JD Capital: how to make sense of today’s consumer market and opportunities within? | Media Interview


"The tidal wave rolls forward."

How should we make sense of the consumer industry today? This is inherently a complex question.

Consider the recent “double eleven” shopping festival, the "low price" trend swept through the entire e-commerce industry, getting the best "value for money" became a market consensus. Offline membership-based supermarkets started a "price war," Sam's Club's low-price experience has been repeatedly studied. All parties contest over sub-contracting factories, buying quality unbranded products at lower prices has become the new trend.

Everything seems to contradict the industry's previous "upward-trending" sentiments, but it is also inappropriate to view the trend as solely "downward". We can still see considerable growth in certain categories and formats: the aggressive expansion of snack discount stores, the continuous efforts in the cosmetic industry to develop effective skincare products… These phenomena indicate a vibrant facet on the demand side, only that new logics are required to capture opportunities.

How to view the seemingly contradictory consumption phenomena? 「Deep Echo」 recently had a dialogue with Chen Wang, Managing Director of the Consumer Investment Department at JD Capital. The discussion attempted to make sense all that is happening from multiple perspectives, including the overall consumer environment, the rise of consumer brands, and new industry opportunities.

What exactly is happening in the Consumer Market ?

In Chen Wang's view, macro changes on the demand side of consumer market depends on two elements — consumption capability and consumption willingness. Right now, the populace is relatively conservative on expenditure, but "the willingness to consume is always there." Everyone aspires a satisfactory lifestyle, and wishes to enjoy superior product experiences.

Therefore, one cannot overly generalize changes when looking at the consumer industry; instead, different demographics and product categories should be considered. In terms of demographics, young people in first and second-tier cities, as well as the middle class defined by income, are currently scaling back consumption. The behavior change of this group is more pronounced on non-essential consumption, such as tea drinks, moderate/light luxury goods and diamonds, as well as fine dining and outdoor entertainment.

Not all categories are impacted. On the contrary, middle-class household spending on childcare and education remains significant, infant related skincare and supplementary food products are still on the upside. This is determined by consumption preferences. If a “conclusion” must be given to the current consumer environment, then it should be that: consumer demands for products have not decreased, but instead weighs heavier on "value for money”.

Under these circumstances, products that are relatively cost-effective, brings small but certain pleasures ("small joys") will have more room. At the same time, as domestic consumers gradually move away from "brand-worship," the trend of pursuing value for money will bring more opportunities to local brands.

Chen Wang emphasizes that, what has not changed, are consumer recognition for brands with quality products and services, and subsequent willingness to pay a premium. What brands need to do is make timely adjustments based on their product category. If the product category faces a trend towards lower prices, firms should adapt by adjusting their product structure, positioning, associated channels and supply chains. If the category is suitable for domestic firms to invest in, is more competitive in terms of price and product itself compared to foreign brands, then the brand firm will have more chance to "stand out" in the current environment.

How product categories differentiate and upgrade?

The consumer environment is changing, but there’s also a "constant, unchanged line" within the industry — the differentiation and upgrading of product categories. The rise of new categories in recent years are all driven by this industry dynamic.

Differentiation refers to: the development of consumer goods following the logic of "satisfy mass-market needs first, niche markets and specialized demands come later". Take sports brands as an example. In earlier years, people had one pair of shoes for all sorts of purposes, but later, shoes diversified according to function and setting (basketball shoes for basketball, tennis shoes for tennis etc). Further, by striking an emotional resonance with users, brands like lululemon have carved out a niche amongst many sports brands. This is also a manifestation of category differentiation.

The driving force behind category upgrading is people's desire for a more enjoyable lifestyles. Take the fresh food category as example. In earlier years, people bought fresh produce from farmers' fair, then from supermarkets, chain stores, community fresh food supermarkets, and later to front warehouses. Each change corresponds to an upgrade in environment, quality, and timeliness.

Chen Wang believes that "the differentiation and upgrading of categories is an ongoing process," but the rate of growth is influenced by the overall consumer environment. Categories like wet toilet paper, functional skincare, domestic snack chips, discount snack stores, and frozen baking supply chains are all beneficiaries in the wave of category differentiation and upgrading.

Take functional skincare as an example. Initially, skincare products addressed basic needs like moisturizing, but now people have more sophisticated demands like anti-aging and sensitivity needs. Furthermore, consumers increasingly value 'substance' over 'appearance' of products, making functional skincare an 'opportunity with certainty.'

The discount retail format is currently attracting a lot of attention, especially the aggressive expansion of snack category discount retail. Chen Wang believes this is determined by the characteristics of the snack category — weak branding on the brand side, abundant upstream supply, and low operational difficulty in retail, all of which contribute to the prosperity of snack category discount retailing. Hard discounting in other categories are also possible, but relatively more challenging, requires continued exploration by distributors.

More content from the dialogue between「Deep Echo」and Chen Wang, MD of Consumer Investment Department at JD Capital:

01. Overall consumer environment: More weight attributed to “value for money”

Deep Echo: regarding consumer market, the industry holds many opinions, but they often seem to contradict each other to a certain extent. How do you view the changes in the consumer industry? Can you systematically introduce your framework of thinking.

Chen Wang: To understand from a macro perspective, consumer demand depends on two things: consumption capacity and consumption willingness. Consumption capacity depends on your current level of income and expectations for future income. People will consume when they have income, there exist no such situation where consumers have money but don’t know how to spend it. Right now, it's about insufficient expectations and confidence, prevailing risk-averse sentiments leading to a more cautious spending.

However, looking from perspectives of consumer industry development and investment, the willingness to consume is always there. Everyone wants to live well, with better products and experiences. This demand is always present, only that it is temporarily suppressed in the current phase.

Looking at our current phase historically, it is in fact similar to Japan in the 1980s. Of course, only similar in terms of certain characteristics, the situation in China is more complex, a direct comparison cannot be made.

Combining consumption capacity and willingness, comparison with overseas environments, we see several important issues. First, the consumer industry can't be generalized; it has to be viewed in layers, through dimensions of demographics and product categories.

From the demographic dimension, young people from first and second-tier cities, middle class defined by income, these groups of people have somewhat reduced consumption. In China, most of the middle class relies on wage as their primary income source and real estate as their main asset, so fluctuations in the real estate market will affect their consumption confidence. Under such circumstances, this group might cut down on non-essential consumption, such as fine dining and entertainment.

On the other hand, consumptions of high-net-worth individuals constitutes a relatively small proportion of their income and assets, therefore the impacts on their spending are less pronounced. As for the low-income group, because of their low income base, the impact on their livelihood is also less noticeable as compared to the middle class, even in the current situation.

Despite potential reductions in middle-class household income, they may continue to increase spending in certain areas, such as childcare. This is because many parents would rather sacrifice their own quality of living than their children’s.

Looking through categories dimension, the reason they differentiation and upgrade, are due to periodic acceleration and suppression of different product categories under different macro environments.

Some categories continue to upgrade, such as skincare and supplementary food products related to infants and toddlers, lower-priced daily necessities that bring everyday joyfulness, and functional skincare products. Meanwhile, discretionary spending items like tea drinks, moderate/light luxury goods, and diamonds are showing a downward trend, their main target consumer are the precisely the young and the middle class.

Now, let's talk about changes in the consumer market. Today's Chinese consumers have reached a high level of maturity and discernment, weighing product quality and experience more, moving beyond mere shallow presentation or blind pursuit of international brands.

This trend is especially evident in first and second-tier cities. Specifically, in industries like functional skincare, dietary supplements, and sports brands, consumers are making more rational choices, no longer blindly chasing foreign brand names. This is a healthy development trend, consumer recognition of, and willingness to pay a premium for, brands that provide quality products and services remains unchanged. In this process, domestic brands, building upon their strength, can win market recognition and compete with international brands.

Consumer demands for products have not decreased, but instead, in the prospective environment, the weight given to “value for money” will be much higher. Behind the value for money logic, lies the desire to obtain emotional value and happiness at a moderate cost.

Similar consumer attitudes were evident in Japan during the 1980s and 1990s, which could also be termed 'small joys'. People pursued similar product experiences at a lower cost, given rise to brands like MUJI and Uniqlo. In terms of demographic structural changes, the Japanese market went through a similar journey. The success of 7-Eleven can be attributed to the trend of single living and smaller family sizes. Industries like prepared meals and pet care are also related to changes in demographic structure. This is our thoughts and view on market changes.

Deep Echo: you spoke in great detail. On a macro level, we can see some commonalities, but there are many differences in demographic segments and product categories. The consumer market still has opportunities, but they are more nuanced now. in this challenging environment, how should different characters within the industry view opportunities and challenges?

Chen Wang: Brands, in their choice of categories, must choose those that align with historical trends. For instance, starting a new baijiu (Chinese liquor) brand or a pure apparel/home furniture brand now would be somewhat against the trend.

After choosing a category, brands need to align their products, positioning, target demography, and pricing with the needs of current and future customers. In categories where 'value for money' is ideal, a high-end positioning would unsuitable. For example, creating a high-end snack or tea drink brand is not quite appropriate, and we would be cautious about investing in such projects.

Our consumer companies are strong in supply-side production, manufacturing, and cost control. Now they are also maturing in brand building and have the capacity become global. Going global a significant opportunity for brands, like Anker and Transsion, for instance.

This is similar to the United States in the 50s and 60s and Japan in the 70s and 80s. Many Japanese companies like Sony, Toyota, and Canon successfully went global then. China is at the stage now, despite current situation being more complex, the trend is unchangeable.

In terms of channels and retailing, the basic logic is to continuously pursue efficiency and enhanced experience on supply and consumer side. A relatively long time is needed to see significant improvements; thus, opportunities are not as abundant. Currently, we see formats like membership-based supermarkets and hard discount stores, which definitely have long-term potential.

Hard discount formats are an improvement for the entire retail industry, but currently, in China, they have only been validated in the snack category. Other categories still require more time and requisites.

Regarding the supply chain, China's supply chain is highly complete and mature. Opportunities lies in finding firms that can address downstream needs and shortcomings. These supply chain firms essentially improve the efficiency of the entire industry chain. For example, in terms of the 'dining' problem downstream, the demand for prepared meals arises from smaller family sizes and young people whom do not cook. Chinese cuisines are complex, and the supply side is not yet mature enough, with some shortcomings in taste and technology, but these will be gradually resolved.

Take frozen bakery for example. There are demands downstream, like membership-based supermarkets that use baking as a signature product, but they will not set up a professional baking business. As it would occupy a lot of space and affects the entire store model. So, frozen bakery firms can meet their needs, which is an opportunity brought about by the supply chain catering to downstream demand.

02. On the differentiation and upgrading of categories:Trends roll forwards, focus needs to be tuned on the essentials.

Deep Echo: What logic and patterns od the rise of new categories follow?

Chen Wang: The rise and growth of new categories are fundamentally driven by the differentiation or upgrading of categories.

From the perspective of differentiation, the basic law of consumer goods development is to first satisfy mass-market needs, such as basic food and clothing, air conditioning, and color TVs. Once these are met, more specialized and segmented demands emerge.

Take sports brands for example. A decade ago, everyone wore the same pair of shoes, but then came the differentiation in terms of function and setting. Today you wear basketball shoes for basketball, and tomorrow tennis shoes for tennis. Later, there’s also differentiation in emotional needs, like the brand lululemon - unlike traditional sports brands that focused on competitiveness - focuses on physical and mental balance. This positioning has been proven successful.

Under the logic of differentiation, for instance, we see functional skincare as a definite opportunity. Ten years ago, skincare products were all about basic needs like moisturizing. Now, there are more specific demands like anti-aging and skin sensitivity.

The second logic is upgrading. Everyone wants a better life and better product experiences. For example, the solution for fresh food evolved from farmers' fair to supermarkets, then to chain stores, community fresh supermarkets, and then front warehouses. Each change represents an upgrade: better environments, closer proximity to consumers, and improved quality etc.

In the pet industry; the previous generation focused on basic needs of humans, but current generation consumer need companionship and emotional value, so pets represent a new category opportunity brought about by 'upgrading'. Similarly, the emergence of new tea drinks aligns with consumers’ upgraded demands, people want drinks with fresh milk and freshly squeezed fruits.

The trends of differentiation and upgrading are relentlessly moving forward. Whether growth is fast or slow depends on the broader framework of demand I just mentioned, looking at consumers' consumption capacity and willingness in specific categories. High-end tea drinks are now adjusting their pricing due to changes in consumer spending capabilities. Wet toilet paper, functional skincare, domestic snack chips, discount snack stores, and frozen bakery supply chains are all areas we see as favourable.

Deep Echo: Some product category opportunities have already become hot spots in the industry, with robust domestic industrial chains, and fierce competition, whenever an opportunity arises, many rush in. How do you view this situation?

Chen Wang: This situation adds difficulty for entrepreneurs and investors, but the essence – competition, had always existed.

The reason for the fierce competition now, is that supply chains and channels have matured, entry barriers have lowered. This, however, bring about a much higher threshold for establishing brand recognition. Your product needs to be robust, your positioning clear, and well-matched with your target demography. Tasks at hand have increased both in volume and in details.

For instance, entering the online market is easy for everyone, but can you sustain a profitability? This is challenging and tests your ability on refining business operations, management, and utilization of cash flow. Currently, with the cooling of capital, funding is more limited, implying higher barriers.

Both the consumer industry and financial capital will go through a process of learning, trial and error, and adjustment. For us, it means summarizing these experiences and returning to our framework. For example, we must now be more cautious in choosing categories.

To give an example, categories like make-up mirrors tend to be generic; users are often indifferent to the brand of make-up mirrors. Therefore, it’s difficult to achieve high-profit margins. If this category is operated online, it can only maintain low-profit margins, or even operate at a loss.

But if you look at a brand like AMIRO (觅光), it originally manufactured make-up mirrors but now produces cosmetic instruments. The functionalities of cosmetic instruments are much stronger, and they have higher value and profit margins, making this category relatively more resistant to fierce competition.

For firms and institutional investors, fierce competition is not a problem, the essence is to focus on the right aspects. For instance, lululemon has always emphasized its positioning around physical and mental balance through various marketing activities. This is also a form of competition, but oriented towards strategic positioning.

Conversely, if you are just competing in terms of investment flow, even investing in projects with an ROI of less than 1, this presents major issues. We have also seen some offline chain firms that, in order to secure a good location, incurred a very high-level rental costs proportionally. Aside from the advertisement considerations, this can lead to significant problems.

The same applies to institutional investors. If you truly believe in the value of a venture, it’s acceptable to accept a slightly higher price. But if this is not the premise, it becomes essential to adhere to an investment discipline that ensures a sufficient safety margin.

Deep echo: how do you determine whether a category opportunity is truly viable? Some alleged new categories only experience fleeting growth.

Chen Wang: In this aspect, as a PE firm, we are slightly better off than VCs, as PE primarily focus on things that have been around for a while. No one can claim to make perfectly accurate judgments, but there are some general principles to be followed.

From the demand perspective, a new category opportunity must align with consumer wants. It's not just about sales volume, but also about repurchase and re-use rates. For example, the reuse rate of products like air fryers is actually quite low. We will verify this through research.

Then, in offline settings for example, you need to look at veritable terminal sales data to make judgments. Low-alcohol drinks were popular for a while, but our offline research found that the data was not promising as expected. We also conduct research in terms of quality, price, and customer satisfaction.

Next, is the business model truly viable? Does it have authentic self-sustaining capabilities? Some categories are viable in terms of demand but are difficult to profit from, like front warehouse e-commerce.

Overseas experiences can also serve as references. Cosmetic instrument products for example, are very mature in the Japanese market. This category is competitive in China right now, but losses are temporary, and we will continual to pay close attention.  

The overarching principle is, to judge whether a category is viable, decisions should be based on whether there are repurchases on the consumer end and whether the business model is viable. These can only be verified through time. In recent years, products like wet toilet paper and disposable underwear have seen sound growth, but whether they can sustain this remains to be seen. Ultimately, we must respect the consumer.

Deep echo: what is in-between, from capturing a new category opportunity, to creating a powerful emerging brand from this opportunity?

Chen Wang: From seizing a new category opportunity to creating a new brand, both internal and external capabilities are needed in-between. Externally, you need heightened sensitivity and grasp of external environmental changes, including changes in consumer demand and channel opportunities. Brands that have risen using platforms like Xiaohongshu (Red) have seized the benefits of new communication methods.

Internally, for brand companies, it's crucial to create a mental distinction. The positioning must not be made up, it has to base on authentic consumer needs. Products, channels, marketing, and capital management all needs to pass muster. For example, your products must gain consumer recognition, should not depend on a singular channel, consider also whether the success rate of investment flows are high or not, and whether your marketing strategy is genuinely effective, or a mere self-gratification. In terms of capital management, you need a reliable CFO. Many new consumer companies dilute their equity too much when the market is favorable, which is a high-risk condition.

The consumer industry varies greatly between categories, and the focus on internal capabilities will differ. For instance, categories like wet toilet paper are typical FMCGs, where product differentiation is not as significant, the focus is more on channels. For brands like Coca-Cola, Nongfu Spring, and Haitian, their products are definitely okay, but their strongest aspect is channels.

03. The “Low Price” Trend: A Disruption, also a reshuffling

Deep echo: here is a topical question. This year, both online and offline are talking about “low price”, a trend that seems to have impacted everyone. How do you view this?

Chen Wang: It's definitely a disruption, but also a reshuffling.

The approach to low pricing varies by category. If you're focusing on value for money, pricing has to trend lower, but you also need to make corresponding adjustments in product positioning and channels. Everything should revolve around consumers and target demographics. For example, insisting on pricing a tea drink at 30 yuan now just won’t work.

In this environment, some businesses can't cope, and others experience reduced profit margins, but able to survive. This brings about a reshuffling effect. Of course, you cannot focus only on low prices; you still need to focus on the essentials.

Sam's Club is doing well in this regard. They continue to improve capabilities in product selection and supplier screening. They select a large number of products, while at the same time hitting consumer preferences, creating a positive cycle. Ultimately, retail businesses compete on these factors – can you continually lower prices and improve quality? Is your supply chain keeping up? These are the key.

For platforms, they should maintain their strategic focus. For example, JD.com has always positioned itself around quality. Going for low prices is somewhat a mismatch with capabilities, but they need to adapt to the environment. Their approach to low pricing doesn’t mean they’ll mimic Pinduoduo (PDD/Temu)’s strategy; it's about making the right adjustments, like increasing the proportion of low-priced products in certain categories.

Whether online or offline, changes in the external environment force businesses to improve their internal capabilities, i.e., achieving low prices while maintaining reasonable costs and quality.

Deep Echo: within the “low price” trend, which format or models are more advantageous?

Chen Wang: It would be the discount retail format. Right now, only the snack category has made the breakthrough, while others are still exploring due to greater difficulties.

The snack category has a few characteristics: first, brand identity on the supplier side is relatively weak, and consumers don’t demand specific brands for snacks. Second, there are many domestic snack manufacturers, so ample upstream supply, giving retail channels stronger bargaining power. Finally, snack operations are simpler – a cashier would suffice, and snacks have a longer shelf period compared to fresh products, which need price adjustments three times a day.

So, discount retail has made it through with snacks, and we continue to pay attention to other discount formats, expecting new ones to emerge gradually.

Deep Echo: you mentioned consumers are willing to pay a premium for brands, while also moving away from foreign brand worship. This is a favourable condition for the rise of domestic brands. But you also noted that everyone is pursuing value for money, with all the platforms hyping “low price” during “double eleven”, it seems to be unfavourable for “brand building’. How do you view these opposing forces?

Chen Wang: We need to view it dialectically. First, consider the category. If it faces a trend toward low pricing, you must adapt, like with tea drinks. Besides adjusting prices, related products also need adjustment to maintain profitability.

We've noticed some brands are emerging. For instance, in snack chips, Calbee from Japan used to dominate, but now domestic brands have emerged. They are priced much lower, but the quality and taste are similar.

Not all categories will choose lower pricing. For functional skincare, price isn’t the most important thing; product efficacy and consumer recognition are key. Brands need to make suitable adjustments, like introducing relatively affordable product lines, completing brand matrix etc. Ultimately, everything revolves around your consumer.