The future consumer service industry will enter an era of meticulous cultivation, no longer relying on solving minor pain points or traffic issues to win.

Compiled by Liu Yanqiu

Source: Touzhong Net

Since the second half of last year, familiar environments, conditions, and factors have undergone drastic changes. We are in a complex era of major changes. How can consumer enterprises "survive"? Where are the future opportunities for the industry, and how should companies position themselves?

Touzhong Information's "Peak Plan" series of online salons invited Song Xiangqian, Founding Partner and Chairman of Harvest Capital, and the lead mentor of the first phase of the Peak Plan, to share his insights. Song Xiangqian has been engaged in equity investment for more than 20 years, investing in consumer brands such as Dongpeng Beverage, Wenheyou, Laoxiang Chicken, Babbi Food, Juranzhi Jia, Xiaoguan Tea, Laiyifen, and Aimer. He has used his industry experience to help these companies navigate through cycles and grow rapidly.

In the sharing session, Song Xiangqian first talked about the pressures and challenges brought about by the current macro environment.

First is the impact on the supply side; second, contraction in demand; third, weakening expectations; fourth, the impact of the pandemic; fifth, the complete overhaul of the entire system leading to the transformation and upgrading of the economic structure, presenting the largest challenges and pressures in history.

After studying the macroeconomic environment and development, Song Xiangqian summarized the current state of enterprises with four "underestimations" and four "overestimations." The "four underestimations" refer to some enterprises underestimating systemic risks.

First, a systematic underestimation of the pressure of economic structural transformation;
Second, a systematic underestimation of the impact of the pandemic on the economy;
Third, a systematic underestimation of the impact of the US dollar re-entering a strong cycle (the Federal Reserve exits loose monetary policy and enters a cycle of interest rate hikes) on the global economy, global capital markets, and global industrial rebalancing;
Fourth, a systematic underestimation of the impact of geopolitical conflicts on the global industrial chain and value chain division of labor.

At the same time, Song Xiangqian believes that some enterprises have overestimated their performance, achievements, resilience, and growth space.

Specifically, Mr. Song analyzed the pressures faced by enterprises from the perspective of production factors such as population, water, electricity, and gas. For example, in the past, due to bonuses such as commercial real estate and electronic payments, the threshold for entrepreneurship was low. However, these bonuses were fully released from 2015 to 2020. In the future, if companies try to transform traffic bonuses through commercial real estate, it is actually a desperate move. After becoming addicted, the degree of reliance on brand real estate developers and infrastructure will become higher and higher, and the internal value creation ability, brand operation ability, and product operation ability of the enterprise will be continuously weakened. "If the layout is only in commercial real estate and online platforms, then we will always be in the stage of paying for traffic, and we will always be in a relatively weak environment."

In this situation, Song Xiangqian believes that the future is no longer the era of businessmen but will enter an era of competing entrepreneurial capabilities. The era of big fish and big water has passed. Companies, especially consumer companies, still need to solve problems from the perspective of the company's value creation capabilities, source and reduce, manage cash flow well, and truly win without leaving the table. However, he does not recommend layoffs for companies because layoffs can only solve short-term cash flow problems and cannot fully release the long-term development value of the enterprise.

"Companies are organs of society and must create social value to have a reason to exist. If you can't make money, the market will inevitably clear you out at some point that may not seem favorable to you," according to Song Xiangqian. In his view, the current overvaluation in the consumer industry and the underperformance of new consumer enterprises are based on this logic. He predicts that the future consumer service industry will enter an era of meticulous cultivation, no longer relying on solving minor pain points or traffic issues to win but requiring breakthroughs in the underlying growth logic of enterprises in all-round competition. This era calls for innovation and mastery of management science.

Here is a summary of the Q&A session, touching on trend assessments in segmented tracks of the consumer sector, provided by editors from Touzhong Net.

Question: The consumer investment sector is currently in a frozen state, and many investors and entrepreneurs are concerned about the financing winter. What are your thoughts on this issue?

Song Xiangqian: Personally, I think the future structural changes will be significant. The era of seizing opportunities in new consumer areas by focusing on small functions, minor pain points, and small traffic has passed. Therefore, those who understand livelihoods, basic needs, and high-frequency industries will gain market competitiveness in the future. This is also a judgment based on the macro perspective.

As I mentioned at the beginning, the macro environment has changed. Trying to capture small traffic, small brands, small opportunities, and small functional entrepreneurship in this era will not provide many market opportunities. Although it is relatively easy to enter because you grasp some pain points and opportunities for upgrading in Maslow's hierarchy of needs, as well as some opportunities for sinking, in reality, your future growth space will be limited. What Buffett said makes sense: structural competitive opportunities and the opportunity to build moats are crucial. Grasping the long, broad, and deep race track, focusing on livelihoods and basic needs, is the key to seizing opportunities in this period of adjustment.

Question: How do you see the future development trends of the Baijiu (white spirits) market, the coffee track, and the short video economy, three segmented industries?

Song Xiangqian: I think coffee is a good track, but we need to consider a question. As the post-2000 generation gradually becomes the main consumer group, they will dominate the market for the next 30 years. Their marginal purchasing power and effective demand determine which industries will enter a period of rapid growth in the future. Does it have a long, broad, and deep track effect?

I think coffee will certainly have a place because young people will increasingly like coffee, shifting from Chinese tea to coffee. Personally, I agree, but the entry point into the coffee track is crucial. I think the depth of one's thinking determines the final destination of life and career. Opening a coffee shop, playing in the third space—very few people in the world can succeed. Starbucks is a special case; it has era opportunities, historical opportunities, brand opportunities, and the opportunity of people's dividends. More importantly, it has the entrepreneurial ability. All these factors combined make Starbucks. I think the coffee industry is not easy to enter, but it is a worthwhile track.

On the contrary, for product-oriented companies taking the route of large circulation, Nestlé is very strong. Italy has the most developed coffee culture, but ironically, the United States has become the most successful country in terms of coffee companies, culture, and brands. Why did Nestlé, a product and service company, become the champion in the US coffee track? This indicates that the business model chosen in the middle of the coffee track, the way of expressing and delivering products and services in this market, is crucial.

Short videos are similar. Many people start businesses, and after starting a business, they do short videos or build MCNs. I think this is playing the traffic dividend. A sentence from Kotler makes sense, I think: everything in retail can be productized, and everything in products can be retailed. So, those who enter the track need to grasp the opportunity and fully express the social currency attributes of the product.

I personally believe in three business logics. The first logic is the transaction itself, product transactions. The second logic is our information exchange, and the third logic is the establishment of trust relationships. But if you cannot establish trust relationships, cannot truly enter the lives of the people, and become part of their lives, I think such companies cannot develop into large companies.

I've looked at the liquor industry a lot, but I haven't taken action because of the issue of Chinese consumption habits. In the liquor industry, for example, "Mao Five Yang," in each segmented category, each taste, each aroma, there are basically some leading companies. These brands are very successful in occupying the user's mind. Companies like Maotai are not pure consumer goods companies; they have strong attributes of production factors. Drinking Maotai is a symbol of identity, equivalent to holding currency and gold. In this case, I think there will be greater pressure for entrepreneurship to break through in the liquor industry. However, there will also be opportunities. I think consumables like taste-upgraded grain liquor, distilled spirits, whiskey, and low-alcohol beverages that young people like will have a future market. The second is in highly strong liquors, like true vintage wines, distilled spirits, and whiskey, where I think there are some opportunities. As for ordinary local white spirits, middle-tier enterprises, I personally think the opportunities may not be particularly significant.

Question: How do you view the valuation logic of star projects like Wenheyou or Manner? Can you talk about Harvest a's overall logic and perspective on the valuation of consumer enterprises?

Song Xiangqian: I once wrote an article explaining our views on valuation. I think valuation is not equal to market value, and market value is not equal to value. Therefore, as an entrepreneur, as a creator, I think it's important to correctly understand the long-term value of your enterprise. Do not turn the establishment of brand and business model into a short-term valuation story and a game in the capital market. If so, it's easy to go astray.

We see many entrepreneurs financing very early, relying on financing to survive each round but without solving any problems or realizing the inherent value of the enterprise. I believe that the value of a company's existence lies first in solving employment issues, second in creating profits, and third in ensuring the viability of the business model. Indeed, only when you can make money will there be room and opportunities for valuation repair. The market's perception of you as an investor or company will only improve in the long term.

During the hot phase of the capital market, most people buy into the valuation logic and the confidence and expectations of growth. But a few will look at the fundamentals, at your ability to create value, which I think is crucial. As Peter Drucker said, companies are organs of society and must create social value to have a reason to exist. If you can't make money, the market will inevitably clear you out at some point that may not seem favorable to you. Now, when we say there is widespread overvaluation in the consumer industry and the performance of new consumption is below expectations, it is based on this logic. Some companies overestimate their performance, the degree of the market, the certainty of the market, and their own abilities.

In the past, many people might not have recognized it, but if you observe a company's gross profit, net profit, labor efficiency, space efficiency, and turnover, what is at the core? First is the sales profit margin; the sales profit margin determines the value of your brand and whether you can make money. However, the results of intense market competition often lead to converging gross profits, unless there is technological innovation and genuine technological empowerment to achieve higher gross profit performance. The second indicator is total asset turnover, and the level of total asset turnover determines your ability to generate revenue and profit with the same resource input. A company with a revenue of 2 billion playing with 4 billion a year, while others play with 6 billion, some with 8 billion, and even some with 12 billion – in terms of efficiency, you are losing to others. So, how is efficiency achieved? Efficiency is essentially the systematic capability of operational and managerial levels, fundamentally relying on revenue, management, and operations to assess the ability to control the core values of the enterprise. Therefore, the future belongs to the era of entrepreneurs, no longer the era of mere business people. The third indicator is leverage. If your gross profit is high, and turnover efficiency is good, you dare to leverage, finance, and borrow money, whether it's your own money or from the supply chain, whether it's interest-bearing or interest-free, you dare to use it. If the first two indicators are at a medium to low level compared to peers, then you dare not take on debt. We have seen many companies in China collapse, and from their past financial statements, you can see that their main business basically doesn't make money; it's all non-recurring income, yet they still dare to take on debt – that's seeking trouble.

I hope everyone can understand that the future consumer service industry will enter an era of meticulous cultivation. It's not just about solving small pain points, addressing traffic issues, or interpreting consumer behavior and psychology that determines success. It requires a long strong suit and, at the same time, a shortcoming that must not be too short. To break through the underlying growth logic of the enterprise in all-round competition, this is not only an era of innovation but also an era where management science prevails.

Question: Hello, I am in the tea beverage industry, and I would like to ask for your opinion on the endgame of this industry. How can players navigate through the cycles to ultimately win the final battlefield?

Song Xiangqian: This is just my personal, brief judgment.

The tea beverage industry is a good industry because it has a certain addictive quality. The current environment of the tea beverage industry has indeed been successful and highly market-oriented in China's consumer entrepreneurship over the past 10 years, thanks to the intervention of capital and successful market education.

However, from an endgame perspective, I think there are three issues to address: Firstly, there is a serious problem of homogenized competition in the tea beverage industry. Secondly, the supply and demand relationship in the tea beverage industry does not seem to match at the moment; personally, I think the supply exceeds demand. Thirdly, the tea beverage industry essentially revolves around playing with milk, tea, sugar, and fresh fruits, and no one has truly transcended from the ultimate product perspective.

Therefore, from an endgame perspective, I believe the competition in the tea beverage industry can be divided into two categories. The first category is companies playing with the supply chain, utilizing standard store empowerment systems, and truly following a business model that empowers others – I think there is an opportunity here. The second category is playing with brands and products. Companies that have a profound understanding of human psychology, and have developed good products and brands with humanistic values, might have a chance of success.

Question: Hello, Mr. Song. I would like to ask for your opinion on the hot pot industry. The second question is, what is the development prospect of well-standardized small catering and pre-packaged meals now?

Song Xiangqian: Catering is a large category, with a market scale of 4.7 trillion yuan. If we include small family-owned stores, I believe it exceeds 5.5 trillion yuan. Employing between 60 to 80 million people, catering is undoubtedly the largest industrial category in China.

But I think it faces a crucial issue that many investors haven't realized. We are still investing in internet celebrities, single-store models, and infrastructure, but we haven't noticed an issue related to people, entrepreneurs, and industry progress. That issue is modernization.

For example, with so many cuisines around the world, why have only Americans successfully turned Starbucks and McDonald's into global chains? Let me tell you something – catering, fundamentally, is not about competing in taste; it's about whether you can truly achieve standardization and modernization under controlled production conditions. Although Haidilao reported a loss of over 4 billion yuan in the last financial statement and closed more than 300 stores during the Chinese New Year, it still deserves respect. Haidilao is the best company in China's hot pot industry when it comes to standardization, modernization, chain operation, branding, and capitalization. However, the challenges and pressures Haidilao faces after the pandemic also prove the importance of management and modernization for a company's growth. Even a successful company like Haidilao, which has already reached the peak in the Chinese catering industry, still faces competitive pressure and challenges. It underestimated the pandemic, miscalculated the importance of management in empowering the industry, and is now paying the price.

Regarding small catering, I personally have a positive view. I particularly like to invest in industries related to people's livelihoods, basic needs, and high-frequency consumption. We invest in local chicken dishes, Babimantou (Chinese steamed buns), and a company making buns, steamed buns, soy milk, and shumai – these are investments in the livelihoods of ordinary people. These companies have great future opportunities because they are close to people's lives and the everyday hustle and bustle. The taste of life, the most touching to ordinary people.

However, in the past, many companies played a fast game. Many companies came in and immediately charged franchise fees and management fees. They were casual about the supply chain, and in reality, they didn't make money from the supply chain or the brand; they made money from franchise and management fees. After a long time, there will always be contradictions between franchisees and brand owners. You want to use franchisees to achieve widespread store openings, and franchisees want to use you to achieve quick profits. It's a relationship of consumption and being consumed. Only by solving the underlying logic of the business, making franchisees feel that joining you is more profitable and achieving continuous, normalized profitability, can your performance be stable. Only then can your franchise, supply chain, operational management systems, brand, and quality control be effective in the long run. Therefore, I am optimistic about this kind of small catering – companies with standard supply chains, well-established standard stores, and the ability to systematize and standardize.

The challenges of modernization in the category of Chinese formal dining are relatively high because, indeed, there is a considerable need for human resources, and chefs face significant pressure within our business model. Although we currently have supply chains and pre-made dishes, relying entirely on pre-made dishes makes it challenging to balance average customer spending and meet consumer satisfaction requirements. It is difficult for us to create consumer surplus and provide consumer benefits. Therefore, the pressure of standardization and modernization, control, and the iterative upgrade of operational levels for formal dining is much greater than the pressures faced by categories like light food, small dining, fast food, and hot pot, which follow standard tracks. Globally successful ventures often offer "limited-service" products. Achieving global chain operations is challenging for high-end dining and formal dining. Zhang Yong, the founder of Haidilao, once said something I personally agree with: a thriving business must come from widespread products. Do not underestimate what we produce. As long as you genuinely embrace the people, embrace quality, embrace the brand, truly understand the hearts of the people, the ceiling of the brand is the people's hearts. By providing good products and services to consumers and the market in a down-to-earth manner, ordinary people will continue to support the business in the long term.

The essence of all businesses in the world essentially boils down to eight words: customer acquisition, retention, conversion, and repurchase. Many people excel at customer acquisition, but when it comes to customer retention, many start to weaken. Playing conversion becomes a significant challenge, facing high costs and ineffective marginal scale. Achieving repurchase is even more difficult because it can only be realized by large brands, good products, and only by strong entrepreneurs. Therefore, although the consumer service industry seems to have a low entry barrier, in reality, the competition threshold is very high.

The consumer service industry seems like a good investment because everyone has scenarios and experiences, but many investors mistake their consumer experiences as investment logic, which is completely wrong. The logic of opening one store versus opening ten stores, opening a hundred stores versus opening a thousand stores is entirely different. The challenges and pressures faced in operations, management, supply chains, human resources, institutional dividends, brand dividends, and innovation increase exponentially. Often, we only look at investing in a single-store model, hoping that future growth will fill the gap in valuation logic – this is very challenging.

Question: Mr. Song, how do you see the trend of brands going global in the next 5 to 10 years? Will there be globally recognized brands from China in this process?

Song Xiangqian: First, this proposition must exist, with the context being primarily focused on internal circulation while external circulation promotes mutual development. If there is no external circulation, can the proposition of brands going global still exist? Therefore, in today's entrepreneurship, one must understand the macro perspective. If you can't see the next 5 or 10 years, you cannot plan the overall situation. Those who do not plan for the overall situation are not enough to plan for a domain, and those who do not plan for everything are not enough for a moment. If you don't conduct in-depth analysis of the international environment, the economy, and the overall development pattern of the industry, the layout might be wrong, and this proposition may not exist.

So, if we think it exists and there is still internal and external circulation, if we continue to remain open and carry out in-depth reforms, then this question is valid. In this environment, I believe China will have the opportunity, and there will be opportunities for Chinese brands to go global. Shein has already become a representative in this regard. Strictly speaking, I may not completely understand it even now, and I may not fully agree. It is simply a fashion consumer product or a fashion brand. I define it as an absolutely efficient and rapid supply chain, combined with the commodity's social and monetization attributes. Therefore, I think companies that apply digital marketing exceptionally well still have opportunities.

"Dengfeng Plan": The "Dengfeng Plan" is initiated by Zero2IPO Group, a top investment institution with a total management scale exceeding 760 billion RMB and investments in over 200 listed companies. The plan aims to gather entrepreneurs who adhere to long-termism, drive industry innovation, focus on creating excellent products, and generate genuine value, helping them climb one peak after another on the entrepreneurial path.