest restaurant company is 7-Eleven, which sells countless bento boxes, combining convenience stores with food service. In 1975, Japan's restaurant industry market was less than 10 trillion yen; by around 1990, it approached 30 trillion yen, tripling. After the economic bubble burst, growth slowed. In 2017, Japan's restaurant market was about 25 trillion yen, close to 1.5 trillion RMB. China's population is 13-15 times that of Japan, but its restaurant market is about 3 trillion RMB, only twice Japan's. Macro-wise, China is likely to see excellent restaurant companies in the next 10-15 years. However, macro promise coexists with practical difficulties; restaurant entrepreneurship requires great patience. It's essentially a service industry, and going from 0 to $10 billion is very difficult.

  3. How Is 'Better and Cheaper' Possible? The third important trend in Japan's consumption upgrade is 'better and cheaper.' Consumers' ability to judge value and price increased, supply chain efficiency improved, retail channels shortened, and cost-effectiveness rose. The essence of consumption upgrade is to sell better products at lower prices, not higher. 'Cheaper' means lower than expected or affordable. For example, consumers might spend 20% of their income on food, but now only 15%, with better quality. China currently has many 'better and cheaper' products. Miniso has a bestseller: a 9.9 yuan coin purse. '90fen' uses materials of the same quality as Samsonite but is much cheaper. Heytea offers drinks made with fresh fruit and tea at lower prices than foreign coffee brands. During Japan's consumption upgrade, low-price, high-quality brands like Daiso and Muji emerged in the 1980s and continued to rise against the trend after the economic bubble burst in the 1990s. Another typical brand that is better and more affordable is Uniqlo. Uniqlo's key to controlling quality and price is its SPA (Specialty Retailer of Private Label Apparel) model, which maximizes offline retail efficiency. SPA means the brand controls the entire production process, from sourcing raw materials and controlling production quality to downstream sales, inventory control, online sales, and customer service. The SPA model is efficient but complex to build. Uniqlo, IKEA, ZARA, NetEase Yanxuan, and Xiaomi all use SPA. Let's analyze its characteristics: First, the supply chain extends to material manufacturers. Uniqlo's classic Heattech line is warm due to innovations in raw materials that only end-to-end companies can achieve. Xiaomi also controls components to support its ecosystem. Second, SPA brands rarely advertise. IKEA, ZARA, and Uniqlo stores themselves are advertisements. Low marketing costs allow brands to return more profits to consumers, creating a positive cycle. Third, data is integrated across the entire chain. ZARA's store sales data can reach Spanish headquarters the next day. When a retail brand can integrate production and information chains, inventory management, a core retail challenge, becomes easier. The SPA model provides quality products at controlled prices, generating high consumer surplus (the difference between willingness to pay and actual payment). The SPA model is effective in home furnishing and apparel, but success is difficult; if achieved, it might make you the richest person in the country. Uniqlo founder Tadashi Yanai has topped Japan's rich list multiple times, and ZARA's founder was Europe's richest for a long time. SPA brands are resilient. People joke about 'million-yuan salary Uniqlo,' meaning even with higher income, consumers still choose Uniqlo. Besides SPA, the basic style positioning also helps Uniqlo achieve 'better and cheaper' and improve business efficiency. Basic styles allow higher sales per SKU, creating economies of scale, giving brands more bargaining power with suppliers and easier inventory management. Also, basic styles are more likely to be bought online because they fit all, have stable quality, are less tied to fashion trends, and are versatile, requiring less try-on. This partly explains why Uniqlo's Tmall sales far exceed ZARA's. In China, few companies can achieve the SPA model. Many Chinese consumer brands are 'distributor brands,' collecting money from distributors rather than directly from consumers, so their customers are essentially distributors. Information feedback is poor, making it hard to respond quickly to consumer needs. In the SPA model, there is no distributor role. Another model is the 'Red Star Macalline model.' It acts as a retail terminal, charging brands for space but not directly controlling products. Simply put, products pass through multiple intermediaries before reaching consumers, making it common to spend tens of thousands on a bed. Red Star Macalline is profitable and viable, but it doesn't maximize efficiency. Uniqlo, founded in the early 1980s, is a typical example of high quality at low prices. When Uniqlo was founded, Japan's per capita GDP was about $20,000, twice that of China now. But China's consumption upgrade is accelerated by mobile internet, so Chinese consumer companies will rise faster than Japan's.

  4. 'Cost-Effectiveness' Is a Replicable Model; Good Brands Satisfy Emotional Appeals The fourth important trend in Japan's consumption upgrade is the emphasis on satisfying consumers' psychological and emotional appeals. This is easy to understand, as many people perceive brands as emotional added value. In the early 1970s, large home appliances like TVs, washing machines, refrigerators, and air conditioners were already widespread in Japan. When material abundance is excessive, the importance of purely material products declines, and consumers tend to buy smaller or more spiritually oriented products. China is currently in such a stage. Consumers crave small happiness, buying products that bring joy at low prices, and value the spiritual satisfaction from added value. If we analyze basic styles from a psychological and emotional perspective, their strong vitality in consumption upgrades is because they represent a lifestyle proposition, expressing a universal attitude or value pursuit: casual, understated, quiet, not 'self-righteous,' resonating with white-collar or highly educated people. In Japan's 1970s and 1980s, the fastest-growing category was home goods, growing about 10 times in a decade. Muji, Daiso, and Tokyu Hands belong to this category. Home goods are low-priced, space-saving, and provide 'small happiness' psychological satisfaction. A small photo frame or a bunch of flowers can make a home warm and stylish. Beyond 'small happiness,' consumers have other psychological needs. Brand positioning is closely related to these needs. For example, Three Squirrels is positioned as nuts, with an emotional positioning of cuteness. Jiangxiaobai is positioned as baijiu, with an emotional positioning of 'life is simple.' Endless personalization and self-expression is an emotional positioning. For instance, while everyone wears Nike, I wear PARTICLE FEVER to show my individuality and style. But what is my individuality? What products highlight my self? These are essentially sociological or philosophical questions, not necessarily answered by purchasing consumer goods, but many try to find answers through consumption. Second, consumers seek timeless brands. Many luxury brands have centuries of history, creating a sense of eternal nobility. Consumers are attracted to the timelessness of high-end brands, so there are often 'retro trends' and 'nostalgia trends.' Additionally, consumers have anxiety and a desire for self-improvement. Buying fitness courses and using knowledge payment brands are two typical consumption behaviors to alleviate anxiety. Consumers have many psychological needs; a product doesn't need to satisfy all, but it must hit one to develop long-term. Note that 'cost-effectiveness' is not a psychological need but a model that any brand can replicate. However, if a consumer brand suddenly shifts from 'cost-effectiveness' to satisfying a specific psychological need, it might alienate consumers without that need. But every positioning choice can't affect everyone. So, when a brand's user base grows, it may become weaker in branding, hesitant to define its emotional appeal or which psychological needs to satisfy. But new brands like 'Nagu' can boldly choose to maintain loyal users and maximize word-of-mouth. Muji is a great example of satisfying consumers' psychological and emotional needs. What is its emotional appeal? First, concern for environmental issues. Muji lovers appreciate the beauty of returning to simplicity and dislike over-industrialized products. Second, extraction and identification with Japanese culture. Muji successfully extracted core concepts of Japanese Zen culture, such as 'nothing is something' and 'white space,' into its brand DNA. It resonates with Japanese consumers' local psychological needs, which is hard to replicate elsewhere. Muji's initial slogan was 'improve quality, lower prices,' with prices one-third lower than similar products. But it sells more expensive in China than in Japan because it targets the mid-to-high-end market there, unlike its domestic positioning. We need to distinguish between local and overseas positioning. Cost-effectiveness and emotional appeal together built Muji; both are indispensable. Currently, Muji has emotional appeal in China but lacks cost-effectiveness, so local brands can find opportunities there.

Summary Finally, we use Japan's home goods industry to summarize, analyzing how its development confirms consumption upgrade trends and what we can learn. In Japan, home goods had extremely high compound growth in the 1980s, ranking second among all industries, after insurance. Home goods originate from Japanese local culture. They are small and affordable, meeting the needs of single people, and adding life interest and expressing personality. When analyzing historical consumption trends, we don't copy or follow blindly. We review history to abstract underlying logic. An industry that can grow rapidly for over a decade during a consumption upgrade must resonate with some social trend to develop in sync with society. We hope Japan's consumption upgrade process can provide lessons for us. This article is from WeChat public account: Fengrui Capital (freesvc).

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