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industry cooling off period is the best growth period for good projects.
At present, the 2022 macro series has released two issues, which are about how we view the changes and fluctuations of the capital market and the reasons behind the differentiation of the VC path between China and the United States. In the third part of this series, I want to talk about consumption with you.
Consumption and investment need attention. After 2016, consumption has gradually replaced real estate and become the main pulling force of “economic growth”. According to the data of the National Bureau of statistics, China’s GDP increased by 8.1% year-on-year in 2021, of which consumer spending contributed 5.3% of the growth value, with a contribution rate of 65.4%. Consumption and investment also need to be cautious. We need to grasp the points that can make the brand continue to develop and grow through the heat and foam.
In this article, I will start from the phenomena I have observed, and talk with you about how to treat the current cold of new consumption, and where are the opportunities for new consumption in China in the future. First, share some main points:
I hope I can bring you some perspectives.
How to treat the cold of new consumption?
This year, there have been many claims that the industry is cold. If you can summarize the new consumer market in the first half of 2022 in one sentence, there will be more projects and less money.
According to the incomplete statistics of Lianshang Retail Research Center, the number of financing projects in the new consumption field in the first half of 2022 increased by 67.5% year-on-year in the first half of 2021, but the total financing amount decreased by 18% year-on-year.
At the peak of new consumption investment in the past two years, investment institutions may mainly focus on whether new brands are a favorite category for young people, whether they are innovative, and whether there is early growth; Enterprises will spend a lot of money on marketing in order to achieve rapid early growth.
From the fourth quarter of 2021, the consumption track has been cold as a whole. Do you really not pay attention to new consumption now? Judging from the amount of financing in the first half of 2022, we are still more concerned about new consumption.
Take Fengrui as an example. In 2022, will it be a cold winter for capital In the article, I mentioned that although everyone now says that consumption is cold, we are actually very positive. From Q4 2021 to June this year, Fengrui invested in seven new consumption projects (including delivery and delivery after the meeting). In contrast, from 2020 Q3 to 2021 Q3 – the period of high consumption and investment, we remained cautious and only invested in four new consumer brands.
We also focus on consumption. Now the focus of attention on new consumer goods brands may have changed. In other words, now you may be more concerned about whether a brand can be recognized by consumers and maintain growth after the capital heat and flow dividends fade.
In the future, when we evaluate the brand power of a consumer brand, we may pay attention to two data indicators: cost to sales ratio and ROI (return on investment).
The cost to sales ratio can be understood as the proportion of brand marketing expenditure and sales revenue. We can see the cost of brand promotion through this indicator. Of course, the cost to sales ratio needs to be combined with product categories. Some consumer categories may require very high marketing expenses, such as beauty products; The marketing investment of some consumer products may not be so high, such as bottled water.
ROI can help investors evaluate the investment efficiency of the project. Simply put, it is how much real income the brand brings with every penny invested. This indicator can also help us judge whether a brand can maintain positive growth after the flow dividend and capital dividend subside, and whether users recognize the brand.
For new consumer brands, in order to achieve long-term development, in addition to receiving category dividends and flow dividends, they need to make more efforts from the product side, supply chain and channel side, and have certain competitiveness in all aspects.
New consumption opportunities in China in the future
So what new consumption opportunities will appear in China in the future? I will focus on four kinds: Digitalization and scientization of strong industries; Digitalization of emerging industries; Internationalization of private enterprises; Private enterprises are sinking.
- Current investors may pay more attention to whether the brand can gain growth and consumer recognition after the capital heat fades. Cost to sales ratio and ROI will become important indicators to measure brand strength and brand degree.
- The new consumption opportunities in China in the future are mainly in the following directions: strong industrial technology and digitalization; Digitalization of emerging industries; Internationalization of private enterprises; Private enterprises are sinking. And China has the opportunity to produce new consumption species that have never appeared in the world.
- China’s new consumer brands should not only go out, but also sink down.
▎ strong industrial technology and digitalization
China has many strong industries. They are usually huge in size and are constantly seeking growth and upgrading in their development. In order to improve the efficiency and quality of development, industries usually need scientific and technological and digital upgrading.
For example, the strength of China’s clothing industry has always been the world’s leading. According to the 2022 clothing industry overseas marketing report released by shopline, China accounted for 43.5% of the world’s major clothing exporters in 2021. The reason why China’s clothing industry is strong is that China has a long and complete manufacturing chain, and there are a large number of escalating local demand.
In recent years, there have been many excellent cross-border e-commerce enterprises in China, such as patpat, cider and sheen. What these cross-border e-commerce enterprises do is mainly based on China’s strong manufacturing chain to digitize the foreign trade clothing retail business and reach overseas users. Then we also know that cross-border e-commerce has risen rapidly in recent years. According to the relevant report of BOC research, the contribution rate of net export trade to GDP at the end of 2021 was 20.9%, of which clothing and clothing accessories accounted for 5.1%.
Another example is consumer electronics. China is the world’s largest producer, exporter and consumer of consumer electronics, and has a very strong industrial strength. I participated in the investment of a panoramic camera brand: insta360 during the IDG period. At that time, they combined the powerful consumer electronics industry in the Pearl River Delta with algorithm splicing technology to develop a panoramic camera. Later, insta360 became the first panoramic camera brand in the world to enter Apple store. This is a typical case of strong industry + new technology.
Drones are also the products of strong industrial technology. UAV production also relies on China’s consumer electronics industry chain. On the basis of this chain, Chinese UAV brands have developed a lot of cutting-edge technologies in the industry, and successfully connected flight control, image processing, obstacle avoidance environment perception, automatic positioning and other technologies with strong technology integration capabilities.
Strong industries and technological breakthroughs have given birth to powerful commercial and consumer UAV brands. For example, Dajiang UAV is a typical example. According to the data of the forward looking Industry Research Institute, by 2020, Dajiang has occupied more than 80% of the market share in the global UAV market, and its domestic market share has reached more than 70%, ranking first among the global civil UAV enterprises.
The above examples can represent the cases of new consumer brands born after China’s strong industries combined with digital upgrading or new technology.
▎ digitalization of emerging industries
Unlike strong industries, which usually have industries first and then digitalization or scientization, digitalization of emerging industries is usually embedded into industrial development at the time of the birth of the industry.
For example, taking the retail industry as an example, China’s retail industry dominated by state-owned forces and foreign capital began to develop in an all-round way in 2001, and Taobao appeared in 2003, and jd.com retail platform was launched in 2004. The emergence of e-commerce has made the retail industry digital, and it can even be said that e-commerce and retail are almost synchronized. In 2021, China’s online retail sales reached 10.8 trillion, ranking first in the world. China’s e-commerce can be said to be a typical representative of the digitalization of emerging industries.
There is also the catering industry, taking meituan as an example. When meituan joined the takeout war, takeout was also an emerging industry in the catering circuit. Meituan, hungry and other platforms have made catering enterprises online and digital. In 2021, China’s online takeout revenue accounted for 21.4% of the total catering consumption revenue, more than 20%. This also shows that meituan, hungry and other platforms have become an important part of the catering industry.
Supplement two relatively emerging industries at present.
One is the psychological counseling industry. In recent years, more and more attention has been paid to mental health. The state has also issued relevant documents such as the mental health law and the outline of the “healthy China 2030” plan to strengthen the construction of the mental health service system. According to the national epidemiological survey data in 2021, 17.5% of Chinese citizens suffer from psychological diseases. During the epidemic, factors such as isolation, long-term home stay, and social reduction also brought a lot of demand for psychological diagnosis and treatment.
However, people in need usually have some resistance to offline consultation due to concerns about disclosing personal privacy, lack of awareness of the industry and other factors.
According to industry data, the overall medical treatment rate of people with mental diseases in China is less than 10%. Therefore, in the past two years, there have also been many online psychological counseling products, which digitally integrate industry resources, help users match professionals online, conduct contactless online communication on the premise of ensuring privacy, and popularize mental health knowledge to users through the platform. For example, the loft glow invested by Fengrui in the first half of the year is such a product.
The other is the housing maintenance and renovation industry. After the central economic work conference emphasized the policy of “housing without speculation”, revitalizing the existing housing has become one of the main countermeasures to solve the housing problem, and the market demand for housing maintenance and reconstruction after home decoration is also increasing.
Compared with traditional decoration, the consumption frequency of house maintenance and renovation is relatively higher. But at the same time, the industry is difficult to standardize and professionalize, and there may be some challenges in the service quality, experience and delivery of the industry. One of the major challenges of branding in this industry is how to realize the standardization, digitization and scale of the whole process. The brand yiniao technology invested by Fengrui in the housing maintenance and reconstruction industry this year has built an intelligent maintenance system based on technologies such as big data, artificial intelligence and the Internet of things, and formulated a standard process for personnel training and offline construction. Provide consumers with high-quality housing maintenance and renovation services.
▎ internationalization of private enterprises
In 2021, Chinese Mainland accounted for 6 of the world’s top 10 container ports (Shanghai, Ningbo Zhoushan, Shenzhen, Guangzhou Nansha, Qingdao, Tianjin). This means that in addition to our status as a major manufacturing country, we have gradually become a global trade center.
The next step after becoming a trade center is to become a global financial center. If we want to integrate the world’s capital, we must have large-scale enterprise internationalization, so that global capital can see our enterprises and establish closer ties with the international market. In other words, we need to ensure two things: one is that it is sufficiently attractive to the international market; Second, capital can be used efficiently in the global market.
China has experienced two cycles in enterprise internationalization:
When both are limited, who will bear the current demand for incubating a new generation of international enterprises in China? Now, it may be private enterprises. In 2021, the Ministry of Commerce issued “accelerating the deep participation of private enterprises in the construction of the” the Belt and Road “, encouraging private enterprises to” go global “. There are great opportunities for China.
The internationalization of large-scale private enterprises is an important step for China to become a world financial center. When these enterprises are deployed globally, it will be more convenient to integrate the money of the world and put the money into the world market again.
Many international enterprises in the United States are representatives of global enterprises. Whether Tesla, apple, Facebook, Wal Mart, McDonald’s, etc., they are international enterprises with global employment, global layout and global investment.
In the past, when talking about going out, it may be more about foreign trade, that is, the outward export of production capacity. At present and in the future, the internationalization of private enterprises has begun to shift from “made in China” to “created in China”, and from productivity export to high value-added product export.
At present, a number of excellent private enterprises have emerged, which set up factories all over the world, employ them all over the world, and complete production, manufacturing and sales all over the world, creating international market value.
For example, tiktok, insta360, Haier, etc. are all created in China based on China’s strong consumer electronics manufacturing capacity and huge consumer electronics market demand, and have made enough efforts in the localization of different countries and regions to achieve the mental occupation of overseas consumers.
In recent years, the industry of domestic floor sweeping robots has also developed very well. According to the data report of home appliance network, iRobot in the United States once accounted for more than 60% of the global market share, but in recent years, Chinese sweeping robot brands such as covos are rapidly occupying the domestic and international markets. According to GfK data, in the second quarter of 2021, the retail share of covos brand sweeping robots in the global (excluding North America) market reached 21.9%, ranking first.
On the one hand, with China’s strong industrial manufacturing capacity, covos has developed many differentiated functions, such as sweeping, suction and towing, self-cleaning, etc; On the other hand, targeted functions have also been developed for the residential characteristics (usually large area) of European and American local consumers, such as enhancing endurance. Therefore, it soon made achievements in the international market.
- Internationalization of capital groups. About 10 years ago, a lot of Chinese capital purchased real estate overseas. At that time, it was mainly large-scale developers. Investment in overseas land, office buildings and hotels was very hot at that time. According to the data released by the China overseas investment Federation, from 2012 to October 2013, the total scale of overseas real estate projects (including projects with investment plans) by mainland Chinese developers exceeded 10 billion US dollars. But by about 2017, after the relevant control measures were introduced, these overseas investments were subject to many restrictions.
- Internationalization of state-owned enterprises. The guiding opinions on deepening the reform of state-owned enterprises published in September 2015 clearly pointed out that “support state-owned enterprises to carry out international operations” and “accelerate the cultivation of a number of world-class multinational companies”. At that time, the international business of state-owned enterprises was mainly composed of import and export trade, project contracting, Greenland investment, overseas mergers and acquisitions, etc., but the subsequent challenges such as the international situation also suffered a lot.
▎ sinking of private enterprises
Brand sinking market does not mean selling different things in high-line cities and low-line cities, but to cover a wider area of Chinese cities and towns. The significance of doing a good job in the sinking market is that high-line cities and low-line cities can enjoy the same good products.
In recent years, many policies have brought new opportunities for consumer brands to sink, such as the infrastructure policy in the past two years.
Since around 2014, due to the comprehensive wireless industry, e-commerce penetration has increased significantly. With the development of the consumption industry, the consumption concept of Chinese residents has also been upgraded. There is more and more consumer demand in the sinking market. However, affected by logistics distribution, commodity supply, circulation network, etc., consumers in remote areas often encounter the phenomenon of “money can’t buy things” or “buy but buy expensive”.
In 2021, the Ministry of Commerce, the national development and Reform Commission and other 17 ministries jointly issued the opinions on strengthening the construction of County commercial system and promoting rural consumption. The report puts forward that by 2025, in areas with conditions in China, we should basically “have chain supermarkets and logistics distribution centers in counties, trade centers in towns and villages, and express delivery in villages and villages”, and also improve farmers’ income and expand the rural consumer market.
In May 2022, the Ministry of Commerce and the Ministry of Finance jointly issued the notice on supporting and accelerating the construction of agricultural products supply chain system and further promoting the development of cold chain logistics, aiming to promote the development of agricultural products cold chain logistics and support and accelerate the construction of agricultural products supply chain system. In other words, it is to enhance the ability and efficiency of cold chain logistics of fresh agricultural products.
In addition, since the 18th CPC National Congress, China has also been committed to achieving common prosperity and improving the income of urban and rural residents. In November 2020, the statement on the proposal of the Central Committee of the Communist Party of China on formulating the 14th five year plan for national economic and social development and the long-term goals for the 2035 also mentioned: “it is entirely possible to double the economic aggregate or per capita income by 2035.”
At present, many consumer brands have found opportunities in the sinking market with the dual support of the market and policy. Taking new energy vehicles as an example, the Ministry of industry and information technology, the Ministry of agriculture and rural areas, the Ministry of Commerce, and the National Energy Administration jointly launched new energy vehicles to the countryside this year for reasons such as supporting the consumption of new energy vehicles, guiding rural residents to travel green, and helping to achieve the goal of carbon peak and carbon neutrality.
The rural activities of new energy vehicles with favorable policies have greatly increased the penetration of new energy vehicles in the sinking market. According to the report of the China Academy of Commerce, nine of the top ten cities with new energy vehicle penetration in May were sinking markets. Among the enterprises distributed by Fengrui, Cheji new energy is a new energy vehicle sales and comprehensive service platform positioned in the sinking market.
We can predict that the gap between the consumption ability and consumption experience of residents in sinking markets such as county-level cities and other so-called high-line cities and low-line cities will become smaller and smaller under the power of infrastructure policies and common prosperity policies. Our private enterprises, our brands, should not only go out, but also sink down.
When a brand makes good use of its logistics efficiency, product quality, circulation links and brand reputation, it will naturally benefit from the infrastructure measures mentioned above and occupy more consumer markets.
New species of consumption unique to China
Combined with the opportunities we mentioned above, China will have many unique new consumer species, and it is likely to become an industry leader in the world. In short, the conditions for the birth of new consumer species can be summarized as “new technology (including digital intelligence) + strong industry + new demand”.
There are three main reasons for this generalization. First, China has been vigorously promoting the development and integration of cutting-edge technology and real industries in recent years, and new technologies and cross-border intersection emerge in endlessly; Secondly, China is the only country in the world that has all 41 major industrial categories, 207 medium industrial categories and 666 sub industrial categories in the United Nations Industrial Classification, with a long and complete manufacturing chain; Finally, China is one of the best single markets in the world, and is constantly upgrading consumption and reducing the consumption gap. The new demand iteration is very fast.
In the world, any country with any two of the above three conditions will produce very powerful consumer species, while China happens to have all three.
For example, freeze-dried coffee, which is very popular in recent years, is a new consumer species born from freeze-drying process + coffee consumption demand + manufacturing and processing industry chain.
The technology of freeze-drying is used to make coffee for three and a half meals, which has brought fire to the industry of freeze-dried instant coffee. But in fact, coffee freeze-drying technology is not a new technology in the industry. As early as the 20th century, Nestle had developed freeze-drying technology. But at that time, for various reasons, there was no large-scale production.
Later, three and a half tons appeared, and began to apply the freeze-drying process to product manufacturing on a large scale. A capsule for three and a half meals costs about 5 – 8 yuan. Consumers can immediately get a cup of delicious boutique coffee by adding water or milk. Nestle, Starbucks and other brands have been working in the instant coffee and boutique coffee market for decades, and they have not mastered the freeze-drying process, but why are our domestic new brands successfully promoting this process on a large scale?
First of all, we need to understand the principle of freeze-drying technology? To put it simply, after cooling the raw materials to a certain temperature (such as -40 ℃), they are sent to a dry vacuum environment to sublimate the water. The moisture of raw materials is removed by freeze-drying rather than drying, and the protein in raw materials is not easy to denature and the organic matter is not easy to volatilize. At the same time, ultra-low temperature also has the effect of sterilization and mildew prevention. Therefore, this technology was used to preserve drugs and plasma in the early stage. At the same time, because it can better preserve the flavor and nutrition of raw materials, this technology has also been applied to the food storage industry.
The introduction of food freeze-drying technology in China is not very long, about around 2002, but the development speed of food freeze-drying industry is very amazing, and the development potential is huge. According to relevant reports of guanyantianxia, the scale of China’s freeze-dried food market exceeded 2.1 billion yuan in 2020, exceeding the global growth rate of 7.8% of freeze-dried food.
In front of the huge demand market in China, freeze-drying technology has been widely used and developed rapidly. When the updated and iterative freeze-drying process meets the new demand of Chinese consumers for the taste of instant coffee, a variety of freeze-dried coffee products were born. (if you want to know more about the story behind three and a half meals, please read the latest issue of the detailed talk series: Li Xiang talks to Wu Jun, the founder of three and a half meals.)
In addition, we are entering a period of rapid development of the tertiary industry. When entering this cycle, the left side of various service industries is the transformation of business models by the Internet and digitalization, which is China’s strong scientific and technological capabilities and manufacturing capabilities; On the right is the contradiction between market supply and demand encountered in the rapid development of the industry, for example, the reserve of professionals cannot meet the market demand. The combination of these two sides will eventually lead to many different business models and products in China’s service industry.
For example, during the epidemic, eating out or taking out may be limited, but you want to eat well and conveniently. This contradiction between supply and demand, combined with China’s strong food processing industry and the rapid development of the cold chain transportation system, has led to the growth of new consumer species – prefabricated vegetables. The birth of prefabricated dishes combines the new needs of consumers for catering (during the epidemic at home) + food processing technology + cold chain transportation system.
Recently, the popular prefabricated dishes are fresh ingredients that are cut and processed, frozen or vacuum preserved, and consumers can eat them directly after simple processing at home. Prefabricated dishes, on the one hand, provide processing services, on the other hand, they are sold to consumers in the form of retail, which can be said to be a new species of semi service retail.
Another example is intelligent fitness. In recent years, the fitness needs of Chinese residents have increased significantly. According to iResearch consulting data, after the epidemic, 64.6% of the national health awareness has been enhanced. The traditional fitness teaching mode is generally that people look for professional coaches offline for one-on-one or one to many coaching, also known as “looking for private teachers”, which has high requirements for venues, coaches’ qualifications, etc. However, affected by the epidemic at home, personal time is not fixed, and the qualifications of coaches are different, more and more people choose intelligent fitness methods such as fitness apps and indoor fitness equipment.
Among the consumer brands invested by Fengrui in the first half of this year, two specialize in smart fitness: bodypark and speed.
Bodypark is an innovative “Ai intelligent fitness interactive platform”. In addition to providing digital course content and real-time online guidance of real-life coaches, bodypark integrates AI technology into its products – a highly accurate human posture recognition and motion understanding engine, which is different from the traditional video or one-way live online fitness teaching. When users exercise, the AI engine captures the key points of users’ bones in real time through the front camera of the mobile phone, and gives real-time error correction feedback, which improves the immersion and interactive interest of the course. AI technology has also greatly improved the teaching efficiency of coaches. With the help of AI, a human trainer can guide up to 25 students at the same time, so that bodypark has a better single lesson profit model than the traditional online fitness courses in the past.
Fast environment fitness focuses on the development of Indoor Intelligent fitness equipment. Its products use permanent magnet motors. Permanent magnet motor is the most used motor type in China’s new energy vehicles. The exercise of a large number of market demand makes China’s permanent magnet motor better and cheaper, which is one of them. And using permanent magnet motor to simulate weight output, in fact, the cost has been lower than the common traditional iron and steel sheets.
Why does China’s permanent magnet motor manufacturing technology develop so much? It is because in the past six years, China’s new energy vehicles have been the world’s largest market, and its manufacturing technology has been greatly tempered by market demand.
After using permanent magnet motor, the tension, thrust and resistance of fitness equipment can be presented in percentage digital way, which is more accurate. On this basis, people can use this equipment to replace many strength training related equipment. At the same time, coaches can quickly formulate training requirements for individuals through digital results.
These fitness equipment and fitness paths are intelligent, and at a time when the demand for fitness services is growing rapidly, they have solved the problems of irregular fitness time, Limited fitness venues, and different trainer qualifications and service capabilities to a certain extent. As a new solution for the service industry, it uses China’s scientific and technological manufacturing, digitalization and the Internet, and of course, it also uses the rapidly growing demand for related services.
Another example is that in recent years, pet tracks have seen significant and sustained growth, and the market size and pet rearing population have increased. According to the white paper on pet industry in 2021 (consumption report), the consumption market scale of urban pets (dogs and cats) reached 249 billion yuan in 2021, an increase of 20.6% over 2020. In 2021, there were 68.99 million owners of urban pets (dogs and cats), an increase of 8.7% over 2020.
The increase of market size and pet breeding population, combined with the general environment of consumption upgrading, has brought a very diverse new consumption demand to the pet supplies industry. When the new demand is combined with China’s manufacturing chain and new technology of the industry, many new pet consumption species will be born, such as automatic water dispensers, automatic feeders and even automatic cat teasers.
These products cater to the common pain points of current “excrement shoveling officials”: less time and energy, and make a digital upgrade for the nursing work of “excrement shoveling officials”. Among the consumer brands we invested in the first half of the year, there is a pet products brand – Youha, which is committed to making pet smart home.
We can also predict the new consumer species that are likely to appear next, such as digital medical pension products.
There is an obvious contradiction between supply and demand in the care of aging population in China’s service industry. In some places, 10 disabled elderly people may only be matched with one care worker resource. About 90% of the social endowment scenes in China are at home, and most of the remaining 10% are in nursing communities, and only a small part are in nursing homes. So our society is facing a problem – what about the lack of professional care for the elderly living at home?
This crowd is huge. During 1965-1973, the baby boom with the largest population base in China (about 260million people) was born. By 2022, almost all of this population began to enter the old age.
Such a huge industry demand, combined with China’s scientific and technological manufacturing capacity, such as chips and consumer electronics, is likely to produce many types of wearable intelligent vital signs monitoring devices, so that these elderly people can get health monitoring even when living alone. In fact, some enterprises have been trying. For example, Xinyong technology invested by Fengrui has observed the intelligent blood pressure measurement needs of China’s huge hypertension population and is committed to developing portable senseless continuous blood pressure monitoring products.
In general, making new technology + strong industries + new demand into a closed loop, with more practice and development, will produce good things that only China can do, and bring opportunities for the next round of new consumption in China.
Author: Li Feng; Source: Fengrui capital (id:freesvc), reprint has been authorized. Reprint authorization and media business cooperation: Amy (wechat: 13701559246);
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