---
title: "Weng Yinuo of Hongzhang Capital: Looking at Consumption Over the Long Term, Re-understanding This Round of 'Cold and Hot' Cycles"
description: "Over the past few years, the consumer investment track has experienced a remarkable rise and fall: from sparse participation a decade ago, to an investment boom starting in 2019, and then a return to rationality in the second half of last year, with confidence seemingly collapsing overnight and voices of 'consumer pessimism' being amplified. In such a cycle transition, how should entrepreneurs adjust their posture to adapt to the new environment? After a round of market turbulence, what kind of consumer companies can truly reach the endgame?"
author: "李知一"
publisher: "New Distribution"
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published: "2022-03-22"
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# Weng Yinuo of Hongzhang Capital: Looking at Consumption Over the Long Term, Re-understanding This Round of 'Cold and Hot' Cycles

> Over the past few years, the consumer investment track has experienced a remarkable rise and fall: from sparse participation a decade ago, to an investment boom starting in 2019, and then a return to rationality in the second half of last year, with confidence seemingly collapsing overnight and voices of 'consumer pessimism' being amplified. In such a cycle transition, how should entrepreneurs adjust their posture to adapt to the new environment? After a round of market turbulence, what kind of consumer companies can truly reach the endgame?

Over the past few years, the consumer investment track has experienced a remarkable rise and fall: from sparse participation a decade ago, to an investment boom starting in 2019, and then a return to rationality in the second half of last year, with confidence seemingly collapsing overnight and voices of 'consumer pessimism' being amplified.
In such a cycle transition, how should entrepreneurs adjust their posture to adapt to the new environment? After a round of market turbulence, what kind of consumer companies can truly reach the endgame?
"Many people think consumption goes from cold to hot, and hot to cold, but we don't think it's that obvious. **Looking at consumption over a long time span, it may not explode, but it has been slowly rising, and it can go very far, requiring our patience for long-term value investment.** "
Weng Yinuo, founding partner of Hongzhang Capital, said, "I have been on the front line of the consumer industry, and in the past few years, I have seen many interesting phenomena. When I started my business in 2012, people didn't pay much attention to consumption; they were all doing platform internet projects.
Later, consumption gradually heated up, with more and more people in the circle, thinking that new consumption was particularly strong and there were many opportunities. GPs who previously invested in the internet all believed that consumption was the next wave of 'internet'.
The consumer pool is deep, with a larger total capacity than other industries, and many companies are still in the traditional stage. Holding the ideal that 'all categories are worth redoing', investors and entrepreneurs alike hope to witness the rise of new brands in various sub-categories.
But since the second half of last year, it has been another watershed. Some question whether consumption is now failing, and many have turned to invest in hard tech and healthcare. **On this issue, many people have their own perspectives, but our perspective at Hongzhang, being on the front line, may be more comprehensive, complete, and realistic.** "
# **Looking at Consumption Over Twenty Years**
# **Re-understanding This Round of 'Cold and Hot' Cycles**
The first angle I want to talk about is that consumption is a very large and diverse concept. Consumption has never been truly defined. Some talk about brands, some about platforms, and others about retail, but none of these are complete understandings. Consumption is a very broad thing.
So what is Hongzhang's definition of consumption? We divide consumer investment into four major blocks:
First, those related to traffic, such as retail, chains, and e-commerce;
Second, product-oriented, including well-known brands and high-quality supply chains. We separate brands and supply chains; supply chain manufacturing is also a big opportunity;
Third, consumer technology and services, with unique technical barriers and service capabilities that improve operational efficiency, empowering companies to integrate and connect offline and online operations. The service industry has strong To B attributes and great potential for deep mining;
Fourth, consumer healthcare, the intersection of consumption and health/medical.
**This is the evolution path of traffic, products, and services. Over the past decade, Hongzhang's investment layout has been carried out according to this evolutionary path.** 
Initially, Hongzhang became famous for investing in China's retail chain sector. We invested in companies like Jiajiayue and Qiandama, and have a deep industrial foundation in China's retail supermarket industry, with many resources on the channel side. Because of our extensive offline contacts, we like chains and have accumulated strong store-opening knowledge.
Later, we invested in the brand side. Unlike many institutions keen on investing in brands, we belong to the supply chain school. We believe that future business evolution will feature 'weak brands' and 'weak links', and our investment choices are not solely based on brands.
**In our decisions, we prefer supply chains with technological barriers. Here, supply chain does not refer to logistics and distribution, but to production supply chains with technological barriers. This is our differentiator.** 
What value has China created in the past two to three decades? From the most macro perspective, China has gradually formed a high-quality super supply chain system, from aircraft carriers to socks, all made well, forming supply chain capabilities at various levels from low to high, becoming the world's commodity hub and factory, with continuous improvement.
**The rise of high-quality supply chains, externally, is the cross-border e-commerce that has been particularly hot in recent years; internally, it is the emergence of new brands.** 
More than a decade ago, traffic and information were concentrated, with only TV and newspapers. But today, media is highly fragmented with many entry points. Conversely, supply chains are becoming more concentrated. Due to national policies and environmental requirements, some small and medium factories have disappeared, while super supply chains have risen.
The logic of business is an iterative game process, and gross margins are determined by game relationships. When brands are strong, distributors are weak; if you rely on distributors, channels become strong, and brands are less dominant.
In my book 'The Future of New Brands', I mentioned a simple truth:
New brands are highly dependent on super supply chains and traffic costs. Most new brands that rise with traffic dividends face intense competition and low growth ceilings, unable to sustain healthy growth. Without traffic dividends, they are just a logo.
So a brand itself is a result, not a cause. We propose an important concept: a brand is a result of cognitive efficiency. And the process of brand creation is the process of forming cognitive efficiency.
**From this perspective, the strength of the brand itself has declined over the past decade. The reason some people invest in new brands is essentially because there were traffic dividends at the time.** 
In our interactions with consumer entrepreneurs, we found that five years ago everyone was focused on Tmall, then they wanted to learn more about live streaming, then shifted to Douyin, and this year they are instead interested in how to build distributor networks. This is an interesting cycle.
The former traffic dividends made the barriers for new brands low. The fact that everyone is doing it indicates it must be simple, with low barriers. So Hongzhang did not act rashly at that time; instead, the high-quality supply chains we systematically laid out over the years have grown well.
So what do we think the endgame is? **From a longer-term perspective, consumer companies must do both To B and To C, and must be multi-brand, because a single brand has a ceiling.** 
However, there is a key point called 'the order of playing cards'. For example, when building a brand, do you start with e-commerce and then build the supply chain, or start with the supply chain doing OEM for others and then build your own brand?
The order and path selection are extremely important, being the core capability of business operations, and actually relate to the ability to allocate corporate resources. In the past two to three years, there have been too many new brand startups, indeed too crowded.
From a 20-year perspective, consumption in China has been developing steadily, and good companies always emerge.
**So consumption seems not so 'fast', but looking at it over a long time span, it is slowly rising and can go very far, requiring our patience for long-term value investment.** Some platform-type businesses, on the other hand, can consume future opportunities in a short time.
So the media thinks consumption has a process from cold to hot, and hot to cold, but we don't think it's that obvious. Consumption may not explode, but it is always there. I previously invested in tech and healthcare at CICC, so why did I later switch to consumption? Because the pattern is there: if a business runs fast in a short time, it also falls fast, so it must not be a good business. Consumption is that good business that starts slowly but doesn't fall.
**Exploring Changes and Hidden Champions**
**How Does Consumer Investment Adhere to Long-termism?**
## **1\. Invest in the Underlying Logic of 'Good Fortune'**
Investment must have 'good fortune'. Good fortune is not metaphysics; it actually has underlying logic.
First, Hongzhang has long insisted on research-driven investment. Research creates value, and value drives investment. Hongzhang hopes to gain deeper insights into the industry based on research and foresight.
Second, we believe that fundamental things last long. We like to invest in basic, livelihood-related, and long-term things. When discussing projects internally, I ask the team: **'Will the project you are investing in still exist ten years from now?' Many products will be iterated out. Overall, we prefer relatively unchanging characteristics and fear trends and volatility.** 
We are sensitive to cycles, including economic and policy cycles. For example, pharmaceuticals and education are greatly affected by policy cycles. We like things determined by market cycles, so our investments are 'a bit earthy', not so fashionable. Among clothing, food, housing, and transportation, 'eating and using' are the scope of the vast majority of our investments.
Going further, I often ask the team: what value does a business create for consumers? What level of consumer demand does the underlying meaning of the business we support solve?
For example, seasonings provide the value of deliciousness, turning ingredients into various flavors of cuisine to satisfy consumers' taste buds. **For instance, if a product solves safety, it is an absolute necessity. Also, solving convenience and laziness is a necessity, because consumer sovereignty is infinitely expanding, and people will become lazier.** 
We pursue what kind of value creation the business is based on. If it is a fundamental necessity, we like it; conversely, if it is easily iterated, we are more worried.
## **2\. How to Give Money to Those Who Don't Lack It Is the Core Competitiveness of Investment**
**Hongzhang's main investment line focuses on two things: 'investing in change' and 'uncovering hidden champions'.** 
First, focus on change: new demographics, new consumption, new business formats, new technologies. Chinese consumption never lacks change; it is always iterating. People's needs are changing, and brands also have a logic of iteration.
Second, 'uncovering hidden champions': this we believe is a bigger investment opportunity in China. With such a large domestic demand base and such a large sinking market, there are many hidden champions that do not raise funds, but people don't know where they are.
**When everyone is doing new brands, we look for hidden champions; conversely, when everyone stops seeking novelty, we are more willing to explore innovative opportunities.** 
When a phenomenal product appears, the time left for our investment judgment is limited. When looking at a project, you can only see the state at that cross-section of time, but things are always dynamically changing, and we may not be able to clearly judge its changes.
**So investment is not a study of a time cross-section, but rather following its own iteration to find the appropriate investment point.** 
For tracks with big future opportunities, being unsuitable now does not mean unsuitable in the future, so key tracks need continuous tracking. Hongzhang is clearly aware of this and continuously increases investment in review, maintaining continuous iterative insights in several key tracks.
Investing in change and hidden champions are not contradictory at the bottom; they are actually the same thing. Consumer companies that have reached a certain scale and have good growth potential do not lack money, and most investment institutions often lack sufficient reasons to persuade companies to accept investment.
**How to give money to those who don't lack it is the core competitiveness of investment.** 
Our standard is 'give money first to those who don't lack it'. How to give money to those who don't lack it requires long-term immersion in the industry, spending great effort on research, and doing sufficiently vertical things.
We must be more vertical than all comprehensive funds, have deeper industry perspectives, have a broader and deeper circle of friends than others, and create greater value for companies. This is our core competitiveness at Hongzhang.
**What Is a Super Supply Chain with Technological Barriers?** 
Let's talk about super supply chains with technological barriers. How to understand 'super'? It has a certain monopoly in the entire value chain and certain technological barriers, but not necessarily hard tech.
For example, in China's apparel industry, the largest brand by market value is HLA, but if you include the B-end, it should be Shenzhou International, which has been growing for over a decade and is a super supplier. What is its barrier? This barrier is often not low price or scale.
After in-depth exchanges, I found that the characteristic of such companies is that they can withstand sudden traffic surges. When a certain style suddenly gets a flood of orders, they can quickly follow up, while small factories collapse. Super supply chains are very flexible, able to withstand large traffic shocks. They have industrial clusters around them, and they can organize the entire production supply chain to serve brand owners.
**Many brands are willing to cooperate with it, not because it is cheap, which is precisely a very high barrier.** 
The imbalance between traffic and supply chain is the norm. E-commerce surges cause factory explosions because they cannot meet such high production demand in a short time, which is very difficult.
From the supply chain perspective, it must be both smooth and flexible, and also scale up output. These two points are contradictory. Being able to handle this contradiction is 'super', withstanding traffic shocks, including process materials and upstream R&D, which constitute the source of the super supply chain concept.
Super supply chains often also have differentiated elements, and some deep manufacturing companies can even control upstream, such as a certain type of chili deep processing that can control farmers' planting processes upstream, forming a unique barrier. This is also the concept of super.
From a macro perspective on China's business structure, China's chain rate is relatively low, and standardization is still low. For example, opening a single store, you can say the soup is made by me, but when opening multiple stores, it must be provided by the supply chain. The supply chain will provide more standardized and safer food, ensuring quality.
So the more chain-oriented, the more dependent on supply chains. Behind Haidilao, there are thousands of suppliers serving it, building an entire ecosystem. **The richer the consumer experience, the more supply chains are at work behind the scenes.** 
In the long run, China's chain rate is increasing, and the benefits to To B will be greater. Moreover, the B-end does not need education, while To C businesses need to spend money on consumer education. Marketing is educating consumers, but consumer habits are sometimes hard to change. Of course, once consumers are changed, the market is yours.
**Consumer Insights from a Macro Perspective** 
Investment in the long run is a macro product. Looking up at the road is important. Besides the details of micro operations, there are also views on worldview. These insights are the starting point of everything, such as our insights into consumers.
Eight years ago, Hongzhang started research on the elderly, i.e., the silver economy, which is an important perspective for future macro observation. When the post-55 generation ages and the post-60 generation retires, it will bring big changes. They are beneficiaries of reform and opening up, while earlier elderly may have poorer payment ability.
**Consumption has two elements: one is payment ability, and the other is time.** 
For example, opening a store in a high-end community is not a good business because residents are busy and won't shop. Resettlement housing is different; residents there have money and leisure, and like to shop. The elderly with money and leisure are a gold mine for consumption, and they need a certain taste, not just for cheapness.
Another example is the social issues of middle-aged and elderly people. Because loneliness is an absolute necessity, observe the age structure of consumers in shopping malls; many are middle-aged and elderly. They want to gather, not eat alone. Afternoon tea is an important social venue. This phenomenon is very similar to Japan. We need to look at consumption from social changes.
Another important factor in elderly spending is the compensation psychology, which also brings various opportunities.
When children's education was hit by the double reduction policy, interest classes for middle-aged and elderly people developed rapidly. Government-run elderly universities are hard to get into, with 80% being women. So where are the men?
We studied fishing gear, which has become a social tool for middle-aged and elderly men, becoming another kind of 'golf club'. Once a product becomes a social tool, its imagination is huge.
**Changes in new demographics bring new category opportunities. Changes in macro demographics, sociology, and family structure bring many investment thoughts.** 
Another example is pets, which we studied seven years ago. From a demographic perspective, there is the necessity of loneliness from aging, and emotional connection. In the era of extended families, people's emotional support was in family members; parents, spouses, and children were stable ways of emotional connection.
But from the extended family era to the nuclear family era, including more young people living alone, the situation has changed. Emotional support is still needed, but people have transferred emotional connections from people to pets. You are good to pets, and pets are good to you. Pets provide more stable and certain emotional returns to people.
The increment of pets is also different from people. The decision cost of going from one pet to multiple is not high. We believe the current penetration rate of pets is not high. When pets also enter old age, the penetration rate will be high, and the category growth rate of pet products will exceed that of people.
Developed countries have all entered aging, which is a common problem. This is the process of applying macro perspectives to project mining.
In the future, there will be a type of entrepreneur, namely capital entrepreneurs. **They no longer rely on long-term capital accumulation from the past, but through strong support from external excess capital, directly operate enterprises of considerable scale, while still based on long-term value creation.** 
So five years ago, Hongzhang started holding-type industrial operations. Our feeling is that there are many 'pits', so we can better understand the difficulties of founders. We hope that investment not only adds value but also creates certain value.
When China's first generation of entrepreneurs grows old and no longer wants to stay in the enterprise as founders, opportunities for wealth inheritance will appear. Hongzhang is not content with the role of an industry-empowering investor, so the difference between standing from a wealth perspective and an operational perspective is significant.
When we have spare energy, we will still try holding opportunities.
The deeper our understanding of the industry, the more we can empower organizational structure adjustments, including the establishment of professional teams after investment, and targeted training programs for young investors. There is a year of learning investment research, then they are sent to invested companies to do process reengineering work. After a year and a half, they can stay or return to Hongzhang.
We hope to cultivate a group of future leaders for the consumer industry who understand research, investment, and business.
**Selected Q&A:**
**How to View the Endgame of the Coffee Track and Community Group Buying?**
**Q: How to judge whether a business is trendy or plain?**
A: First, in our topic system, we don't use the concept of 'new consumption', because saying 'new' consumption implies corresponding old things, but old things in their era were also the most trendy and newest.
So it's just a longer time dimension. Hongzhang does not make such a distinction. Innovation is the basic state of survival, just a continuous iteration process.
We don't say whether a specific business is new or old. Our basis for judging investment opportunities is from the category logic. For example, baking: baking as a whole has always existed, spanning thousands of years. This long-standing category is the foundation. We don't like categories created out of nothing; trendy things may not last long.
**Another angle is the narratability and verifiability of investment. The earlier the project, the greater the need for narratability.** 
For example, coffee, we can express it with narratability: 'All nations that drink tea will be occupied by coffee', which makes the coffee market very imaginative. But in terms of verifiability, the single-store model of coffee shops, investment returns, replicability, etc., all need to be verified.
Generally, early projects have less verifiability and amplify narratability, while later projects have more explicit verifiability. It's just that the weight relationship between the two changes during enterprise development.
**Q: How do you view the current logic and patterns of chain expansion?** 
A: When we talk about the growth path of chain enterprises, we often mention the inflection point. Often a certain model has a ceiling, including a ceiling on the number of stores.
For example, a high-end format highly dependent on shopping malls, we can quickly measure its upper limit. China has 8,600 shopping malls, with an annual growth rate of 8%. The ceiling for this brand format might be 2,500 to 3,000 stores. This is judged from the availability of locations.
There is also direct operation and franchising. Direct operation is your own control system, which will stop growing at a certain stage because the organization can't keep up, so there is a staged ceiling. A small store model may also stop growing at 1,000 stores, so you need to switch from direct operation to franchising to replicate quickly.
Speaking of restaurant chains, casual dining in a single city reaches its limit at 50 stores, and loss-making stores appear because sufficient density causes self-cannibalization. After doing well in one place, you also need to verify whether it has cross-regional capabilities, because Chinese tastes are too diverse, with significant regional flavor differences, so many restaurants are regional.
But there is one flavor that works nationwide: spicy, because it is addictive.
**As for expansion pace, there is no good or bad. Besides cognitive issues, there are organizational issues. If organizational capabilities don't keep up, fast store opening also means fast store closing.** 
There is also the financing pace. If the organization hasn't kept up, using raised funds for rapid expansion means many companies don't die of hunger, but rather 'die of overeating'. The pain begins after financing. Running a business is a matter of rhythm and the order of playing cards.
**Q: How do you evaluate the current coffee track?** 
A: Hongzhang has done deep research on coffee, basically visiting global coffee markets.
We believe that the final returns from coffee come from the supply chain. The largest value creation process is roasting. Behind coffee, there is a super supply chain. On the scene side, there are different schools of educating consumers: store models, machine models, coffee machines becoming coffee PLUS, making coffee ubiquitous.
Thus, coffee is not about cup volume, but about treating it as a service. For example, I saw a coffee bar in a Japanese real estate company, which is a service 'PLUS'.
Addictive products need a long time to educate consumers. So in China, the coffee market is just beginning. Currently, only Shanghai truly has coffee culture.
Starbucks educates consumers with standardized coffee, forming a third space, then develops to higher dimensions, such as coffee flavor, fruit aroma, and greatly increased form, artistry, and cultural tone, entering the boutique stage.
At the boutique stage, it is no longer a chain business. **The deeper the coffee culture, the less it is chain, even anti-chain. So countless small brands appear, with few stores, but emphasizing the boutique quality of beans. So the endgame of coffee is the supply chain** business.
My prediction is that in the long run, due to intensified competition, the scene side often cannot make money, more out of sentiment. In the end, those who make money are the supply chains. Starbucks is both a brand and a supply chain, able to control upstream coffee beans.
**Q: How do you view community group buying?** 
A: The logic of community group buying is a digitally driven supply chain. It gives small stores digital tools to sell fresh produce they didn't have before. It conforms to all retail characteristics. Its cleverness lies in acquiring customers through small B.
**But the problem is whether the relationship between the supply chain and small B is long-lasting. When burning money on subsidies, consumers think it's cheap, and delivery is completed at the small B end. Besides extra income, how much effort small B spends also affects whether they continue to cooperate.** 
Another issue is that natural retention without subsidies is low. Like the B2B era, users will connect to multiple apps, and whichever has no subsidies sees traffic decline. Consumers have no stable habit formation, only caring about cheapness.
Why are products in community group buying cheap? Because many fresh produce quality grades are non-standard.
For example, fruits: better-quality fruits are usually in large supermarkets like Yonghui and Jiajiayue. They take the limited high-quality supply first, and the rest goes to the circulation wholesale market. Community group buying often takes discounted products from the wholesale market, so the actual quality gap is large.
After buying once and comparing quality, consumers won't buy a second time.
Community group buying is a retail business. It is a city-by-city battle, hard to nationalize because local supply chains are hard to build. If the supply chain is strong in one region, there can be opportunities for staged benefits.
Source: Langchao New Consumption (ID: lcxinxiaofei)
Share: Weng Yinuo
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