Breaking the Cycle of Cutthroat Competition in Consumer Industries: Is "Going Premium" the Secret? | Li Feng Column
New Trends in Consumption: From "Value for Money" to "Premium Pricing"
There's no such thing as a permanent investment framework in this business. You're constantly correcting mistakes and refining your approach in practice. Today, I want to share a recent shift in my thinking on consumer investing — specifically, moving past the "value-only" bias and developing new perspectives on the trend of consumer brands "trading up" on price.
Before diving in, here are the key points:
- The old "value-only" orthodoxy was driven by new supply chain technologies and improved product capabilities. Before the consumption upgrade era, the market went through two phases: satisfying demand for durable and necessity goods, then popularizing and branding optional consumer goods. This coincided with China's large-scale industrialization, where making products cheap was the ultimate competitive advantage and core market need.
- Entering the consumption upgrade phase, shifts in market dynamics, supply chains, and consumer demand created opportunities to "trade up." Specifically, China's consumer market is gradually moving past the "value-only" era. People's demands are evolving in three directions: better aesthetics, better quality, and stronger emotional value.
- Severe "involution" in the consumer goods industry has also made "trading up" an inevitable trend. Since 2018, China's total retail sales of consumer goods have fallen to single-digit average growth. With overall growth slowing, brands can't survive by endlessly grinding on one dimension of value. You have to make your products more beautiful, better, and emotionally resonant to ensure longer viability — this is essentially the process of "trading up."
- You can't just raise prices for no reason. How expensive should "trading up" be? It's fundamentally a question of benchmarking. Benchmarking matters for pricing because it defines who you're being compared against. If you're roughly as good as a competitor but relatively cheaper, that establishes your perceived value in consumers' minds. As multiple layers of added value accumulate, a brand's reference point shifts, enabling upward price migration that consumers will accept.
Here's the detailed analysis. I hope it offers some useful perspective. Founders and industry experts, I welcome ongoing dialogue with you. And if you have an industry background and are interested in consumer investing, we'd love to have you join us (hr@freesvc.com).
A Bias Shattered?
Recently, FreeS Fund invested in a Chinese luxury brand called Duanmu Liangjin. It's an original designer label focused on handbags and fashion accessories made primarily from wood. Its pricing sits roughly at PRADA's level, slightly below LV.
When my colleague first brought up this project, I flatly refused to look at it. I'd long believed that Chinese brands couldn't escape the "value positioning." China's supply chain capabilities are too strong; in that competitive environment, domestic brands could never command premium pricing. Building a local luxury brand? Forget it.
In truth, I was prejudiced against the very idea of "trading up" with Chinese brands.
But my colleague was persistent. After about two weeks of lobbying, I finally agreed to meet the founder. To my surprise, the conversation was revelatory — I had immediate investment interest. Yet when the project went to internal discussion, it still faced significant skepticism. Many colleagues raised objections or doubts.
Source: Duanmu Liangjin official website
So colleagues were sent for in-person experiences, in three batches. Each time they went, they were full of doubts; each time they returned with shopping bags. The tally: before we'd even invested, the team had spent considerable money at Duanmu Liangjin. Everyone loved the designs and products. The shopping was genuinely pleasurable.
This was a tipping point for me. In fact, over the past few years, without anything quite this dramatic, I'd been feeling vague but persistent real-world challenges to my "trading up" bias.
Another example: since 2020, consumer investing has been white-hot. Near year-end, several category-leading brands we'd previously invested in came to me one after another. All were raising rounds and wanted my advice — which institutions to approach, what valuation to target.
Given the market heat, the numbers I suggested were honestly higher than my true expectations. "Try raising at this valuation — it might work." I was quickly humbled by the CEOs. Their verbal offers were already 1.5 to 2x what I'd proposed.
I was genuinely struck. These brands all commanded premium pricing, yet were being chased by both consumers and investors alike.
I began wondering whether my framework of boxing consumer brands into "value" was somewhat blind and outdated. This became the catalyst for a more systematic update to my thinking on recent consumer changes.
How Did the "Value-Only" Bias Form?
First, let's examine how this bias developed.
Because it used to be true.
We can roughly divide China's consumer market evolution into three phases:
Phase one: satisfying demand for durable and necessity goods. Most典型 was housing, plus essential appliances and furniture — meeting basic household living needs.
Phase two: popularizing and branding optional consumer goods. Optional goods aren't essential to survival, but enhance life quality.
Phase three: the consumption upgrade, category upgrade, and digital upgrade era we're in now.
"L性价比" was largely a product of the first two phases. Whether buying appliances, clothing, or necessities for daily life, the prevailing pursuit was "good, affordable, and branded."
Why could products be "good yet affordable"? This was driven jointly by new supply chain technologies and improved product capabilities (encompassing raw materials, design, functionality). During the first two phases, China's large-scale industrialization coincided with a market where making products cheap was the paramount competitive advantage and core need.
A quintessential example is logistics development's impact on costs.
While China's logistics sector as a percentage of GDP still trails developed nations like the US and Japan (National Bureau of Statistics data shows 14.8%, 14.7%, and 14.2% for 2018 through H1 2020, versus 8-9% in developed countries), another industry metric — "ton-kilometer" cost (average cost to move one ton of goods one kilometer) — shows China already leading the US.
Take bottled water. In earlier years, water wasn't sold online because margins were thin and logistics could eat 20% of the price. But now brands like Nongfu Spring use localized water sources and packaging plants, dramatically cutting distribution costs. This is how our brands achieved "good yet affordable."
Another example is apparel, where industrialization massively boosted "value."
But it's worth noting: while consumers bought more and more clothing, the industry itself struggled. Per National Bureau of Statistics data, national apparel retail grew year-over-year from 2011-2017, but growth rates decelerated annually. In 2018, apparel retail hit 987.04 billion yuan, down 4.8% year-over-year — the first negative growth on record.
This brings us to the crucial question: entering phase three's consumption upgrade, is "value" still the market's core demand?
Not entirely.
How Consumption Is Changing: Market, Supply Chain, and Demand Shifts Creating "Trade Up" Opportunities
In this third phase of consumption upgrade, category upgrade, and digital upgrade, how are mass consumption environments and attitudes evolving? This determines how we should adjust our understanding of consumer brands.
Consumption Environment and Demand
First, the macro picture.
On November 3, 2020, General Secretary Xi Jinping's explanatory notes on the Proposal for Formulating the 14th Five-Year Plan for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 were released. The drafting group believes that given China's economic development capacity and conditions, the economy has the hope and potential for long-term stable development. Reaching current high-income country standards by the end of the 14th Five-Year Plan period, and doubling economic output or per capita income by 2035, are entirely achievable goals.
To achieve "doubling per capita income" requires 4.73% average annual growth over the next 15 years. This isn't a difficult target. So we can basically predict that by 2035, most Chinese cities will reach roughly current Beijing/Shanghai levels.
We're all familiar with the Engel coefficient — the proportion of food expenditure in total household consumption. The higher a household's income, the lower the share spent on necessities. If the "double income" target is achieved, this means society-wide spending on necessity goods will continue declining as a proportion of total expenditure.
Another basic logic: when your income doubles, your spending certainly won't decrease. Maintaining the same living standard, your expenditure likely doubles too. Where does that extra money go?
Still on goods and services — but you'll tend toward brands and quality, not necessarily pure cheapness. This is intuitive. Compare your student years with limited income to your working life: consumption levels rise unambiguously, and what you buy is "better and more expensive." Another analogy: progressing from drinking purified water to unsweetened sparkling water, coffee, and fresh fruit tea — the price you're willing to pay and the experience you receive are fundamentally different.
As consumer markets gradually move past the "cheap above all" era into consumption upgrade, people's product demands evolve in three dimensions:
- Better products: health, raw materials, freshness, wellness
- More beautiful products: aesthetics, functionality, shareability
- Stronger emotional added value: environmental consciousness, playfulness, individuality
All of which create opportunities to "trade up."
Cross-Industry Supply Chain Technology Application and Development
Of course, consumption upgrade isn't driven solely by environmental and demand changes — it's enabled by new technology development and cross-industry technology application.
Take instant food. Driven by pandemic lockdowns, China's instant food consumption grew 1.5x from January-May 2020; in February, the worst outbreak month, it surged 21.3x. Instant food seized this market opening.
Remember childhood instant noodles? Typically a vegetable packet, oil packet, and seasoning packet, priced around 2-3 yuan. The vegetable packet used hot-air drying technology — blanched, chopped vegetables dried with sub-100°C air. Low cost, but poor rehydration, so the vegetables were usually flavorless after soaking.
What was the hottest instant food of 2020? Luosifen (river snail rice noodles).
As mentioned, people's product demands have risen — including richer raw materials and better shareability. Traditional instant noodles offer nothing worth posting; luosifen is far more photogenic. A single luosifen package contains seven or eight ingredient packets, some up to eleven. With simple preparation, you get something colorful, aromatic, and genuinely substantial — perfectly presentable on social media.
Beyond the multiplied ingredient packets, many instant foods now use upgraded technology. Instead of hot-air drying, both vegetable and meat packets increasingly use freeze-drying. Conducted at low temperatures, freeze-drying prevents proteins, microorganisms and other substances from denaturing or losing biological activity. After rehydration, taste and appearance remain highly authentic.
These advances are enabled by massive changes on the raw material supply side. Only when supply chains develop to a certain level can cross-industry technology application and development occur.
In summary: changes in consumption environment and demand, combined with cross-industry supply chain technology development, make "trading up" achievable for consumer brands.
04 Severe "Involution" in Consumer Goods Makes "Trading Up" an Inevitable Trend
The previous section covered conditions enabling "trading up." But for many consumer brands, trading up isn't optional — it's essential for survival.
2020's buzziest internet term was "involution." Academia, tech — everyone complained of endless, exhausting competition. Consumer goods faces equally severe involution.
National Bureau of Statistics data shows that since 2018, China's total retail sales of consumer goods growth has fallen below 10%: 9% in 2018, 8% in 2019, and -3.9% in 2020 due to COVID.
From 2018 onward, average growth in total retail sales has dropped to single digits. Finding a sub-sector with double-digit growth is already exceptional.
With limited overall growth, brands face shifting competitive dynamics within categories — moving from incremental market competition (how to grow the pie) to stock market competition (how to divide the pie).
When "involution" hits, capturing more share for your brand requires more than single-point focus. Single-point focus means excelling in just one dimension. But as industries shift to medium-low speed growth, you can't ride overall industry momentum. To maintain competitiveness and margins, you must either extend across multiple value chain segments — at least two or more — or effectively leverage supply chain changes to achieve distinctive innovation, like self-heating hot pots in instant food.
When "involution" arrives, endlessly grinding on one dimension of value isn't enough. You must make your products more beautiful, better, and emotionally resonant to ensure longer viability. This is essentially the process of "trading up."
05 Two Questions About "Trading Up"
How Expensive Exactly?
How expensive is fundamentally a benchmarking question.
At the article's opening, we mentioned our new investment, the Chinese luxury brand Duanmu Liangjin. Its customers typically benchmark it against PRADA, which establishes its pricing legitimacy as a Chinese luxury brand.
We also noted apparel's struggles, yet China has produced a not-cheap clothing brand: Li-Ning. Customers benchmark it against Nike and Adidas. As Chinese streetwear, its quality and design match international brands, but prices run 10-20% lower — so consumers accept its premium positioning.
From these examples, benchmarking's pricing significance is clear: who you're compared against, and who you're relatively cheaper than while being roughly comparable, determines your perceived value.
The next question: how is this mental benchmark established? In other words, what gives you the right to be expensive?
What Gives You the Right to Be Expensive?
Having set your pricing benchmark, how do you get consumers to accept it? In reality, plenty of price hikes face backlash and rejection. Let's be honest — you can't raise prices arbitrarily. Where's the value in your "expensive"?
This returns to our three demand upgrade dimensions: more beautiful, better, and stronger emotional value. As multiple layers of added value accumulate, a brand's reference point shifts, enabling upward price migration that consumers accept.
Take HEYTEA. One of its industry-transforming changes was raw materials: switching from tea powder to brewed tea, from fruit flavoring to real fruit, from creamer to real milk — achieving ingredient upgrade. Consumers accepted its premium pricing.
Take Saturnbird (三顿半). Beyond cool packaging, premium aesthetics, and visual appeal, its category upgrade was technologically driven. Its signature product is freeze-dried coffee powder in mini coffee cups. The innovation was super-instant solubility — pour into cold water or milk for immediate, quality cold brew or latte. Taste authenticity and convenience came from applying freeze-drying technology to coffee.
Compared to Nestlé's ubiquitous sub-1-yuan 3-in-1 sachets, a Saturnbird cup runs 3-4 yuan, or 2-3 yuan on promotion. But consumers pay for the taste and convenience.
It's worth emphasizing: "expensive" doesn't mean "poor value." While trading up, brands can simultaneously achieve better value as sales scale and supply chains develop.
Following this logic, "becoming expensive" has a navigable path. But one caution for brands:
There are many ways to accumulate emotional appeal. Younger generations who haven't experienced material scarcity will pay for emotional fulfillment. However, forcibly imposing emotional added value on products doesn't work.
Why "forcibly"? Take IP. Generally, historically successful IPs have time and story沉淀 — they undergo an emotional accumulation process. Hello Kitty, created by a character company rather than originating from anime or film, is essentially the sole exception.
Source: Hello Kitty official website
Whether consumer goods or cultural creative products, the core is finding what enables users to build and accumulate emotional attachment, then better embedding it in products and services.
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