Hyomi Jie, Portfolio Manager, Fidelity China Consumer Fund, explores the fast evolution of consumer attitudes and brand strategies
The consumer story has been a dominant theme in China for some time, but the dynamics of this are changing. Since the turn of the century China has seen tremendous growth in wealth due to better paid jobs. This was initially led by international businesses setting up in China to take advantage of low wages and a large workforce, but now we see local companies adapting and innovating to become industry leaders in their own right and cater for a local population with greater earnings power.
This first wave of the consumer story saw people simply buying everyday goods like TVs, fridges and cars. While there are still vast untapped markets here, such as rural China, we are also entering a new stage of consumption - services and premiumisation.
Many consumers have that TV or fridge, and they do not need another. Now people want to use their hard-earned cash for experiences such as eating out and travel, and for better products. This combined with higher income, better quality of living, higher sophistication and greater choice, is driving a change in consumer trends.
These same consumers are now looking to trade up, which means consumer premiumisation and greater brand awareness. The interesting nuance is that there are a number of industries where local Chinese firms are becoming the leading brand or premium product due to having a deeper understanding of the local market and being able to cater to local customs and taste.
International brands continue to be popular in areas like autos. There are also a small number of product categories which just fail to gain customers' trust, especially infant milk formula and wine. It has been interesting to note recently that one of China's biggest dairy companies, Mengniu Dairy, announced a bid to acquire 100% of Bellamy's, a popular Australian organic infant formula company. This will enable Mengniu Dairy to see the economic benefits of selling a premium foreign brand to domestic consumers.
On the whole, however, Chinese consumers have a growing appetite for local brands as they become increasingly affluent and proud of their own culture. People are willing to pay more for higher quality everyday items like tissues and paper made of organic materials like bamboo.
This has not gone unnoticed, and Chinese companies are responding by implementing multi-pricing strategies. For example, China's largest brewer, CR Beer, now has a number of brands in its portfolio that tap into different market segments and generate a desire for customers to purchase the next tier up.
Domestic fashion companies are also taking notice and are building premium lines for their brands. Sports company Li Ning, a company well-known in China for functional sportswear, has developed a high-end streetwear line that debuted during New York Fashion Week in 2018. This approach has helped boost sales and its share price. Another company is JNBY which has one of the biggest shares among domestic designers in the affordable luxury market and has successfully been able to adapt to fast changing fashion trends.
This information is for investment professionals only and should not be relied upon by private investors. The ideas and conclusions here do not necessarily reflect the views of Fidelity's portfolio managers and are for general interest only. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity China Consumer Fund can use financial derivatives which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1019/25049/SSO/NA