The economy is looking wintrier and competition intensifying in mature markets, but that is not necessarily a bad thing for the consumer sector.
Famed dramatist Arthur Miller once penned in The Price, ”Years ago a person, he was unhappy, didn’t know what to do with himself—he’d go to church, start a revolution—something. Today you’re unhappy? Can’t figure it out? What is the salvation? Go shopping.”
He has a point. In fact, the significance of consumption today could almost be considered functionally a conglomeration religion, politics, culture, and social internalization rolled into one.
It’s not only an era in which ‘new capital’ is celebrated, but also a time for ‘new consumption’ to rise up. An oft-repeated phrase in Chinese financial circles since 2018, ‘new consumption’ came to the old world of capital with a shock wave.
The arrival of Lining as an eminently fashionable and sought-after brand, Bosideng in New York Fashion Week, Haidilao’s global embrace, Didi’s domination over Uber in the youth ride-sharing market, a Huawei whose features and sales eclipse Apple and Samsung, and the complete squeezing of Forever 21 out of the Chinese market… tell us by so many signs that real change is quietly occurring in consumer groups, consumer wants, and consumer products.
”It has to do with young people and their sense of patriotic enthusiasm”, founding partner Song Xiangqian of Harvest Capital confidently puts it.
In fact, we all look to shore up our self-confidence through consumption in an uncertain world.
As we look back on the last 40 years, we find the greater majority of foreign brands entered the Chinese market in the 1980s. It was an age of ‘shortages’ and hence international brands such as McDonald’s, KFC, Uniqlo, H&M, Zara held a special place in the hearts of ’80s kids, for whom foreign goods were perceived as superior to those made in China. Only Western brands were capable of bringing that self-confidence. There’s no denying that, having come to middle age now, this group is also slowly exiting the consumer market.
Yet China’s tremendous rise is all ’90s and ’00s children have ever known as China has really taken on the mantle of the world’s second-largest economy. A stronger sense of self-confidence as a part of one’s national identity on board the train of high-speed economic growth has brought with it a similarly stronger sense of national recognition. ‘Guo Chao’ has become the protagonist of ‘cool’ in the consumer market of today’s era. They bring out the best each other.
Don’t chase trends -invest in champions only
The new sheen on ‘China-made’ is a trending market for some, but, provocatively, a mere flash in the pan for others. Not everyone ends up going onto greater and greater heights — the collapse of Wuren Huojia and ofo are still fresh in people’s minds. Such stories of chasing the ‘next big thing’ are not only a sober reminder to anxious entrepreneurs but also an instruction to many investors in the logic of ‘more haste, less speed’.
Song Xiangqian founded Harvest Capital in 2007 (originally Jiahua Weiye Capital). As an investor and ‘lifestyle Guru’ who has kept to the consumer sector for 12 years at Harvest Capital, Song Xiangqian has set down firm roots in China’s consumer industry. He has a ‘slow and steady wins the race’ mentality, and consistent focus on ‘big consumption’ and the modern services industry.
”I often tell my team that if you want to make a fast buck, Harvest is not for you.” I’ve become accustomed after more than 20 years in finance to a focus on slow, diligent, high-quality work”, Song Xiangqian says frankly.
As he tells it, Harvest Capital has invested in nearly 30 consumer brands in these 12 years and, ”We put our money to very good work. Although it is not a large number, basically all the projects we invested in are champions of their subsectors nationally”.
Today’s consumer might have already become accustomed to a lifestyle including the following: taking a bite out of a Babi Mantou after waking up with a cup of Xiao Guan Tea, catching a Didi to work, ordering a pack of Qiaqia Food for morning tea, glancing at Dazhong Dianping over lunch, sharing Laiyifen snacks with friends for afternoon tea, drinking a freshly brewed pot of Laoxiangji after returning home at night, and requiring an Eastroc Super Drink for the occasional overtime. Behind these now universally-known brands lie the professionalism and dedication of Song Xiangqian and his investment team over these past 12 years.
Gloria: Harvest Capital has lived through many different investment waves since its 2007 founding to 2019, such as O2O, mobile internet, AI, 5G, and so on. But you’ve always focused your time and energy on consumption – the consumer domain – and have only invested in the mainstay essentials. That focus is a little surprising. In your view, does that stem more from consistency or stubbornness?
Song Xiangqian: I think, first of all, it’s due to passion. I’m a proponent of consumerism and have quite a ‘zest’ for life. The consumer sector suits my personality because it’s a passion of mine, so I can be persistent.
Consumption is based on insight into human nature. If you can perceive the human condition, if you can make your way into every house in this country and provide all its people with buns, soy, breadsticks, clothing, food, and so on; that is, the everyday consumables and daily expenses, food, accommodation, travel, entertainment, education, and so on, which are always relevant to every one of us throughout our lives, then you’ve got an already sufficiently impressive endeavor there.
A full 12-year rotation of the Chinese Zodiac has brought with it many changes in what is hot or not in China’s VC industry, but Song Xiangqian seems almost to have never lost his footing despite numerous ‘false trends’ and the ups and downs thereof. Harvest’s investment projects form a dense wall of data and Song Xiangqian’s office desk is piled to the brim with trophies and medals. His investment success rate approaches 100%.
”The companies we invest in are leaders in their industries. Now, the bigger and better the company, the less their need of funds and the more stringent their demands on investors. Frankly, it’s a significant burden in terms of our pre- and post-investment management”, Song Xiangqian states that, ”Fortunately we haven’t stumbled on anything as of today. In terms of our investing, we have never born any losses from any of our projects and, in terms of post-investment management, many of the companies we invested in have also become our LPs. They are entrepreneurs choosing to trust in Harvest’s sense of professional dedication and investment prowess, which we find very gratifying and are very thankful for.”
‘Super companies’ and a resurgent ‘Guo Chao’
The data indicates Chinese youth aged 20-30 make up around 17% of China’s population, whereas their consumptive spending power accounts for over 30% of the total.
As a generation of Chinese youth drive the next wave of popular trends forward, many local domestic Chinese consumer brands are also rising to the call with the changing tides of a new era — ‘Guo Chao’ thus came into being, about which Song Xiangqian opines with certainty that, ”What China’s got now, the world will certainly get in time.”
Gloria: In 2019 we saw a slowdown in the rate of economic growth, but we also saw a particularly encouraging trend in the consumer sector in terms of essentials; the rise of ‘Guo Chao’. Former foreign greats are gradually disappearing or fading and young people starting to mass toward more niche ethnic Chinese brands. Why do you think this is?
Song Xiangqian: China is a major power with a very unique culture. The emergence and dominance of Chinese consumer brands will prove a very beneficial supplement to the rest of the world, which includes our current Old Godmother, Din Tai Fung, Haidilao, Bosideng, and others – more and more increasingly. I believe we are going to see more entrepreneurs really focus on their insights into human nature in the next 20 or 30 years as we enter an era of ethically-focused businesspeople, thus further improving and refining their insights into their products. They are going to be imbuing their goods with greater cultural value, and I believe that Chinese brands will certainly be expanding to and flourishing in the rest of the world.
Gloria: Then can I ask, wherever there are people there is a market, and wherever there’s a market, there’s brands. There are brands in every era. So how can we know for sure ‘Guo Chao’ is really here? And an era of ‘big consumption’? Might it not be a flash in the pan? A false boom?
Song Xiangqian: From a macro perspective, it’s because – and most people today understand – we used to be a country with a very high savings rate, but now everyone is willing to spend.
Secondly, family structures are also changing because of structural changes in society’s consumption. The dominant force in consumption across society as a whole has been trending younger. They are children of the ’95 and ’00s, and will become the dominant consumer force of the future. This generation looks to the future with a lot of confidence and has high hopes about increasing future incomes and living great lives. They also know how to satisfy themselves.
Thirdly, I’m confident about China’s economy. Although it’s facing difficulties now, I believe China’s economy will certainly become the world’s engine of economic growth after this challenging period, and the motor of the world economy.
China’s urbanization rate in 2018 hit 59.58%, just a short distance away from the 70% level of developed countries. Many people are moving to an urban lifestyle, which must imply changes are afoot in consumers’ behaviors and tremendous rise.
Commercial sophistication is an important mark of a developed country, whereas China’s business culture today is in the process of being born. Its ethoses will gain in strength as China’s entrepreneurial spirit takes shape.
”China will be creating a lot of great companies during this process”, Song Xiangqian states confidently.
The total market cap of Haitian, which sells soy sauce, approaches 300 billion RMB. Even a ‘small’ chain of traditional hotpot restaurants, Haidilao, stands at 200 billion RMB. Kweichow Moutai is valued above 1 trillion RMB. Once unthinkable, a ‘wave of super companies’ in the consumer services industry will usher in an era where they will begin to emerge and dominate in tomorrow’s China.”
Wuhan Zhongshang publicly announced the Securities Regulatory Commission had approved Juran Zhijia’s restructuring on the night of 17 October 2019. Wuhan Zhongshang changed its name to Juran Zhijia on 26 December, marking the furniture sales giant’s official debut to the A-shares market which, as at the end of trading today, had reached a total market capitalization of 63 billion RMB.
This project, one of Song Xiangqian’s favorite investment cases, also brought in a tidy profit for Harvest Capital.
The furniture market comes in at over 2 trillion RMB and rides a fast lane of 5% year-on-year growth, yet lacks concentration and urgently requires the organizing influence of a market giant. The only two major Chinese players in this ‘fast track’ are Juran Zhijia and Red Star Macalline. One, Juran Zhijia, is based in the north of China and Red Star Macalline in the south. For Beijing-based Harvest Capital, the ‘northern Juran’ was undoubtedly the best investment target.
”First of all, it had monopolistic characteristics. Secondly, it had a strong advantage at scale with net profits exceeding 2 billion RMB as an excellent channels-focused Chinese company on the national scene; thirdly, it still had a lot of space for change and improvement, had resolutely embraced the era of the digital economy, and had made great strides toward reforming services in traditional furniture, i.e. so-called ‘middleman landlord’, circulation channels. They were consistent about their C-end focus, implementing ‘new consumption’ reforms, and evolving from a low-to-high frequency”, Song Xiangqian states.
On the other hand, a strong and well-funded company like Juran will have essentially no need for extra financing.
”I’d been friends with Wang Linming of Juran Zhijia for many years. He didn’t want to go public, but I don’t like giving up. I had to try with such a great company.”
Good things take time. Song Xiangqian began a 10-year long quest for Juran Zhijia.
A determined Harvest Capital kept in touch with Juran Zhijia, got to offer its services, and then to demonstrate how Harvest Capital differs from other investment institutions in those 10 years.
”When large companies select investors, they are actually selecting partners. They are selecting overall capabilities, choosing the help you can offer while at the same time you also have to gain their respect and trust in the course of that cooperation”, Song Xiangqian puts it bluntly, ”We put our company’s services first. We work very hard without necessarily the expectation of return.”
An opportunity finally arrived in 2018. That was the year Red Star Macalline, which had been publicly listed in Hong Kong for over 2 years, formally returned to the A-shares market. The rapid pace of the competition gave Juran another impetus in their embrace of capital. In early 2018, Juran Zhijia announced an accepted 13 billion RMB joint investment from investment institutions, including Alibaba, Taikang Group, and Harvest Capital.
Song Xiangqian had finally ‘got the girl’ after a 10-year marathon; going by Juran Zhijia’s market cap today, the investment would net a 70%+ profit.
”Actually, Wang Linming and I had already agreed on preliminary intentions in 2017. Juran Zhijia was then currently embracing new retail and undergoing a digitalization transformation and upgrade. It was necessary for them to occupy the capital market heights to achieve their industry dreams,” Song Xiangqian stated to iAsk, ”Frankly, Harvest led on the project. We did all the due diligence and the Ali and YF funds joined afterwards. I was fortunate enough to witness this process alongside Director Wang.”
”Looking forward to China’s next 30 years, more important than the ‘wave of supers’ coming in the consumer services industry is another characteristic of the coming era, which will be the birth of super companies. We believe companies like Uniqlo, McDonald’s, and Coca-Cola will certainly be born in China in the future.”
Will lipstick get redder and short skirts shorter?
Life goes on, but the world of capital really can add a dash of color for the investor with a more unique vision.
Song Xiangqian is a visiting professor as well as an investor. It is hard to imagine a man with those solemn twin titles would love shopping. In fact, not only does Song Xiangqian love shopping, but he is also very knowledgeable about what is trending right now in the ‘she economy’ and has his own unique spin on things.
Gloria: It’s a bit hard to imagine a seasoned finance professional and visiting professor from the securities industry could also be a passionate consumer.
Song Xiangqian: I go shopping a lot. Men don’t normally, but I love it. Because I love looking at brands and my focus on brands, you could say, my understanding of women’s clothing, shoes and hats, including all the women’s brands and founding histories, is much greater than for the average woman or everyday consumer. I’m afraid it’s no longer just a job. I really love this industry.
Gloria: Really? Then what’s hot and in vogue in 2019?
Song Xiangqian: In 2019, I think live TV was quite big, live streaming was quite big. So Li Jiaqi was very popular; social influencer marketing was very big – these are developing trends of our time.
Gloria: So what kinds of consumer products were hitting their stride in 2019?
Song Xiangqian: Lipstick, I think. Lipstick will be popular because the economy isn’t great at the moment. The ‘lipstick economy’ has arrived. I also think fashionable short skirts will do well because skirts will keep getting shorter as the economy remains flat.
Gloria: Could you explain this a bit from your professional perspective? When we talk about the ‘lipstick economy’, the ‘short skirt economy’, what is under that? What does that mean?
Song Xiangqian: It’s about attention. Everyone is very busy when the economy is doing particularly well and fairly self-confident. So we don’t need to wear such short skirts to get others’ attention. We don’t need to select such red lipstick to face the world with confidence. But when the economy is trending down, then people lack confidence and so skirts need to be a bit shorter and lipstick needs to be a bit redder.
2019年的雪比以往时候来得更多一些，无数个曾经的大热风口步入凛冽寒冬。天气正冷，太多企业亡命天涯，资本世界人心惶惶。然而，自然堂面膜2天卖了105万张，故宫口红名声大噪，李佳琦在千万个手机屏幕上夸张地喊着“Oh my god”。
The snows of 2019 have come in greater force and many former trends fallen into wintry times. As its cold outside, there are too many anxious corporations and investors are getting jittery in the world of capital. But CHANDO still sold 1.05 million masks in 2 days, there’s still a lot of buzz around Palace Museum Lipstick, and Li Jiaqi is still yelling his over-the-top ”Oh my God” across countless mobile phone screens.
Song Xiangqian’s theory is indeed reasonable. Prevailing trends are fickle, but material consumerism never stops – because men are going to feel empty, and women are going to feel lonely. That might also explain some of the newfound glamor on ‘made in China’.
As stated by Song Xiangqian: ”I’m also trying to achieve a balance in life as well. I’ve got to have a sufficient zest for life as someone involved in the consumption and services sector. I think my ideal state is when lifestyle reaches a certain level and it’s not about having more or less money. It is better to be the ‘stable farmer’ rather than the ‘hunter’ and to try to plant some fantastic seeds in the limited acres in your hand, and to look up at rolling clouds or down to flowers blooming in your yard with peace of mind.”