Li Feng: Will Consumer Investment Stay Hot in 2021? | FreeS Research

峰瑞资本·April 1, 2021

Whenever most people aren't optimistic, there's usually an opportunity hiding in there.

Consumer investment was one of the hottest themes in 2020. So what changes might we see in 2021? This article tackles the topic from two angles:

One, why did consumer investment get so hot in 2020?

Two, will the consumer track stay hot in 2021?

Before diving in, here are the key takeaways:

2020's consumer investment boom resulted from a confluence of factors: strong stock performance by consumer staples in public markets, countercyclical growth in essential goods during the pandemic, shifts in major fund investment strategies, the demonstration effect of Perfect Diary's IPO, changes in traffic structure, and the "hibernation" of offline retail giants that gave internet-native brands shelf space.
In 2021, both foreign and RMB capital will remain abundant in China. From a pure capital availability standpoint, consumer investment may sustain last year's momentum. But at the category level, some segments that posted eye-catching growth in 2020 may struggle to maintain that pace, while offline competition will turn more brutal.
Macro-wise, rising internet penetration and new traffic sources could help certain new consumer brands stay "hot" in 2021. But if capital markets reassess the template established by Perfect Diary, some bubbles in the consumer sector could burst or correct, cooling investment sentiment.

The detailed analysis follows. We hope it offers some useful perspective, and welcome ongoing dialogue.

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Why Did Consumer Investment Heat Up in 2020? What Happens in 2021?

By Li Feng

01 Why Did Consumer Investment Get So Hot in 2020?

▍Food, Alcohol, and Tobacco: Unusual Growth

The consumer investment boom unfolded against an interesting backdrop: in 2020, China's per capita consumer spending actually declined year-over-year.

National Bureau of Statistics data shows that real per capita disposable income grew 2.1% in 2020, roughly in line with economic growth. Yet total retail sales of consumer goods fell 3.9% year-over-year. People earned more but spent less.

Against this backdrop of declining overall consumption, certain categories bucked the trend with year-over-year growth — food, alcohol, and tobacco. Per capita spending on these categories reached 6,397 yuan in 2020, up 5.1%, accounting for 30.2% of total consumer spending.

With overall spending down and this category up, food, alcohol, and tobacco qualified as "high growth." High-growth sectors naturally attract capital and create wealth effects.

▍Global Liquidity Surge, Clear Wealth Effects

As we've analyzed before, when investors face massive uncertainty like a pandemic, they tend to seek out the greatest certainty — well-performing internet companies relatively shielded from COVID's downside. But many of these companies aren't listed on A-shares, so investors pivoted to staples like food, alcohol, and tobacco.

In public markets, this category delivered standout performance. Numerous consumer brands saw dual growth in share price and market cap: baijiu (Moutai, etc.), condiments (Foshan Haitian Flavoring & Food, etc.), beer (Tsingtao Brewery, etc.), dairy (Yili Group, etc.).

An important factor behind this was the global liquidity surge.

Globally, no year saw money printing on 2020's scale. Per IIF data, global debt grew by $24 trillion last year to a record $281 trillion.

What did that $24 trillion do? Its most direct impact hit equity markets. S&P data shows global stock market capitalization rose 16% to $104 trillion in 2020, with nearly one-third of that increase coming from Chinese stocks. A-share market cap totaled roughly 80 trillion yuan, up 20 trillion (34%) from end-2019 per Securities Times·Databao.

Hot capital markets amplify returns for the strongest-growing categories. This explains why food, alcohol, and tobacco outperformed so dramatically — and public market performance shapes private market investment decisions.

▍Fund Strategy Shifts

Over the past two years, numerous super-platforms have emerged or gone public. Many funds concluded that TMT opportunities were dwindling; fewer invested in media, entertainment, and other new platforms. Consumer became the new hotspot, and capital followed.

▍Demonstration Effect

Consumer investment also heated up due to demonstration effects. Previously, investors assumed consumer brands couldn't match internet companies' trajectory of reaching tens of billions in market cap within three or four years — until Perfect Diary's IPO in 2020.

In November 2020, Yatsen Holding Limited — Perfect Diary's parent company, founded just four years prior — listed on the NYSE as the first Chinese beauty company on US markets, closing its first day with a market cap exceeding $12.2 billion. This represented a stage-validated success for the Perfect Diary model.

More capital players took encouragement, hoping to bet on their own "Perfect Diary." This created a separate wealth effect in primary markets.

▍Traffic Structure Shifts

In 2020, numerous standout brands emerged in new consumer sectors, many growing rapidly. A key driver: traffic红利 and structural changes in traffic.

First, homebound time surged dramatically. More time online meant new traffic and users, boosting internet penetration. Not only did user numbers grow, but time spent online increased significantly — bringing traffic红利 to new brands.

Another manifestation: simultaneous shifts in traffic structure, traffic medium, and platform recommendation algorithms.

Taobao redesigned in 2020, allocating most resource slots to recommendations. Major transaction and traffic platforms, Taobao included, began emphasizing precision recommendation — meaning more tags for transaction and off-site traffic distribution. The more niche and precise your product tags, the better the matching recommendation resources you'd receive on transaction platforms. This change particularly benefited brands going from 0 to 1.

Meanwhile, during the previous mobile internet boom, traffic concentrated in a few giants. With the rise of short-video platforms, lifestyle-sharing platforms, and livestreaming platforms, traffic began redistributing from major oligopolies to multiple smaller ones. Competition among different traffic platforms created more opportunities for brands. The rise of content platforms also gave consumer brands new growth avenues — even with limited budgets, a single viral piece of content could make you.

▍Offline Retail's New Product Vacuum

The most distinctive feature of 2020 consumer retail was major brands' "rest and recovery" year. It was arguably the year with fewest new product launches from offline retail brands — almost nothing new on shelves.

Here's why: when offline brands launch new products, they typically need two years of sampling and testing. After narrowing to three to five new products, they deploy them in limited ranges across different city tiers and demographic compositions to test reception. Only after that do they lock in which products to push for the peak season, then mobilize national supply chains — since most companies' production sits close to consumption.

COVID hit in January 2020. Compared with innovative companies, major brands faced greater supply chain management and recovery pressure. As the pandemic's scope and duration exceeded expectations, new product timelines got derailed. This gave internet brands shelf space in offline channels — especially smaller online-native brands with buzz and new products in hand.

Given these six factors, we saw heated consumer investment in 2020. Which brings us to the new question: what about 2021?

02 Will the Consumer Track Stay Hot in 2021?

To answer this, we can examine which 2020 growth drivers will persist and which may shift.

▍Can Last Year's High-Growth Categories Sustain Their Pace?

Answer: some can, some probably can't.

We noted that food, alcohol, and tobacco grew despite declining overall consumption. Is that normal?

No.

At China's current stage of socioeconomic development, the normal pattern sees essential goods' share of consumption gradually decline while non-essentials and services rise. COVID distorted this pattern, suppressing consumption desire and altering consumption composition.

But as 2021 brings gradual pandemic control and normalization of daily life, spending patterns should re-align with developmental stage norms.

Preliminary conclusions:

First, household consumption will return to positive growth this year.

Second, essential consumer goods that performed well during COVID face high base effects; overall scale will be hard-pressed to maintain high growth, likely settling at low growth or flat, with declining share of total consumption. Conversely, offline services devastated last year will rebound more strongly, with better odds of high growth.

Another hot track last year: cross-border e-commerce. Will it stay hot?

In 2020, China recovered fastest among global supply chains while maintaining massive scale, naturally becoming the primary international supply chain support. So in H2 2020, China's foreign trade grew rapidly, with cross-border e-commerce especially fast — making it a hot investment area.

But 2021 brings visible changes:

First, the Northern Hemisphere is entering summer; as developed countries improve COVID control, global supply chains will likely recover. China's dominant role in global supply chains since H2 2020 may dissipate as global sourcing resumes. So while China's foreign trade will still grow in 2021, maintaining high growth off such a high base presents challenges.

Second, with offline transactions constrained last year, many offline trading companies were forced "online." China's cross-border e-commerce seller count grew rapidly. As supply chains recover and demand redistributes, even if total demand keeps rising, massive supply growth will intensify competition, accelerating survival-of-the-fittest dynamics.

▍Is There Enough Market Liquidity? Will Wealth Effects Persist?

Preliminary answer: yes.

If developed-country central banks don't make major policy pivots (rate hikes, liquidity tightening, etc.), global liquidity will remain massive this year. What does this mean for China?

China was the only major economy with positive growth in 2020, with GDP exceeding 100 trillion yuan. January-February 2021 data suggests China can maintain solid growth. The recently concluded Two Sessions set a GDP growth target above 6%. Given China's enduring long-term growth capacity, capital will remain bullish on China.

Specifically, domestic market liquidity comes from two sources:

One, foreign capital. Without fiscal/monetary policy changes abroad, some released liquidity will inevitably flow into China. There's enough foreign capital, and China is attractive enough.

Two, domestic capital. You may have noticed the central bank's February statement that "prudent monetary policy should be flexible, targeted, and appropriate, with stability as the priority, no sharp turns, proper policy timing and intensity, and balance between economic recovery and risk prevention." This suggests no floodgates opening, but sufficient capital to support economic development.

So whether foreign or RMB, capital will be abundant in China this year. However, wealth effects may not meet high expectations. At minimum, Q1 saw volatility in global stock markets.

Will Fund Strategies Shift?

With ample market liquidity, capital will still flow toward consumer from a pure capital-availability perspective. Whether enthusiasm matches last year's levels remains to be seen.

How Will the Demonstration Effect Evolve?

Macro-wise, with rising internet penetration and new traffic sources, some new consumer brands could stay "hot" in 2021.

But as noted, Perfect Diary's IPO created a demonstration effect for consumer investment. In 2021, Yatsen Holding Limited's capital markets performance will continue shaping that effect.

Put differently, what market cap the capital markets ultimately accept for Perfect Diary will partly determine whether consumer brands stay hot in primary markets in 2021.

If markets validate its development model and long-term profitability, it could be worth more than now. If markets question its underlying business model, bubbles in new consumer sectors could burst or correct, cooling the industry and investment sentiment.

Overall, investment will return to rationality, recognizing that consumer brand entrepreneurship must pursue long-term brand-building. Red oceans can provide tailwinds, but what matters most is profitability and repeat purchase.

How Will Traffic Structure Evolve?

Answer: new traffic platforms may be gestating.

Micro-wise, as we noted, precision recommendation on traffic platforms helps brands go from 0 to 1, but that same precision raises barriers from 1 to 10 — harder to break out of niche audiences, harder to scale.

Macro-wise, we face the特殊性 of simultaneous shifts in traffic structure, traffic medium, and platform structure — enormous opportunities and challenges intertwined. Historical experience suggests that when current-generation platforms near their traffic ceiling, new platforms inevitably emerge. What form? We don't have a definitive answer.

New platforms either find incremental time or compete for replacement in存量 markets — temporal replacement, format replacement. We're curious who will pry loose the first brick. We hope to connect with entrepreneurial teams in this direction.

How Will Offline Competition Evolve?

Answer: offline competition will turn more brutal this year.

As mentioned, major offline brands had a "rest and recovery" year; this year they'll be firing on all cylinders, likely concentrating two years of innovation and two years of budget into one output — "taking both exams together."

Last year's Double 11 saw major brands "dominating the rankings"; this year, their focus on China may become more normalized. Online, they'll commit more resources to battle. Offline, even more so.

The importance of offline experience is rising. For a long time, users were accustomed to seeing products offline then price-comparing online. Now habits have shifted: users get "planted with grass" online, then consume offline. So we're seeing many online-grown brands now radiating offline.

But competing offline plays to traditional brands' home turf. A key traditional advantage: national supply chains. For example, as a water brand launching new products, I can produce rapidly at locations closer to sales points rather than shipping water everywhere. Another advantage: shelf presence. Established giants like Coca-Cola and Nongfu Spring have greater shelf placement leverage, creating real pressure on startup brands.

So when evaluating last year's breakout brands, we may need to take a longer view. By next summer, will these new brands still rank top-three in consumer mindshare? Surviving this fierce offline elimination round would mark true establishment.

Closing Thoughts

Whatever changes this year brings to the consumer track, one old saying holds for entrepreneurs: entrepreneurs basically turn bitterness into sweetness through perseverance. When everyone's bullish, there's usually something wrong; when everyone's bearish, opportunity usually hides.

Topics include:

Why switch to investing? How to shift identity and mindset in your first year?
What's it like doing venture capital in China? How to understand the tides in primary markets?
How do individuals break through and grow while investing, and how to meet challenges?
What's resonated most deeply during four to five years at FreeS?
For those who studied and lived abroad for years, how to choose between returning to China to start a company versus doing investing?
What major directions look promising in 2021?

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