Consumption logic

Consumption is weakening overall, but there are structural opportunities

In the 90s, Japan's consumption weakened in terms of total volume, and the average consumption tendency continued to decline. At the end of the 80s, with the bursting of Japan's asset bubble, residents' income and wealth both declined, causing household consumption to shrink significantly. The growth center of private consumption in GDP has shifted down by nearly 5 percentage points. Pessimistic expectations for future incomes and concerns about the future social security system due to the aging population have led to a significant decline in Japan's willingness to spend.

Against the backdrop of declining aggregates, there is no trend growth opportunity for consumer stocks, which means that the winning consumer stocks have seized structural opportunities.

The winning logic of consumer stocks - the export of medium and high-end products to avoid consumption downgrade

Compared with technology stocks, most high-quality consumer stocks do not account for a high proportion of overseas revenue, among which exports such as automobiles, consumer electronics, and home appliances account for a relatively high proportion, but non-durable goods such as cosmetics, food and beverages, and retail companies account for a relatively low proportion of overseas revenue.

Among them, cosmetics companies are relatively high in overseas revenue and have a certain contribution to the performance of exports. In the 90s, especially after 95 years, the export volume of cosmetics showed a significant increase, which contributed to the growth of the performance of related enterprises. Taking Kao, a typical cosmetics company, as an example, the proportion of its overseas revenue has been rising, from 15.9% in 1990 to 29.7% in 1998, and the proportion of overseas revenue has remained at about 25% in the following years, which reflects its business expansion and revenue growth in overseas markets, and is also one of the main reasons for its outstanding market performance. Shiseido, another cosmetics company with a strong market performance, also increased its overseas revenue from less than 10% in the mid-90s to nearly 40% in 2010.

The winning logic of consumer stocks - the ultimate cost performance caters to the consumption downgrade

Seize the opportunity of consumption downgrading, and win the stock game with the ultimate cost performance. From the perspective of consumption style, after the bubble economy burst in the 90s, Japan entered a "low-desire society", no longer pursuing luxury and high-end enjoyment, but entered the consumption downgrade stage with a decline in customer unit price.

A typical manifestation is the decline in luxury consumption, the size of Japan's luxury market continued to shrink in the 90s, and the year-on-year negative growth lasted for more than a decade, until 2005 before returning to positive.

According to the data of the Japan Food Service Association (JFnet), in the mid-to-late 90s, Japan catering companies showed a trend of volume increase and price reduction, which also reflects that residents pay more attention to cost performance and pursue high-quality and low-cost brands and goods.

Typical high-quality stocks under the logic of cost performance, namely Fast Retailing (Uniqlo) and Shimamura (Simole) in the apparel industry. In the 90s, Japan residents' clothing spending decreased by an average of 3.8% per year, but the revenue growth rate of Fast Retailing and Shimamura is still growing against the trend, with Uniqlo's domestic sales growing at an average annual rate of 46.1% and store numbers growing at an average annual rate of 33.0%.

The secret to their success is the ultimate value for money, with listed apparel retail brands Shimamura and Uniqlo having the lowest expense ratios at 21.7% and 29.0% respectively. Among them, Uniqlo is reducing costs by narrowing the product range and mass production; Shimamura, on the other hand, diversifies risks and minimizes design costs by expanding the variety and reducing the number of products, and establishes its own logistics system to reduce transportation costs.

|Consumer stocks win the logic - tap new demand - young people

The first category of new demand comes from: The new generation of young people such as "Heisei abandoned house", "otaku", and "unmarried family" have a consumption style of "moving from reality to virtuality" and pursuing emotional value. Compared with the Showa generation, young people born in the 80s and grew up in the economic downturn have less confidence in the future, advocate illusory pleasures, and have less interest in real things.

In addition, with the change in the concept of marriage, more young people choose not to marry and remain single, and the proportion of single-person families has increased from 20.8% in 1985 to 28.5% in 2003. As a result, young people spend less on household purchases such as buying houses and durable goods, and pay more attention to personal consumption and activities. Under this logic, there are many high-quality individual stocks born in large numbers, such as game companies such as Konami and Nintendo, film and television companies such as Japan TV and Tokyo Relax, and pre-made vegetable companies such as Mitsubishi Foods and Nissin Foods, and Ten Allied as an example of an izakaya and other catering businesses.

The consumption of "otaku" in Japan is mainly concentrated in the fields of manga, entertainment, and games. In the 90s, relatively cheap and easily accessible forms of entertainment were able to satisfy young people with difficult employment and low incomes.

Among them, Konami also sells gambling pinball machines, slot machines, and computer game software, which grew rapidly in the early 90s, supporting the high growth of its performance. Nintendo, on the other hand, is mainly engaged in gaming hardware and software, and its innovative game design and high-quality entertainment products have also enabled its performance to maintain high growth.

From 1989 to 2003, the number of movie theater screens increased by 2.4% annually, and box office revenue increased by 1.4% annually, which allowed related stocks such as Tokyo Relax and Japan TV to maintain performance growth.

The increase in single-person families has led to a change in the food and beverage consumption style. Rather than tedious home cooking, single young people will choose to eat out more often, or choose pre-made dishes for cooking, so as to reduce housework and achieve a more convenient lifestyle.

According to the data in Japan's "Annual Report on Household Income and Expenditure Survey", from 1989 to 2003, although the annualized growth rate of overall food consumption was -0.5%, the annualized growth rate of cooked food consumption still maintained a positive growth rate of 2.3%, which made the performance of individual stocks such as Mitsubishi Foods and Nissin Foods, which mainly engaged in convenient prepared food, increase.

Although the annualized growth rate of eating out is -0.1%, if you look at the category, according to the Food Service Association (JFnet), from 1994 to 2003, the growth rate of small, "entertainment" type restaurants such as cafes, izaya and family restaurants remained at a high level, and among them, ten allied was also born as a high-quality stock with izakaya as the main business.

|Consumer stocks win logic - tap new demand - elderly groups

The second category of new demand comes from the older population. With the intensification of social aging and the change of consumption habits of the elderly population, the silver economy has also become a new boom. Moreover, compared with other groups of people, the elderly population in the 90s accumulated more wealth during the Showa period, and the consumption propensity was relatively higher, making it the new main force of social consumption. According to the NLI Institute of Japan, from 1990 to 2005, the total consumption of the elderly in Japan increased from 33 trillion yen to 58 trillion yen, with an annualized growth rate of nearly 4.0%.

The consumption demand of the elderly is mainly divided into two aspects, on the one hand, it is related to medical and health, and on the other hand, it is the consumption "upgrade" of the elderly population, such as goods and services related to the elderly.

The winning logic of consumer stocks - mining new demand - policy support

The opening of government policies to restrict certain consumption categories is another logic of demand growth. The small retail industry benefited from the deregulation of the Big Store Act in the early 90s, and new retail formats such as convenience stores and 100-yen stores were able to develop rapidly.

Another industry that is supported by the policy is pharmacies. Since 1992, the separation of Japan medicine has been further promoted, and pharmacies have been gradually separated from hospitals to support and develop independently. In the same year, the Ministry of Health and Welfare reformed drug pricing to effectively control the differential benefits of drugs and reduce drug prices. At the same time, Japan is expanding the training of pharmacist professionals and promoting fixed pharmacies. After the successful separation of medicines, the structure of prescription drug sales terminals has undergone subversive changes. The number of prescriptions accepted by dispensing pharmacies and the amount of dispensing drugs have increased significantly. This has led to outperforming drugstore-related stocks in Japan, such as Sundoleke, which rose 15.6% annualized from its listing to Q1 2003.

Domestic investment opportunities

Referring to the domestic situation, while seeing the changes in the external environment and the arduous challenges faced by the total amount under the internal circulation, we should also see the structural investment opportunities nurtured in the process of reshaping the economic system by the "internal circulation".

From the perspective of the upstream supply side of the internal circulation, there is a large gap between China's key technologies and international competing products, and under the high-risk preference brought about by the capital market reform, it represents a huge space for technological progress and penetration improvement in the future. We can pay attention to the medium and long-term investment opportunities of domestic substitution in military industry, chips, domestic software, materials and other subdivisions. Equities in high-quality, scarce leading companies, including technology, will have the potential to continue to outperform other assets amid high volatility.

In this round of policy adjustments, more emphasis will be placed on security in the economic system, and the strategic inventory level of related resources is bound to be qualitatively improved, which means investment opportunities in agriculture and other related sectors; The further development of the central and western regions, which have strong complementarity between potential reserves and China's high dependence on foreign demand, will be an inevitable choice of the national strategy, and the related investment opportunities in the western infrastructure sector are also worthy of attention.

As far as the downstream demand side of the internal circulation is concerned, small household appliances, cosmetics, clothing, home decoration, pet food and other sub-industries have a deep OEM background, and at the same time, they are actively using new marketing channels to shape the relevant listed companies with popular brands, or accumulate under the "new domestic product tide" led by the new consumer forces after 95-00; In recent years, the "Belt and Road" markets such as Africa and Southeast Asia have entered high growth and their relative reliability in the new era.