The combination of foreign capital and the Chinese consumer brands help cast new international brands and generates great synergies to both sides.
Antitrust, reform in education, real estate and medical care policies, Common Prosperity... all of these show that China is undergoing earth-shaking change. These changes have brought large uncertainty, making many investors afraid to invest in Chinese projects and companies. However, over the next decade, China sure will become the world's largest economy. How to better understand the opportunities and risks of the Chinese market and deal with certainty and uncertainty is a crucial problem. EqualOcean launched a series of research, China's Future Investment Watch, hoping to provide clues for global investors.
Recently the world has seen a tremendous boom for online shopping and social media. In the past two years, COVID-19 became an unexpected catalyst for new e-commerce platforms, reducing the cost of online shopping as everyone started shopping online as they endured the pandemic.
It is no secret that improved infrastructure produces more consumption, and this is a story going on all the time. The Internet's innovators have been producing a fresh new era for major consumption companies. Following the increasing diversity of social media outlets riding this wave in China, we find the emergence of Xiaohongshu – a life-sharing community – and Douyin – the Chinese-version of Tik Tok – standing out as examples of places where companies can reach out to customers way faster and more efficiently. Many brands stood out in the past year in the online consumer goods sector in China.
Here we discuss why Chinese brands have been expanding so fast, what this means to the investors, and whether we should resolve to catch the opportunities or not.
A consumption cult
In 2020, the 'investment cult' appeared in China's consumption sector, with significant funds brought into the area, including both domestic and foreign capital. Interestingly, under this fever the money spent per capita decreased compared to 2019, a turn caused by the COVID-19 pandemic. In 2020, disposable income in China reported a 2.1% increase, along with a GDP growth of 2.3%. However, retail sales of consumer goods decreased by 3.9% year-over-year during the year, among which some robust sectors in consumption, like food and beverage, achieved high growth during the year. Apparently, the COVID crisis actually reformed the consumer goods industry structure.
What happened in 2020?
In 2020, according to Institution of International Finance (IIF), the total debt globally rose by USD 24 trillion and hit a historical high. The stock markets grew by 16% in market capitalization, with China’s A-share market going up by 34%. The viral secondary market, especially in certain sectors, reshuffled the investment direction in China.
Followed by some domestic brands' IPOs, which all went far beyond issue prices, capital was spurred. For example, Popmart (9992:HK), a pop culture toys collection seller, went public in Hong Kong in December of 2020, going up by 158% in the two months following the debut. Perfect Diary (YSG: NYSE), a Chinese cosmetics brand, went public on NYSE in November of 2020, after only four years from establishment, with the IPO price of USD 10.5 per share, closing double then at USD 20.03 after the first trading day, and reaching its highest point of USD 24.55 in February of 2020.
Also, the significant increase of time people spent on Internet in 2020, brought traffic dividends for many new brands. Along with the prosperous growing platforms like short video, life-sharing, and live-streaming, more opportunities are provided for new consumption brands. Large brands that mainly focus on offline activity took a break in 2020, with new online-based brands catching a perfect time to grow.
With the fastest rebound from the economic downturn, China became the main support of the global supply chain and cross-border business, especially e-commerce, which achieved massive growth, thus becoming the hottest property for investments.
All the reasons above contributed to huge progress in the investment fever in China’s consumption sector in 2020. Will this continue in 2021 and after?
In 2021 and after
What specifically motivated by the pandemic, like traditional food and beverage sectors, will back to normal. With the spending back on track, other major consumption sectors will rebound. Also, the high recognition on Chinese economy as it was the only one achieved positive GDP growth among important economies, the global liquidity released last year is expected to continue in 2021 with sufficient fund continues to run into Chinese market, and consumption sector is possibly their choice.
What is more, as the Internet has already upgraded the marketing strategies for consumption products, brands that benefited from this wave will continue to expand this way. Investment will be more rational and focus more on long-term value beyond the thunder in 2020. Furthermore, offline market will become fiercer as everyone is trying to release the energy accumulated during the pandemic, only best brands will stand out. E-commerce platforms is going to provide more investment opportunities.
Also, VC/PE has been increasing investment in China in the past years. in the future, we don't see a decrease trend. Technology crackdown is a fact, but consumption has no constraints. The sector has been attracting more funds in the past four years, where both domestic and foreign capitals want to make profits.
The IPO cult in the recent years clustered in the consumption sector, which is the best exit way for VC/PE, marking an increasing recognition from global investors on Chinese brands. The flourish in the primary market is reflecting the great opportunities in the secondary market.
D2C: Redefine the international brand
Domestic brands going global is always a cultural output, both for US, the top economy worldwide, and China, the second largest but speedy growing economy. National power forms the basis for brands to export internationally.
However, beyond that, the logic of becoming international brands has been changed. Looked back to the paths to success for traditional retail brands from US, like Starbucks and Coca Cola, which takes decades for them to build a new market. By the time, given the difficulties of customer acquisition, brands had to beat almost every other company in the industry to settle in a new market. For example, Starbucks ruled the coffee market globally, and was already a giant coffee empire even before it started to deploy international market. 'Growing big' is the only way for traditional brands, which had been suffering from the client acquisition and market research without the technology-support to expand.
Now with many smaller companies in China started globalization, which are redefining the international brand. There are mainly two ways of companies in China going global. First refers to the companies benefited from the traffic dividend of Internet, became famous through platforms like Xiaohongshu and Douyin, started and with online and deploying overseas online, represented by NEIWAI, Anker, and SheIn. Second characterized by the older Chinese brands that has already been developing locally for many years and extended to explore overseas offline, like Li Ning, Anta Sports, and Huawei, Xiaomi.
Now, like we said, the Internet saved significant time and cost for companies, companies back by the Internet with direct-to-customer (D2C) model are expecting to produce many international brands, featured as the first way.
Yes, the D2C platforms, what we believe will be the most growing ones in the future five years. Without relying on the physical stores that Starbucks, Coca Cola used to, D2C companies can eat the market in a very short time, with more precise customer insights. Given the huge advantages of using D2C mode, many traditional brands like Uniqlo, Nike, and Apple are building their D2C platforms as well. For young Chinese brands that started with D2C mode are expected to grow very fast, beat many traditional international brands without becoming massive scale, representing a new form of international brand. Growing huge is of course the definite way to be a global brand, but when it is no longer a dealbreaker, things are getting easier.
We can take SheIn as an example. This Chinese brand is now the largest fast-fashion retailer in the US by sales. Already constituted 13% of the total fast fashion sales at the beginning of 2021, SheIn continued to bite the market and achieved 28% market share by mid of June, according to Earnest Research. With as good as the design and quality but cheaper prices compared to Zara, SheIn is apparently changed the Z-generation’s stereotype on China made products and won this customer group over Zara and H&M. Already being recognized, which used to be the hardest part for retail companies exploring oversea markets, maintain the market will not be that hard.
Same story for Anker, a digital peripheral products supplier, now a known-to-everyone in the power bank sector. with the best access to the global electronics manufacturing center in Shenzhen of China, it is trying to replace the world’s view on'made in China' with 'smart-innovation in China' The more cost-effective, better design and more functional products from Anker has won the US customers. Now it ranks first in Amazon's search rankings for computer peripherals with the evaluation as high as 4.9 stars to 5 stars.
These new international brands do not have to become a giant like Apple, to win in its own small sub-sector. SheIn and Anker have already beat the ruling brands, which are indeed to be considered successful. Also worth mentioning is that the brands with better stories, more differentiation and better strategies, after the investment cult partially boosted by the COVID-19 pandemic – these should be the focus for investment.
With increasing recognition on Chinese brands globally, we are highly confident on Chinese D2C brands to become international fast and steady.
Strong economy. China is commonly recognized as the country that has achieved the speediest economic growth over the past decades. On the way to becoming a developed country, freshly-established companies are aggressively emerging, telling the world a different Chinese story.
National power. Since China joined the WTO in 2001, 'Made in China,' a sort of byword for artificial and low-quality products, has been transforming to 'Crafted in China' – which represents more cost-effective products with higher quality. For 20 years, China has led the global supply chain, which forms a solid basis for retail consumption products to deploy overseas. The Z-generation, which serves as the main spending power in consumption, has been more logical and gained more recognition in China, providing a better atmosphere for Chinese consumption brands to go global.
E-commerce coverage. The e-commerce system is considered to be the most sophisticated in China, providing more advancements for Chinese companies deploying online shopping globally. For example, according to U.S Department of Commerce, the e-commerce retail sales in US grew by 14.9% year-over year, but only took 11% of the total retail sales, by end of 2019. China reported 20.7% by the same time. Based on this low penetration rate in US, we expect the growing trend to be continue and might be even faster.
Established foreign trade channels. Except for the US, South-East Asia and central eastern Europe should be the most popular first stops for Chinese brands going global. Just like the US to the rest of the world, China is very well-recognized in such areas, making it easier for Chinese brands to break into the local market. 'Belt and Road Initiative' – is a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in nearly 70 countries and international organizations, which exact covers the areas above, also providing great channels for domestic brands to expand.
Supply chain advancement. The fastest rebound from the economic downturn shaped China into the most crucial supporter for global supply. Even though the importance has eased off since 2021, the contribution is still significant.
We are expecting to see winners in many sub-sectors in major consumer goods areas. For example, in fast fashion and electronics, as we illustrated before, China has more access to the original manufacturing factories, so large value can be generated.
If capital firms are looking for projects to invest in, we believe China will be the largest market, producing the greatest number of international brands in the future.
Bottom Line – to global investors
We've discussed why the Chinese market, especially Internet-backed D2C Chinese brands in major consumption sector, is the most investable area. It is also clear that capital helps young companies to get larger, go more global and therefore generate more profits.
Compared to Chinese domestic funds, institutional investors in the US are willing to and capable of longer investments and are thus more suitable for VC/PE investment. To some extent, foreign capital firms, represented by the US, are more welcomed for young startups.
Also, when exploring the global markets, ‘localization’ will be the top issue to resolve for Chinese brands. From which perspective, when breaking into foreign market, the local investor can provide the networks and certain local supports to help Chinese brand operating the oversea market.
Chinese brands are getting stronger and expanding to the rest of the world. Global funds are the always-welcomed investments for these young Chinese brands. Great synergies are being generated for both sides.
EqualOcean operates offices in Beijing, New York, and Shanghai. We welcome investors interested in the Chinese market to contact us via (contact@EqualOcean.com) or visit our offices. We believe the exchange of views will make you have a clearer prediction of the future.