In the investment industry, there is no framework that can be done once and for all. It is always to correct mistakes and revise and perfect in practice. Today I would like to share with you a recent change in Feng Shu’s consumer investment philosophy-the elimination of the “only cost-effective” stereotype, and new thinking on the trend of “expensive” consumer brands.
Before starting, as usual, share a few main points:
- Previously, everyone believed in “only cost-effective theory”, which was jointly promoted and promoted by the application of new technologies in the supply chain and the enhancement of product capabilities. Before the consumption upgrade, the market has gone through the two stages of “satisfaction with durable + mandatory consumer products” and “popularization and branding of optional consumer products”. The period coincided with the large-scale industrialization in China. How to make products cheaper is the biggest competitiveness of merchants and the core demand of the market.
- Entering the consumption upgrade stage, changes in the market, supply chain and demand bring opportunities for products to be “expensive”. Specifically, the Chinese consumer market is gradually passing the era of “only cost-effectiveness”, and people’s demand for commodities is constantly escalating, manifested in three aspects: products are more beautiful, better, and spiritual added value is stronger.
- The serious “involution” of the consumer goods industry also makes “expensive” one of the inevitable trends. Since 2018, the average growth rate of total retail sales of consumer goods in China has fallen by double digits. When the overall growth slows down, it is not enough for the brand to focus on one point and continuously polish the price/performance ratio. You must make your products beautiful, better, and stronger spiritual added value to ensure longer vitality. This is actually The process of making a brand more expensive.
- You can’t just raise the price for nothing. How expensive is “to be expensive”? It is actually a benchmarking issue. The significance of benchmarking for pricing lies in the fact that your brand is comparing with whom, who you are similar to but relatively cheaper than it, which determines your reasonable value in the minds of consumers. Because of the production of multiple added value, the brand’s target products have migrated, which in turn brings about the migration of price ranges, and upward pricing can be accepted by consumers.
The following is a specific analysis, hoping to give you some inspiration.
01 A prejudice was broken?
Recently, Fengrui invested in a national fashion boutique brand called ” Duanmu Liangjin “. This is an original designer brand, focusing on designing and creating handbags and fashion accessories with wood as the main material. Its product price is similar to PRADA, a bit cheaper than LV.
When my investment colleague first mentioned this project to me, I decided not to look at it. I have always been inclined to think that it is difficult to escape the “personal setting” of cost-effectiveness for brands in China. China’s supply chain capabilities are too strong. In this competitive environment, it is difficult for local brands to set prices high. Therefore, it is basically useless to be a local luxury brand.
In fact, I was somewhat prejudiced about making brands expensive in China.
My colleague was very persistent. After about half a month, I was still dragged to meet with the founder. I didn’t expect to meet and chat, “It’s so fragrant”! There was investment intention on the spot. But when the project was brought to internal discussion, it was still not favored. Many investment colleagues raised objections or doubts.
▲ Source: Duanmu Liangjin official website
As a result, the colleagues were also arranged to experience on-site, and they were divided into three batches. Every time before I went, everyone was full of suspicion, but when they came back, they were all big bags. Statistics show that everyone has spent a lot of money in the “Duanmu Liangjin” store without investment. Everyone likes their designs and products very much and it is very enjoyable to buy and buy.
This thing for me to say is a lever. In fact, in the past few years, although it has not been as obvious as this time, it is vaguely that my inner prejudice about “being expensive” has been constantly being impacted by reality.
Give another example. Since 2020, the consumer sector has been very hot. At the end of the year, several leading brands in the subdivisions that we had previously invested in came to me. Without exception, it is all about financing. I would like to hear my advice, such as what kind of institution should be found, and how high the valuation should be.
Considering that the consumer market was very hot at the time, the value I quoted to them, to be honest, was slightly higher than I expected, “Financing according to this method, this valuation should be promising.” Unexpectedly, I soon “Despised” by the CEO. It turns out that the verbal quotations they received before are 1.5 to 2 times the value I gave.
At that time, I was very touched because the prices of these brands are not low, but without exception, they are sought after by consumers and investors.
I began to wonder whether the previous frame of consumer branding on the “price ratio” was a bit blind and outdated. This has also become an opportunity for me to have a more systematic thinking update on the changes in consumption in recent years.
02 How did the stereotype of “only cost-effectiveness” come into being?
First of all, we might as well take a look at how the previous “price-only theory” stereotype was formed?
Because it was true before.
We can roughly divide the development of China’s consumer market into three stages:
The first stage is the satisfaction of durable and mandatory consumer products. The most typical is the housing, and some necessary electrical furniture to meet the basic family living and living needs.
The second stage is the popularization and branding of optional consumer products. Optional consumer goods mean you can live without these, but having them will make your life experience better.
The third stage is the consumption upgrade, category upgrade and digital upgrade stage that we have been in in recent years.
To a large extent, “cost-effectiveness” is the product of the first two stages of consumption development. Whether it’s buying electricity, buying clothing, or just-needed products in food, clothing, housing, and transportation, everyone is usually looking for “easy to use, inexpensive, and branded.”
Why can it be “easy to use but not expensive”? Behind it is the joint promotion and promotion of the application of new technologies in the supply chain and the enhancement of product strength (including raw materials, design, functions, etc.). In the first two stages of consumption development, it coincided with the large-scale industrialization of the country. How to make products cheaper is the biggest competitiveness of merchants and the core demand of the market.
One of the most typical examples is the impact of logistics development on costs.
Although from the data of the proportion of the logistics industry in GDP, my country’s logistics development seems to still lag behind that of developed countries such as the United States and Japan. /GDP values are 14.8%, 14.7%, and 14.2% respectively. In developed countries, the ratio is stable at around 8-9%), but from another industry commonly used indicator “ton-kilometer” (average cost per ton of cargo transportation for one kilometer) From a point of view, our country is already ahead of the United States.
Take the bottled water we drink as an example. In the early years, water was not sold online, because the gross profit margin of water was not high, and the logistics cost might account for 20% of its price. But now like Nongfu Spring , using nearby water sources and packaging plants, the distribution cost is greatly reduced. This is why our brand can be “easy to use and not expensive”.
Another example is the clothing industry. With the development of industrialization, the “price ratio” of clothing has been greatly improved.
But it must be pointed out that although consumers are buying more and more clothes, the clothing industry is living quite hard. According to data from the National Bureau of Statistics, the retail sales of apparel products across the country increased year by year from 2011 to 2017, but the growth rate has slowed year by year. In 2018, the national retail sales of clothing products was 987.04 billion yuan, a year-on-year decrease of 4.8%, and the retail sales of clothing products experienced negative growth for the first time.
This brings us to the key question-in the third stage of consumption upgrade, is “cost-effectiveness” still the core demand of the market?
03 Changes in consumption: opportunities for products to be “expensive” brought about by changes in the market, supply chain and demand
In the past few years, we have been in the stage of consumption upgrade, category upgrade, and digital upgrade, which is the third stage. What will happen to the mass consumption environment and consumption concepts? This determines how we should adjust our understanding of consumer brands.
Consumer environment and demand
Look at the macro level first.
On November 3, 2020, General Secretary Xi Jinping made an announcement on the drafting of the “Proposals of the Central Committee of the Communist Party of China on Formulating the Fourteenth Five-Year Plan for National Economic and Social Development and Long-Term Goals for 2035”. The document drafting team believes that from the perspective of economic development capabilities and conditions, my country’s economy has hope and potential to maintain long-term stable development, reach the current high-income national standards by the end of the “14th Five-Year Plan”, and achieve economic aggregate or per capita income by 2035. It is entirely possible to double it.
To achieve “doubling per capita income” requires an average annual growth rate of 4.73% in the next 15 years. This is not a difficult goal to achieve. Therefore, we can basically predict that by 2035, most cities in China may reach the current level of Beijing and Shanghai.
Everyone is familiar with the Engel coefficient, which refers to the proportion of household food expenditure in total consumption expenditure. In other words, the higher the income of a family, the lower the proportion of household income used for necessities. Assuming that the goal of “doubling per capita income” will be achieved smoothly, it means that the proportion of expenditures on essential consumer goods at the entire social level will continue to decline.
Another basic logic is that when your income doubles, your expenditure will certainly not be less than it is now. If you maintain the same standard of living, it is likely that your expenditure will also double. Where will the twice as much money be spent?
In fact, it is still spent on goods and services, which means that you will tend to pursue brand and quality, but you may not necessarily pursue simple cheapness. This is easy to understand. If you compare it to a student year with little income, your consumption level after work will definitely increase. There is no doubt that the things you buy are “better and more expensive”. To make another analogy, you have evolved from drinking pure water to drinking sugar-free sparkling water, coffee, and fresh fruit tea. The price you are willing to pay for it and your feelings are definitely different.
When the consumer market has gradually passed the era of only bargaining, and entered the consumption upgrade stage, people’s demand for commodities is constantly escalating, which is manifested in three aspects:
Better products: health, raw materials, freshness, health preservation, etc.
Products are more beautiful : appearance, function, suitable for show, etc.
The spiritual added value of the product is stronger: environmental protection, play, personality, etc.
These all mean that commodities have the opportunity to be “expensive”.
Cross-industry application and development of supply chain technology
Of course, behind the consumption upgrade is not only the consumption environment and changes in demand, but also the development of new technologies and the application of cross-industry technologies that make everything possible.
Let’s take convenience food as an example. Affected by home isolation during the epidemic, China’s convenience food consumption increased by 1.5 times from January to May 2020. In February, when the domestic epidemic was the worst, the consumption of convenience food increased by 21.3 times. Convenience food took advantage of this opportunity to open up the market.
Everyone remembers that the instant noodles that you ate when you were young are usually a vegetable bag, an oil bag, and a seasoning bag, which cost about two to three yuan. At that time, the vegetable bag used the drying technology, chopped and blanched, then dried with hot air of less than 100 degrees . The characteristic is low cost, but the effect of re-absorbing water is not good, so after soaking, vegetables are often tasteless.
What is the hottest convenience food in 2020? Snails and lion powder.
As we mentioned in the previous section, people’s demand for goods has increased, including features such as more abundant raw materials and more suitable for shows. The traditional instant noodles are soaked without any drying points, and the snail noodles have many bright spots. In a packet of snail noodles, there are as many as seven or eight packs of various materials, and there may be as many as 11 packs. After a not-so-difficult operation, it came out with all the colors, fragrances, flavors, and real materials, and the photographs and presentations were not shabby at all.
In addition to several orders of magnitude more seasoning packs, many convenience foods have now undergone technological improvements and no longer use drying technology. Both vegetable packs and meat packs use freeze-drying technology. Freeze-drying is carried out at low temperatures, and materials such as proteins and microorganisms will not be denatured or lose biological vitality. Therefore, after being soaked, the taste and appearance are still highly restored.
These can be achieved mainly due to the huge changes in the supply side of the production raw materials. Only when the supply chain has developed to a certain level, can the technology’s cross-industry application and development be realized.
In summary, changes in the consumer environment and demand, as well as the cross-industry application and development of supply chain technology, have enabled consumer brands to be “expensive”.
04 The serious “involution” of the consumer goods industry makes “expensive” one of the inevitable trends
In the above part, we introduced the conditions for consumer brands to be “expensive”. But in fact, for many consumer brands, “being expensive” is not a choice, but a way of survival and development.
The hottest internet term in 2020 is “involved”. The academic circle and the Internet circle are complaining that their “volume” has no limit. In fact, in the field of consumer goods, involution also exists and is serious.
According to data from the National Bureau of Statistics, since 2018, the year-on-year growth of my country’s total retail sales of consumer goods has fallen below 10%, 9% in 2018, 8% in 2019, and -3.9% in 2020 due to the epidemic. .
It can be seen that since 2018, the average growth rate of total retail sales of consumer goods in China has fallen by double digits. If you can find a segment with a growth rate of more than double digits, it is a very good direction.
Then, with limited overall growth, the competitive landscape faced by brands in categories has also begun to change. In other words, brands are facing competition from the incremental market (how to make the cake) to the stock market (how to divide the cake).
When the “inside roll” appears, it is definitely not enough to just aim at one point to get more cakes for your brand. The so-called aiming at one point means that your brand is only prominent in one link. But now, as the industry shifts to low-to-medium-speed development, you cannot take advantage of the overall vigorous development of the industry. To ensure competitiveness and gross profit, you must either extend the industrial chain to achieve and accumulate, or at least two links. ; Either it is the effective use of changes in the industrial chain to achieve unique innovations, such as self-heating small hot pot in the field of convenience food.
In other words, when the “involution” appears, it is not enough for you to focus on one point and continuously polish the cost-effectiveness. You must make your products more beautiful, better, and stronger spiritual added value to ensure longer vitality. This is actually the process of making a brand more expensive.
05 Two Questions about “Being Expensive”
How expensive is it to sell?
How expensive to sell is actually a question of benchmarking.
At the beginning of the article, we mentioned the newly invested Guochao boutique brand “Duanmu Liangjin”. Customers of “Duanmu Liangjin” often label it as PRADA, so that its pricing as a Chinese luxury brand will stand.
We just mentioned that the clothing industry is not easy to do, but China still has a clothing brand that does not sell cheaply-China Lining . Because customers compare it to Nike and Adidas , as a national trend, its quality design is not inferior to the international brands, but the price is 10%-20% cheaper than Nike and Adidas, so consumers are willing to pay for it. .
From these two examples, we can see that the significance of benchmarking for pricing lies in who your brand is comparing with, who you are comparing with is relatively cheaper, which determines your reasonable value in the minds of consumers.
Then the next question is: how to establish the benchmark in the minds of consumers. In other words, why do users make you expensive?
Why do users make you expensive?
After setting the benchmark for product pricing, how do you make consumers accept your pricing? In real life, there are a large number of price increases that are complained and unacceptable by consumers. Frankly speaking, you certainly can’t raise prices for no reason. Where is your “expensive” value?
This goes back to the three aspects of demand upgrades we just mentioned: products are more beautiful and better, and spiritual added value is stronger. Because of the production of multiple added value, the brand’s target products have migrated, which in turn brings about the migration of price ranges, and upward pricing can be accepted by consumers.
Take hi tea as an example. A major change brought by Hey Tea to the industry is reflected in the raw materials: it changed tea powder to tea soup, fruit flavors to fruit, and creamer to milk… to realize the upgrade of raw materials. So it is expensive, and consumers pay for it.
Take three and a half meals as an example. In addition to the coolness, high-level sense and appearance of the packaging, a major manifestation of the upgrade of the three-half category lies in technology. Its star product is freeze-dried coffee powder in a mini coffee cup. The key to innovation is super instant. The user pours coffee powder into ice water or milk, and immediately gets a cup of delicious cold brew or latte coffee. The taste reduction and convenience are achieved thanks to the application of freeze-drying technology to coffee by Santon and a half.
Compared to Nestle is well known, less than a dollar a triple instant, three meals half the price of a small cup about three-four, when promotional twenty-three, but thanks to the taste and convenience, the user is willing for it Pay the bill.
It should be pointed out that “expensive” does not mean the opposite of “cost-effective”. While making expensive, with the increase in sales and the development of the supply chain, brands can achieve better cost performance while being “expensive”.
If you follow this line of thought, “become more expensive” is a road path to follow, but one thing is need to be reminded of the brand.
There are many ways to accumulate emotional appeal. The younger generation who have never experienced material scarcity are also willing to pay for the satisfaction of their emotional needs. However, forcibly imparting spiritual added value to offline products is not feasible.
Why do I say “forced”? Take IP as an example. Generally speaking, successful IPs in history have time and stories to settle, and they will definitely go through a process of accumulation of emotional appeals. Hello Kitty, which was created by a cartoon image company and not derived from a certain animation film and television work, is probably the only exception.
▲ Source: Hello Kitty official website
Whether it is consumer products or cultural and creative products, the core thing is to find something that allows users to build and accumulate emotional appeal, and then better attach it to products and services.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-secret-to-getting-rid-of-the-predicament-of-the-consumer-industry-is-to-make-it-expensive/
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