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2024.07.28

Word count: 5844, reading time: about 12 minutes

IntroductionThe consumption concept of "I can buy expensive things, but I can't buy too expensive" has become the consensus of more and more consumers.

Author |First Financial Daily Liu Xiaoying Wang Zhen Chen Shanshan

Consumers and brands’ perceptions began to “misalign.” For example, in the Chinese market, more and more consumers found that the price of Uniqlo’s products kept rising, but the quality did not improve.

Brands on the other hand believe that Chinese consumers are looking for products that are cheaper than their own as "substitutes."

In a recent briefing, Pan Ning, CEO of UNIQLO Greater China, admitted for the first time that the "substitute" consumption trend has had a significant impact on the company. "The cost-effective consumption is particularly evident among the younger generation. Under the consumption value of 'substitute', consumers no longer choose branded products, but choose more affordable products with little difference in quality."

Uniqlo is not the only company that has felt the arrival of the "parity" era. After communicating with some businesses and consumers, the reporter from China Business News learned that the popular "parity" cannot be simply understood as consumption downgrade, nor is it an extremely low price. Many young consumers have matured and savvy consumption concepts. They define "parity" not as cheap goods, but as both "parity" in price and "parity" in quality.

The consumption concept of "I can buy expensive things, but I can't buy too expensive" has become a consensus among more and more consumers.

Under this "parallel substitution" trend, many industries are undergoing tremendous changes on the supply and sales sides.

A good alternative to local brands

The clothing industry where Uniqlo is located can be said to be the main battlefield for "substitution". In recent years, many clothing factories that originally did OEM for brands have begun to set up their own stores on the platform and create their own brands with the help of the widespread use of consumer e-commerce channels. For example, last year a company called "Shirt Lao Luo" started to create its own brand through Douyin live broadcast. According to public information, the most popular product of "Shirt Lao Luo" is a shirt product developed specifically for e-commerce, and its cumulative sales exceeded 10 million within one year of its launch.

Many local brands like Luo Yonghao's shirt brand can offer lower prices than Uniqlo, more styles, and faster response to consumers, while also having acceptable quality. Naturally, Uniqlo feels the pressure of being "replaced".

There are also many "substitutes" in the cosmetics field. Many industry insiders told reporters that the rise of domestic brands such as Winona and Proya in the past two years is because they focus on functional products and are substitutes for big brands. For the same anti-aging product, some big brands cost more than 1,000 yuan, while local brands cost around 300 yuan. The latter is more popular in the mass market. In addition, some cosmetics brands, such as Mary Kay, were originally OEM factories, and then transformed into independent brands. After years of development, they have also achieved a certain scale and stable consumers.

On Xiaohongshu, many beauty KOLs started their careers by taking advantage of the popularity of ingredient parties. They will specifically dismantle the ingredients of big brands and then find products with the same efficacy to recommend. Cosmetics substitutes refer to finding substitutes with similar ingredients, efficacy and quality between relatively low-priced cosmetics and high-priced cosmetics. These substitutes usually have similar formulas and ingredients to high-priced cosmetics, but have more advantages in price.

The trend of "substitution" in the home appliance consumer market is also very obvious. According to data from Aowei Data Compass, since 2024, Hisense, TCL and others have gradually replaced Sony's high-end TV market share; Haier's Casarte and Midea's COLMO are also replacing German brands' high-end washing and drying set market share.

As of July 14, Sony, which focuses on high-end products, saw its share of the offline channels in the domestic color TV market decrease by 3.94% year-on-year to 5.16%, with an average price of 13,795 yuan; while Hisense and TCL, which have seized the high-end market with Mini LED backlit LCD TVs and ultra-large-size TVs such as 100 inches, increased their shares of the offline channels in the domestic color TV market by 2.64% and 1.06% year-on-year to 31.01% and 16.42%, respectively, with average prices of 7,629 yuan and 6,332 yuan, respectively.

The high-end white goods market is similar. In the first half of this year, in the domestic online market for washing machines and dryers (wash and dry sets), the market shares of Siemens, Bosch, and Miele decreased by 0.61%, 0.75%, and 0.98% year-on-year to 6.28%, 4.71%, and 1.06%, respectively; the market shares of Casarte under Haier Smart Home and COLMO under Midea Group increased by 0.21% and 0.39% to 3.77% and 0.74%, respectively, and the market share of Little Swan under Midea increased by 5.54% to 29.85%.

Peng Yu, COO of Beijing Zitan Insight Data Co., Ltd., told the First Financial reporter that the "parity" phenomenon appeared earlier in the mobile phone market. Brands like Xiaomi's Redmi, OPPO's OnePlus, and vivo's iQOO all take the cost-effective route.

A dark horse emerges in the subdivided track

Cindy, a COSPLAY enthusiast, is a heavy consumer of cosmetic contact lenses. He has found that there are more and more brands of cosmetic contact lenses in recent years. "I used to buy Korean brands, but now I buy domestic brands in the live broadcast room, and the price is cheaper."

"Compared with other consumer industries, the overall market growth of cosmetic contact lenses is still good. The annual growth in the past two years has been 30%-40%, and this growth rate should be maintained in the future." Li Jialiang, founder of Shanghai Jialiang Medical Devices Co., Ltd. (hereinafter referred to as "Shanghai Jialiang"), told reporters that the company's revenue last year was around 600 million yuan, and this year it is expected to reach 800 million yuan.

Shanghai Jialiang was founded in 2008 and initially mainly sold imported products. Li Jialiang told reporters that the cosmetic contact lens market began to take off in 2010 and showed signs of heating up in 2013, but the industry was dominated by imported brands at the beginning. "Except for Johnson & Johnson and Bausch & Lomb, which you know, there are also Japanese and Korean brands. In the past, the domestic cosmetic contact lens sellers were all channel dealers and distributors."

The changes occurred between 2016 and 2020. Colored contact lenses have gradually shown a trend of being localized, and a large number of local colored contact lens brands have emerged, which has also brought down the prices.

Li Jialiang told reporters that ten years ago, Japanese and Korean brands accounted for more than 90% of this market, but now they have almost withdrawn. Now Taiwanese brands and mainland brands each account for half. In terms of price, the price of cosmetic contact lenses has generally dropped. The price of 10 lenses of imported brands is about 100 yuan, but the average price of domestic ones is now 40-50 yuan, which is also the mainstream price in the current market.

"Even five years ago, the domestic cosmetic contact lens market was still dominated by Korean brands," said Tang Shunchu, founder of Kangshida Technology Group. "For a long time, there were no domestic brands in the cosmetic contact lens market, but now, whether in terms of quality, price or color design, Korean cosmetic contact lens products have lost their competitiveness in China."

The technological upgrade behind the replacement

Behind the expansion of market share and the price parity is the rise of upstream local production companies such as Kangshida and Ruierkang. 20 years ago, cosmetic contact lenses were still a new thing in mainland China, and there were almost no complete and mature production lines. The production capacity in Taiwan was mainly used for OEM. Tang Shunchu was one of the first entrepreneurs in China to develop and manufacture cosmetic contact lenses.

Around 2000, cosmetic contact lenses and other contact lenses were still a new technological product in China. There were almost no production lines in the mainland, and domestic contact lens brands were even more barren. The products on the market mainly came from Europe, America, Japan and South Korea.

At that time, Tang Shunchu, the general agent of Korean contact lenses in China, believed that opening a store and doing department store business was just a means of making a living, and developing and manufacturing contact lens products for Chinese people was his career. In 2005, Kangshida was officially established.

At first, due to the lack of precision of the equipment, the lack of experience and ability to process the edges of contact lenses, and the lack of corresponding technology in the color fixing process, the research and development work repeatedly hit a wall. Tang Shunchu invested 10 million yuan every year, but the test results failed year after year. "Today it fades, tomorrow it breaks, and the day after tomorrow it is uncomfortable to wear."

In 2012, the then State Food and Drug Administration first proposed regulatory requirements for colored contact lenses. To produce and sell colored contact lenses, one must obtain a medical device registration certificate for such products, as well as corresponding production and business qualification certificates. In the same year, Kangshida's contact lenses finally came out of the laboratory. "They said I couldn't make it, but I insisted on making it. I invested for 7 years and lost money for 7 years, but I persisted." Tang Shunchu said.

In addition to Kangshida, after 2005, a number of contact lens manufacturing factories were established in mainland China, and gradually grew into the "hidden champions" of this industry.

Jin Yilin is also one of the "well diggers" of domestic contact lenses. In 2009, he founded Jilin Ruierkang Contact Lens Co., Ltd. in Northeast China. At first, Ruierkang's production molds were imported from South Korea. Although the mold development link was omitted, Jin Yilin always felt that he was controlled by others. "Contact lenses require very high precision molds, but the quality of molds imported from South Korea varies, which greatly affects the product qualification rate, and the import cost is also very high."

Therefore, Jin Yilin decided to develop the full-process manufacturing technology of contact lenses on his own. In 2014, Ruierkang successfully developed the inner coating printing and dyeing technology and obtained an invention patent, which solved the common problem of discoloration of contact lenses at that time. In 2015, the company achieved fully independent production of molds, and its production technology and materials have completely freed itself from dependence on overseas companies.

The "parity" advantage brought by technological and process improvements is also reflected in the field of white goods. Haier Smart Home, Midea Group and other companies have also continued to carry out cross-border mergers and acquisitions and technological innovation in recent years, and their ability to integrate global resources and product technology innovation has been continuously improved. Products such as Haier Smart Home's washing and drying sets can integrate Italian appearance design, German energy-saving technology, Chinese algorithms, Japanese structural design and Australian core components. At the same time, the improvement of China's home appliance industry chain and the improvement of intelligent manufacturing level can also provide products with higher quality-price ratio. For example, in the first half of this year, the average price of Siemens' washing and drying sets was 9,193 yuan, and the average price of Little Swan's washing and drying sets was 7,507 yuan.

The rise of online platforms

Improvements in technology and craftsmanship have allowed Chinese home appliance brands to snatch market share from traditional high-end brands. On the other hand, emerging Internet brands that focus on cost-effectiveness are also snatching market share from traditional brands with advantages.

At the shareholders' meeting of Gree Electric Appliances in June this year, Dong Mingzhu, chairman and president of Gree Electric Appliances, criticized Xiaomi's false propaganda of being the number one air conditioner and attracted widespread attention. The reason behind this is that Xiaomi has grabbed a lot of market share in the domestic online air conditioner market this year.

From the perspective of online channels in the domestic air-conditioning market, as of July 14, Xiaomi Air Conditioner's market share increased by 4.31% year-on-year to 11.64%, jumping to third place in the industry, with an average price of 2,209 yuan; while Gree Air Conditioner's online market share decreased by 3.9% year-on-year to 23.68%, ranking second in the industry, with an average price of 3,451 yuan.

Unlike Gree Air Conditioner, Xiaomi Air Conditioner only operates online channels and is manufactured by other factories, so its channel costs and operating costs are relatively low. The reporter also noticed that in the domestic color TV market, Hisense and TCL are supporting sub-brands Vidda and Thunderbird. These sub-brands rely on the supply chain advantages of their parent companies and mainly go online channels to seize the market with more cost-effective products. For example, the price of Thunderbird 100-inch TV is 14,999 yuan. In the first half of this year, the domestic shipments of Thunderbird brand TVs increased by 66.4% year-on-year.

The rise of online channels not only reduces channel costs, but also makes the cost-effective "dark horses" in more subdivided industries more easily visible to consumers.

Li Jialiang told reporters that when he first started selling cosmetic contact lenses, 95% of his business was offline. At that time, relevant regulatory policies did not allow online sales of cosmetic contact lenses, and offline pharmacies and eyewear stores became Shanghai Jialiang's main sales channels. However, due to the limited sales radius, the local brand has not been able to grow.

In 2015, restrictions on cosmetic contact lens brands entering e-commerce platforms were gradually lifted. After much investigation, Li Jialiang decided to "test the waters" on Pinduoduo. Half a year later, during his mid-year review, he unexpectedly discovered that the platform's daily order volume had reached 50,000.

"Now the situation has been reversed. 95% of our business is online." Li Jialiang told reporters that offline sales are limited by sales radius, while online sales can help brands reach more consumers, and online consumers are more receptive to new brands and domestic products.

In addition, a large amount of consumer demand and online reviews are also transmitted to the factory side through e-commerce platforms such as Pinduoduo, which has brought motivation for contact lens factories to optimize processes and improve efficiency. In the past five years, the production capacity of domestic contact lens factories has increased significantly. Five years ago, the total production capacity of all domestic contact lens factories was about 10 million pieces per month, and now the monthly production capacity is nearly 200 million pieces. The improvement of factory efficiency has in turn brought about a reduction in product costs.

Zeng Jinbei is also a beneficiary of the rise of online platforms, which has led to changes in its sales model and expansion of production capacity. Initially, like many other merchants in Yiwu, he was engaged in traditional foreign trade, helping trading companies produce accessories for weddings and parties.

"After the trading company purchases the goods, some are sold to foreign brand stores, and some are sold on Amazon. The prices listed overseas are several times higher than the prices I give to the trading companies." Zeng Jinbei told reporters that, for example, the masks worn at the dance, my factory price is about 20 yuan, but it can be sold on Amazon for 29.99 or 39.99 US dollars; a fashionable belt, I gave the foreign trade company a price of 10 US dollars, but the selling price in a brand store in the United States became 139 US dollars.

The change occurred after 2014. As the traditional foreign trade industry was in a downturn at the time, Zeng Jinbei began to test the e-commerce platform. "We started on domestic B2B websites and found that there was more room for e-commerce than traditional foreign trade. In 2020, we started to contact SHEIN and brought our products abroad in one go."

On the SHEIN platform, Zeng Jinbei is mainly responsible for making good products, and other daily operations including pricing and transportation are assisted by SHEIN employees. "The price I give to SHEIN is similar to that given to foreign trade companies, but SHEIN's pricing is much cheaper than Amazon and foreign brand stores, so it naturally snatched a lot of market share from Amazon."

Before cooperating with SHEIN, Zeng Jinbei's annual sales were around 8 million. After the cooperation, in 2022, his sales doubled to more than 20 million. This also gave him the motivation to expand production. After the production site and equipment more than doubled, the cost was further reduced.

In recent years, e-commerce platforms including SHEIN and Temu have emerged in overseas markets by integrating products and supply chains, allowing foreign consumers to enjoy the cost-effectiveness of products, while also affecting the business of many foreign brand stores.

Zeng Jinbei revealed to reporters that the American brand store that had been purchasing fashionable belts from him before would place an order through a trading company every two or three months before the epidemic, with 2,000 belts each time, but no orders have been placed since 2020. "Now there are still occasional inquiries, but the frequency is less, and they are starting to inquire about relatively cheaper products."

Substitution does not mean sacrificing quality at a low price

In the eyes of many practitioners, the rise of substitute products and brands is also a process of "demystification" of the industry. "Substitutes" have become more and more the active choice of consumers - not because they can't afford it, but because they prefer cost-effectiveness.

Li Jialiang believes that the reason why local brands can now lower their prices is that, in addition to the expansion of production capacity, the rise of platforms, and the reduction of costs, there is another factor that consumers are "disenchanted" by big brands. "For example, in the past, when people bought air conditioners in China, they would buy Japanese brands, but later everyone gradually bought brands like Gree and Midea, right?" He believes that when consumers are not familiar with a new product, they tend to choose traditional big brands, but once the technology matures and some products catch up, then mature consumers will tend to choose products with better cost performance.

However, it should be pointed out that there are also many problems in the current rise of substitutes. For example, in the beauty industry, Bai Yunhu, founder of the Yiyoumei digital supply chain platform and a daily chemical expert, has noticed that some so-called "white-label" GMV has doubled rapidly through top traffic platforms such as Douyin recently, but from the perspective of their marketing model, they mainly achieve rapid monetization through closed loops such as "super-large investment flow + extreme cost-effectiveness + emphasis on efficacy".

According to FeiGua data, DCEXPORT, Dr. Wen, VC, and Creator made it to the TOP100 list during Douyin's "618" this year. Take Dr. Wen as an example. Before December 2023, it was still unknown, but after that, its monthly sales on Douyin exceeded 100 million yuan. From January to May this year, Dr. Wen made it into the TOP20 list of Douyin beauty brands with sales of more than 100 million yuan each month.

"From the perspective of the industry, 'substitution' is a double-edged sword. It can quickly gain users in a short period of time, but 'extreme cost-effectiveness' may come at the expense of quality." Bai Yunhu believes that when some companies go to an extreme in pursuit of scale and revenue and only focus on price, it is dangerous. "Today, the top traffic platforms mostly use 'cost-effectiveness' or even 'ultra-low prices' as their competitive strategies, causing more and more brands to have to 'participate in price competition' and 'increase traffic' to achieve GMV growth, which is unsustainable."

In the home appliance industry, some industry insiders pointed out to the First Financial reporter that while Xiaomi air conditioners have seen a significant increase in sales this year, some problems may be exposed. It is expected that Xiaomi air conditioners will use their own shipment scale to strengthen the quality control of the main components of air conditioners. After all, "the final competition of products still comes down to product quality." He suggested that Xiaomi air conditioners control costs while ensuring product quality, and at the same time increase investment in and control of offline installation and after-sales outlets.

According to the reporter, unlike the previous OEM model of providing both labor and materials, Xiaomi Air Conditioner has switched to the processing with materials model based on the ever-expanding shipment scale. Some traditional home appliance companies have also begun to ask the supply chain for room to reduce costs.

"The previous product selection logic was that the OEM factory made a product, and the influencer team and the brand side selected the product. The current logic is that the brand side and the influencer team want to make a certain product together, do market research together, want a certain price, and then negotiate with many factories and select the OEM factory." A relevant person in charge of a home appliance company told the First Financial reporter that the OEM factory's molds cost, how much each screw costs, who are the parts suppliers, how much is the operating cost, how much production is required to survive... The brand side has to talk to the OEM factory and list the cost list very detailed, down to its supply chain. "Only after all the expenses of the influencer, brand side, platform operator, factory side, etc. are all pulled together can we achieve such a low price as it is now."

Peng Yu, COO of Beijing Zitan Insight Data Co., Ltd., pointed out to reporters that the development of "substitute" products has become a comprehensive layout for many companies to cope with diversified consumer demands, and it will only be strengthened in the future. "But in an era of increasingly diversified consumer demands, companies have their own business operation risks when developing any new product line. At the same time, when consumers are pursuing substitute products, they must also clarify their needs. Both companies and consumers need to grasp the positioning and value of substitute products.

WeChat Editor| Ziang