Aiming for the Unicorn in the Consumption Trade-Up Trend

Author: Xingshi Wang

Editor’s Note

The term “consumption upgrade” has become an investment theme that continues to draw attention in the capital market. What are the rules and patterns behind this phenomenon? How do you discover a consumer company with great potential? After thorough analysis, Source Code Capital exclusively presents Source Code Research Report Issue No. 3.


  • Demand differentiation and understanding trade-offs form the predominant behavior patterns in the consumption upgrade theme.
  • There are opportunities for unicorns to emerge in both directions.

1. What is the driving force behind consumption upgrade?

In recent years, the consumption upgrade phenomenon has been fueled by growth in per capita disposable income. Different from the Industrial Revolution and Information Technology Revolution, it is rare to see cross-era products in this consumption upgrade trend. Instead, there is a tendency towards better matching of improved technologies and optimized products that meet consumer demand. Through our in-depth research, we discovered two intriguing findings:

(1) Demand differentiation 

Nowadays, many people proactively manage their health through exercise. Some people are keen on weight-lifting and jogging, while others prefer yoga. The prevailing trend in consumption demand is a gravitation towards upgrading to better products. Nonetheless, specific consumer demands are differentiated. When consumers select suitable products for themselves, it is hard to determine whether or not their judgment in selecting such “suitable” products is entirely rational.  

With typical demand segmentation, most often a specific consumer group will be categorized under a certain label. There are the content-driven and barrage-videos consumption of China’s Generation Y; the “blue collar” content consumption and short video demand of Blue Collars; the food and take-out consumption demand from White Collars; and then there is the female fashion and cross-border e-commerce demand among Females, just to name a few. The demand segmentation of these specific consumer groups possess a user base with numbers reaching into the billions, large enough to support multiple “billion-dollar type” investment ideas.

The top-notch businesses within this circuit have both a deep understanding of, and a firm grasp on, these specific consumer groups. It is amongst these types of companies that the margins between place and product begin to become skewed. An example of this is the self-owned brand and fresh foods convenience store chain 7-Eleven. The margins amongst categories are also becoming blurred, say for the Japanese retail company Muji, which represents the lifestyle of a specific consumer group. Precisely because the positioning and category boundaries are becoming distorted, the boundaries between different corporations and their values are also becoming distorted.  

(2) Trade-Offs in Consumption

I recall that when I was small, I had to save up my pocket money for quite a long time in order to purchase an encyclopedia set. Now, our incomes have increased exponentially, and we spend even more money. We save for a mortgage, buy a car, buy luxury products, or pay for an overseas vacation. Whether we do so intentionally or unintentionally, we tend to spend less money on things which we do not value, even if we can afford them.

This type of “trade-off” consumption behavior is reflected to an even greater extent in terms of the proportion of consumption expenditures on the various categories. However, it is not yet reflected in the absolute amount of the consumption expenditure itself. Ten years ago, the Boston Consulting Group conducted a global study investigating the consumer habits of seven nations. The study revealed that this type of trade-off consumption behaviour was, in fact, pervasive on a global level. In countries which were experiencing an economic downturn, the majority of the consumers would spend slightly less money and save slightly more (hereinafter referred to as “trading down”). However, there are consumers who would spend more money on certain categories in order to acquire better products (hereinafter referred to as “trading up”).

Through the study, the Boston Consulting Group revealed that when consumers trade down, they feel that they are more pragmatic, shrewd, and informed, as opposed to when they trade up, which gives them the feeling that the product they purchased “worked more effectively,” and “possessed obvious technical content.”

Generally speaking, when discussing cosmetics, men tend to think that the active ingredients in various cosmetic brands are similar to each other. They tend to also think that the exact cosmetic functions lacked differentiation from a strict scientific basis, and the cost of raw materials is fairly low. Females, on the other hand, tend to compare the effectiveness of each particular cosmetic brand and their own personal user experience.

Our demand for better and more suitable products or services is endless. The cash registers at Galeries Lafayette in Paris are jam-packed with Chinese tourists, while the Ginza district of Tokyo is filled with consumers coming from all corners of the world. When it comes to trading up products, we will venture out beyond national borders in order to find better and more suitable ones, and so, the competition in the trend of trading up is prevalent on a global basis. Many times, an imported brand from an exporting country comes with an upgraded aura both product-wise and culture-wise, and becomes both the object of academic study and the object of competition.

When speaking about the trading down categories, the price-performance ratio still comes into play, but it needs to be interpreted from a different angle. Consumers will not look for products with the best possible effects and functions at the same price. Rather, they will look for products with the same or similar effects and functions with the best possible price. With regard to the categories which consumers are certain that they will trade down, this type of high price-performance ratio brand will become their preferred choice. Examples include the hardware products of MINISO, Netease Yanxuan, and Xiaomi ecological hardware products.

When the enhancement of a product’s effectiveness and the idea of spending less arrives at a relatively stable equilibrium, consumer demand will quickly converge to a new product brand or distribution channel.

2. A unicorn emerges from three quadrants

If demand segmentation can be categorized as mass demand and niche demand, and consumption trade-offs can be classified as trading up and trading down, then we end up with four quadrants. There is a high probability that a unicorn will emerge from the following three quadrants.

(1) Mass trade-up demand

Going back to the discussion regarding the labelling of specific consumer groups: On a personal level, the “young parents” consumer group is probably the one which I would most closely identify myself with at this moment. The young parents’ population base is quite large, and parents are willing to forego personal comfort in order to spend a little more money on their children. This is why young parents purchase diapers from Japan, milk powder from Germany, and send their children to childhood programs. As long as they can afford it, parents will do their most to provide their children with the best. This is a typical example of mass trade-up demand.

(2) Mass trade-down demand

We find more examples of mass trade-down demand in Japan. As an example, the economy car, K-Car, is a cost-effective solution that satisfies the Japanese family’s demand for automobiles, while achieving the highest price-performance ratio. Sometimes mass trade-up demand can morph into mass trade-down demand. Both UNIQLO and MUJI swiftly rose to prominence after undergoing such transition. For the aforementioned young parents consumer group, suppose the food safety and product quality standards of domestic brands were at par with imported brands. Then many “pragmatic, shrewd, and informed” parents would most likely spend more money on their children’s education (as opposed to products).

(3) Niche upgrade demand

If a consumer group only has a population base of 100,000 people or even less, the upgrading trend will be even more accentuated. Under such circumstances, a corporate brand can easily become synonymous with niche consumer demand, and the niche market might end up being the “ceiling” or barrier to corporate development. Niche consumer groups are often the opinion leaders within their field, and their choices can often have an impact on the mass consumer community. If an enterprise exerts its efforts in this direction by expanding categories, and increasing product lines and so forth, enterprises can break through the impeding ceiling, and rise to a new level, as in the case of Canada Goose and Under Armour. There is no sharp distinction between niche demand and mass demand. As a result, in the future, it is highly likely that a large company belonging to the mass trade-up demand category could be concealed within the niche trade-up demand market.