BY: Harvest Capital, Xu Dawei

The macro perspective is something we must accept, while the micro perspective is where we can make a difference.

— Charlie Munger

Former Governor of the Bank of Japan, Haruhiko Kuroda, mentioned in his book "Turbulent Times" that during his tenure as governor, foreign visitors often said, "Walking on the streets of Tokyo, it's hard to imagine this is a country in the 'Lost Decade' or facing deflation." This made him realize that there might be a significant difference between GDP and social welfare.

Governor Kuroda summarized that the first factor causing the disparity between GDP and social welfare is working hours. Even at the same GDP level, when working hours are reduced, and people have more leisure time, the level of social welfare will increase. The second factor is the difference in average life expectancy. A longer average life expectancy means more satisfaction throughout one's life. The third factor is the equality of income and asset distribution. Whether it is the total GDP or per capita GDP, the growth rate conveys the concept of "average." However, social welfare cannot be uniformly grasped, and the wealth gap is one of the important factors affecting the level of social welfare. The fourth factor is the difference in the non-economic values pursued by society. Even for the same commodity, compared with other countries, Japan can provide additional value in terms of safety, reliability, accuracy, cleanliness, and other services. This may lead to a higher actual level of social welfare in Japan.

The former Deputy Governor of the Bank of Japan, Iwao Kiyama, estimated that in 2014, Japan's per capita GDP was equivalent to 70% of the United States, but according to economic welfare, it was equivalent to 92% (the calculation only includes the first two easily quantifiable factors among the four). Governor Kuroda believes that this calculation can correct some impressions based on GDP comparisons. The difference in happiness between Japanese and Americans is not as large as indicated by the GDP indicators.

Many people who have been to Japan have marveled at the high cost-effectiveness in many areas of mass consumption. People linger in Japan's drugstores, discount stores, and small pubs, discovering that the cost-effectiveness of Tokyo Ginza's Uniqlo even exceeds that in China. This experience seems to corroborate Governor Kuroda's statement that for the same commodity, compared with other countries, Japan can provide more additional value.

Looking at the Chinese consumer market, in recent years, consumers seem to have enjoyed many consumption benefits. The main providers of these benefits are internet companies that have easy access to money and new consumer brands. For example, in the past two years, the hot and fervent fresh e-commerce, to attract new customers and seek future so-called monopoly profits, gave out benefits such as one yuan for a box of eggs. The earlier shared bicycles used high-recharge-return activities to entice consumers to recharge to lock in customers. Unfortunately, such "benefits" are like water without a source and wood without roots. They do not come from the company's own efficiency but from the investment funds raised by investors, or even from the hard-earned money of consumers themselves. When the tide recedes, these "charitable organizations" reluctantly reveal their awkward nature, and most of them disappear along with the "benefits" to consumers. This kind of "benefit" is no different from a Ponzi scheme and is better off without it.

In the frenetic environment, many people choose shortcuts. Emerging brands are more willing to spend a lot of money on acquiring traffic. Constantly talking about finding people, replacing big brands, but rarely spending time studying consumers, and unwilling to invest in long-term competitive factors such as brand mentality, product research and development, etc.

On the other side of the new consumer, many "old" brands of middle-aged and elderly people are also unwilling to spend time studying consumers, lack the willingness or ability to learn about new demands, new scenarios, and digitalization. They still rely on their old manufacturing capacity and traditional channels, leading their brands and products to gradually drift away from the mainstream consumer groups.

In summary, there are still few companies in China that truly care about consumer welfare. This may be because everyone has become accustomed to the comfortable days of plenty of water and big fish over the past few decades. The increment is large, the dividends are enough to enjoy, and it is too difficult and tiring to take the time to polish products and brands, and the short-term input-output ratio is also not accounted for. Everything is human, and in the face of short-term interests and human weaknesses, long-termism often cannot withstand a single blow.

Currently, China's aging population is similar to Japan in the 1990s, and other economic indicators such as debt levels, asset bubble levels, and other macro indicators are quite similar. In the coming years, it is difficult to expect China's GDP to return to a high-growth trajectory, and maintaining a moderate to low-speed growth is already challenging. On the demand side, the sluggish consumer willingness and insufficient growth capacity may not be a short-term problem. On the supply side, the upward trend of rigid production factor costs is difficult to reverse and is expected to continue for a long time. With the squeeze on both supply and demand, the "price destruction" style of internal competition that occurred in Japan in the 1990s is likely to be staged in the Chinese market.

Unlike the first half of the game with a friendly cycle of greetings, the second half will be a brutal knockout round. With each drop in the water level, a batch of boats will run aground and retire because they are too deep in the water. Those who can survive in the rounds of knockout matches can only be those who pursue extreme efficiency. Here, extreme efficiency should not be simply equated with cost efficiency, and it is not synonymous with low-end brands. Instead, it refers to comprehensive efficiency leadership covering multiple dimensions such as products, brands, channels, and digitization.

For example, if you are a successful beauty company with precise product branding that captures the hearts of consumers, you don't need to invest heavily in flashy advertisements to have good organic traffic. Consequently, every dollar consumers pay to you includes a lower cost of traffic, allowing you the opportunity to deliver high-quality products with conscientious ingredients at a lower price than your competitors. Your excellent customer retention is a result of respecting and treating consumers well. You can do this because you are skilled at efficiently building consumer trust. You have higher brand efficiency.

For example, if you are a successful restaurant business with a simple and refined menu where the top 10 dishes account for over 60% of revenue, and most of them are pre-made in a central kitchen with minimal processing in-store, you have the opportunity to compress SKU and back kitchen space and personnel. While competitors struggle to cope with rising costs and are forced to raise prices, you can keep your menu prices at an affordable level. Knowing that consumers' pockets are getting shallower, you understand that truly good things are those that ordinary people can afford. You can do this because you have the ability to create genuinely delicious and affordable dishes. You have higher product and supply chain efficiency.

For example, if you are a successful beverage company that has established a fully digitized corporate ecosystem with millions of consumers actively engaged in your mini-programs and public accounts every day, you have the opportunity to deeply understand consumer needs. Continuously optimizing your products and services, you can launch larger bottles of refreshing beverages without increasing the price, creating greater consumer surplus. Consumers, through word of mouth and repeat purchases, give you double returns, allowing you to continuously optimize scale and network effects. You can do this because you understand consumers very well. You have higher digital efficiency.

Each substantial efficiency improvement means an increased sense of economic well-being for consumers and may be a continuous strengthening of a company's competitive advantage and moat.

Of course, doing the right things is not easy at every step.

The data from the National Bureau of Statistics shows that in April, the total retail sales of consumer goods in China were 2.9483 trillion yuan, a year-on-year decrease of 11.1%. Among them, retail sales of goods were 2.6874 trillion yuan, a year-on-year decrease of 9.7%; and catering revenue was 260.9 billion yuan, a decrease of 22.7%. It can be foreseen that in the coming years, the majority of consumer goods enterprises in China will face challenging times. Systematic reshuffling is almost inevitable, with a large number of inefficient enterprises likely to be phased out. Whether there is a pandemic or not, this process is likely to occur. The prolonged pandemic may accelerate this process and greatly intensify the scale of elimination.

Drawing on the economic experience of Japan, a slowdown in GDP is difficult to avoid, but the boost to the national economic welfare is achievable. Relatively speaking, people have a weaker perception of changes in GDP, while their perception of changes in personal economic welfare is much stronger. In this process, consumer goods enterprises have significant potential. Compared to developed consumer markets such as the United States and Japan, there is still much room for optimization and upgrading in China's consumer supply side. The more efficiency is improved on the supply side, the more opportunities there are to provide greater economic welfare on the demand side.

In fact, for current Chinese consumer goods enterprises, the choice to act or not is no longer optional. Unless actively withdrawing, in the intense elimination round of the second half, only those who are proactive and embrace change have a chance to survive and win. To smoothly navigate into the next season, consumer-oriented enterprises need to relentlessly pursue ultimate efficiency. When most enterprises strive for ultimate efficiency, the natural result will be an overall enhancement of economic welfare for consumers—doing good for oneself is doing good for others, and this is the best testament.

This is the best of times, and it is the worst of times. In the future, there may be a saying "don't waste a crisis," and it will likely be said by the individual who survived among the nine lives. Focusing on creating consumer welfare is the mission of this generation of entrepreneurs and the best way forward for businesses.

As Nietzsche said, what doesn't kill you makes you stronger. Great enterprises cannot be built in smooth sailing conditions. We have reason to believe that truly world-class consumer brands in China will emerge victorious in this harsh competitive environment.