Asia is leading a new phase of consumption.

investment viewpoints

Asia is leading a new phase of consumption.

A number of long-term trends are reshaping the global landscape, potentially awakening new high profile brands. Asia’s expanding middle class is one example of a trend which is driving new phases of consumption.

Prestigious brands will continue to offer opportunities for investors in the current environment, in our view, but there are also demographic and technological developments which are fuelling the rise of newer high-profile brands. Brands which are less exposed to these trends may fall behind those who are better positioned to benefit.

The rapid growth of China’s middle class is one example of a trend which is having a profound effect on demand. China’s upper middle class – defined as those earning between $21,501 and $53,900 – was around 53 million in 2005 and is expected to reach 525 million by 2025. This rapidly expanding class of consumers with greater disposable income has had a positive impact on brand names such as Shiseido – a Japanese company dealing in premium cosmetics1.

There is also a generational shift underway which will have a profound impact. China’s millennials are on track to become bigger spenders than their parents’ generation within the next few years2. Considering there are currently more millennials in China than there are people in the US, this is a noteworthy development3. A survey conducted by KPMG found that “31% of Millennials expect a significant increase in their income over the next five years”.

The survey also revealed that this shift is having a positive impact on the luxury sector in particular, as approximately 70% of millennials who responded indicated their consumption of luxury goods and services was set to increase over the next 12 months.

Luxury companies in particular are already refining their marketing strategies in order to appeal to a younger, more technologically-savvy demographic. Christian Dior recently became the first luxury brand to create an official account on Chinese social network Douyin, for example.

Investors will inevitably gravitate towards the ‘best in class’ brands, those with global authority and the ability to create premium products. However, the basis of an effective investment strategy with this focus also requires the inclusion of more fledgling companies, in our view, as well as an understanding of the forces which shape them.

Consumer trends are creating new prestigious brands that will either join or replace those at the top of the ladder. The demographic trends evident in China will deliver a huge boost to companies which are in a position to access the mainland market.
 
Q&A – Juan Mendoza
 
Why is China so important to brand prestige?

China is going to be a huge influencing factor because of the demographic changes which are unfolding. The middle class is expanding and this is going to continue to have an impact on demand. At the same time, China’s millennial population is growing and they are expected to be bigger spenders than their parents’ generation within a few short years. When you consider there is a greater number of millennials in China than there are people in the US, this is a significant market.

Companies which are best positioned to meet the demands of this consumer class will be at an advantage. There will be a very noticeable impact on brands which effectively align themselves with this development.
 
What makes a brand sustainable?

Companies with a prestigious brand can enjoy significant and enduring competitive advantages. They have a proven ability to create premium products and are skilled at introducing them to new markets by means of strong distribution networks.

There are also a number of long-term trends are reshaping the global landscape, fueling the rise of new high-profile brands. Prestigious brands also stand to benefit from these trends but they wont be alone.  

We aim to identify companies with sustainable financials, sustainable business practices, and sustainable business models which can benefit from these long-term trends. We believe these attributes equate to a sustainable investment opportunity.
 
Distribution channels are evolving. How is this taking shape?

Distribution channels are evolving and strategic alliances such as ‘e-concessions’ are becoming more commonplace. ‘E-concessions’ are structured agreements between retailers and third party online marketplaces and this market is expected to hit EUR 6 billion by 2025.

This type of arrangement is effective in bringing local brands to a wider base, as demonstrated by the growth of online fashion retail platform Farfetch. Small, independent boutiques are given the chance to compete in the global marketplace while still retaining their physical presence.
 
What other global megatrends are shaping brand prestige?

In our view, there are five global megatrends which stand to have a material impact on the prestige brands of tomorrow. These are centered around healthy living, leisure, demographic changes in Asia, aspirational consumption, and disruptive technology.

We can already see evidence of how brands which react to these trends can place themselves at an advantage. A significant global market for wellness has emerged in recent years, for example, ranging from fitness to organic foods. This healthy living trend has boosted a number of leisure firms, including athletic apparel retailers.

Disruptive technologies represent a fascinating area of growth. Digitally-driven services, from streaming media to online marketplaces, are replacing traditional channels at an incredible rate. From ground coffee to luxury fashion, few brands can ignore the digital race, paving the way for e-commerce solutions.

We are facing significant long-term structural trends that we believe will have far-reaching implications for our sector. In addition to strengthening existing brands, they stand to fuel the creation of new prestigious brands.

 

Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this piece.

2 https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2017/12/chinas-connected-consumers-the-rise-of-the-millennials.pdf

3 https://www.fbicgroup.com/sites/default/files/CCS_series01.pdf

 

 

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