The Trading-Up Era: Every Time You Pay, You Vote for the Life You Choose

This series looks at how brands and consumers have changed in a China that is "trading up," and what each side has tried. This is the opening piece.

Two months ago, it happened again: customers queued in a long line outside a store.

On December 12 last year, MUJI opened its largest flagship store in China on Huaihai Road, in Shanghai's busiest shopping district. By nine that morning, people were already lining up at the door. The crowds were so large that MUJI limited entry. Around 10:30 the line stretched nearly 100 meters; by 2 p.m. it had doubled. At 4 p.m. it was still growing, and almost every customer waited about an hour to get in.

On its first day the store rang up about 7,000 card transactions and more than 2.15 million yuan in sales — more than double what MUJI's China unit had forecast.

Su Jing, founder of the Japanese culture magazine Zhi Ri, heard the news in Beijing and was surprised. He knew that in Japan, "because the market has so much supply," MUJI has nowhere near this kind of pull. In China, though, consumer demand is growing faster than suppliers imagined. MUJI has 134 stores in 39 cities in mainland China and is still opening 30 to 35 new ones a year; by 2017 it plans to open 50 a year. The stores keep getting bigger, and the average one earns back its costs in 15.9 months.

The credit goes to the rise of the urban consumer.

The Atlantic and Goldman Sachs Global Investment Research published a 2015 report, "The Rise of China's New Consumer Class", and its findings also beat expectations: China's urban middle-class consumers now number more than 100 million — about 146 million — with an average annual income of US$11,733 each. Together with another 236 million urban mass-market consumers, they are "no longer spending only on the basics."

Consulting firms noticed this new attitude to spending early and named it "trading up." "Consumers are putting more weight on their own needs and on expressing personal style," a 2006 Boston Consulting Group report explained. The same report noted regional differences: "A brand may be commonplace, yet in Russia or China it can stand out more than in mature markets and become an expression of trading up." In China, MUJI is one such expression.

Consumers may not use the phrase "trading up," and they may struggle to say how their lives have moved up a notch. But entrepreneurs and industry watchers across China have all noticed it.

"Everyone is talking about 'trading up,' whether in Beijing or Shanghai. What does it really mean?" said Wang Zhiwei. "I think it just means being able to spend a bit of money to live better." Wang is the founder of the review outlet "Penguin Eats & Drinks Guide," whose review of 300 bags of potato chips drew more than a million reads on WeChat last December.

These reviews are thorough, fussy and expensive. Follow their advice and you may well spend 100 yuan on a bag of chips, drive a dozen kilometers or more to a ramen shop for a bowl that costs over 100 yuan, and fall into the habit of drinking craft beer, wine shipped direct from the vineyard, and coffee better than Starbucks.

In "Luxury for the Masses," an article for Harvard Business Review, the consultants Michael Silverstein and Neil Fiske argued that once a new "luxury brand" takes root, it can quickly rewrite the rules of its category and take the lead, as Starbucks did with coffee. Over the past 16 years Starbucks has opened more than 1,900 stores in China, more than 400 of them in 2015 alone. It recently said it plans to raise its China store count to 4,400 within five years.

That may be a dangerous move. "A new competitor always makes the previous new-luxury winner look dated," Silverstein and Fiske added. A rival can show up at any time — and once better coffee arrives, Starbucks will soon become the basic option.

Xu Ke, a co-founder of the shopping-advice outlet "Qingdan," realized during this year's Spring Festival that even a humble packet of instant noodles shows trading up at work. In a small shop in rural Hebei, most of what he saw on sale was Baixiang instant noodles at 3.5 yuan a packet. A few days later, in a Lawson in Osaka, he bought instant noodles at 105 yen a packet — about 6 yuan.

"Those two little shops mark an upper line and a lower line. The lives and spending of most urban Chinese around us fall between the two," Xu said. "What people call 'trading up' is starting near one line and gradually moving toward the other."

Urban consumers may need time to reach "the other line," but they now have far more ways to learn what it looks like, without even traveling abroad. 100 Good Things, a book on the art of everyday living by the Japanese bestselling author Yataro Matsuura and the stylist Masako Ito, came out in China last May to wide acclaim. Its publisher, Chen Ken, says Matsuura writes about "typically middle-class things," and that these ideas have reached China at just the right time, because "it's all about imagination and taste... and taste really does cost money."

Fortunately, "the middle class has now formed." Its members are learning, as Matsuura does, to tie spending (money) to an outlook on life (imagination and taste), which sets them apart from the old rich who "worshipped big brands." Purui Culture, the publisher Chen founded in 2011, brought out another of Matsuura's lifestyle books, 100 Basics, four years ago. The book, which lays out personal rules such as "don't accept anything for free," has been reprinted every year and sold nearly 100,000 copies. It sells especially well in airport bookshops, where business travelers often pick up new ideas.

Linghu Lei, creative director of the monthly magazine Life, likes to recommend Matsuura to people. Matsuura appeals, he said, because he acts as a mentor on how to live and how to spend. He takes young people to better restaurants and tells them sincerely that he uses these things himself (however long he has actually used them). He has "stepped out of brand preaching."

People resist that preaching mainly because, as their wants rise, they lack confidence in choosing the right products. "All the fresh produce is shipped straight from the farm, everyone is pooling orders to import wine, every restaurant boasts of craftsmanship" — yet very likely "they don't know what their money can buy," Wang Zhiwei said. Outside a small circle of enthusiasts, he said, the urban mass market needs friendlier ways to learn all this.

In content, Monocle is the model. Its guide to the world of shopping is friendly and lively, warmer than Wallpaper, the showcase of fine things Tyler Brûlé founded earlier. "Yes, I think it goes beyond the elite, because what he picks isn't necessarily expensive, but it's always right. He believes the design is right for society, for the planet, for city people as a whole," Linghu Lei said. "And it's as if he built a party, a religion. You believe in these things, and they can change how you see the world. There's a whole system behind it — a visual identity system and a creative system."

Few would dispute that changes in consumers are always systemic. Anna Lappé campaigns for organic food. She may not count as a success in that cause, but you may have heard her line: "Every time you spend money, you're casting a vote for the kind of world you want." Most entrepreneurs accept this logic and believe a change in lifestyle shows up first, and fastest, in spending. "If I want to tell you about a way of life you could adopt, the best way to spread it is through goods — things that can be copied and standardized." On that basis, Gong Yingqi and Xu Ke co-founded Qingdan, which offers consumers guides to everyday goods.

Of Qingdan's 600,000 users, 78% are urban women aged 25 to 35 — evidence of another trend within trading up. Gong believes urban women want to shop efficiently, do less research and comparison of their own, and rely more on expert advice. Su Jing and Chen Ken back this up: women make up most of the readers of Zhi Ri and of Matsuura's books, and they are keener to learn about another way of living.

Urban women are almost certain to be the customers brands fight hardest for in this wave of trading up — just as, in postwar America, they powered the rise of upscale department stores with remarkable force.

In China, Su Jing believes, strong demand will drive new brands to grow quickly "within the next three to five years." Feng Su, founder of the home-sharing community Haohaozhu, is equally convinced. When an investor introduced the two this January, they talked about where the market was heading and excitedly agreed that new things "will come faster than people think." They also agreed on another point: consumers will have more and more choices, and even a single market segment will have room for a dozen or even dozens of options.

"Users do aspire to brands, but because brands are so fragmented, we don't see most users chasing one brand. It's more that each brand has its own group of fans behind it," Feng said in an interview last November. These users, he said, have moved past the stage of learning the basics of buying and arranging furniture from IKEA.

Economic growth is slowing, but brands would rather believe China's urban consumers are maturing. Naoyuki Yamamoto, MUJI's general manager for China, said in an interview in January that MUJI has seen Chinese consumers change: "Overall, more and more customers want to 'treasure every item they buy,' and the new generation of customers is more careful and weighs more factors."

That matches what the Boston Consulting Group observed: trading up always comes with "trading down." Consumers rethink how they spend their income, putting more into the categories they care about and cutting back on others. "Consumers in emerging markets are starting to use their growing discretionary income to choose better goods or services, while in some categories paying more attention to getting better things for less."

Yet these careful consumers looked far less rational whenever a new MUJI opened. The year before the Huaihai Road flagship, MUJI opened what was then its largest flagship in the world, at Taikoo Li in Chengdu. Its MUJI Cafe & Meal restaurant was the first in China, and the queue of customers wanting a taste filled the stairs of an entire floor.

Demand keeps outrunning supply, which means more upgraded products need to appear. Su Jing thinks "another 20 to 30 brands like MUJI will grow big in China," and that may solve the problem. Meanwhile, more people like Su Jing, Feng Su, Gong Yingqi, Xu Ke, Linghu Lei, Wang Zhiwei and Chen Ken have emerged. They are doing what Tyler Brûlé and Yataro Matsuura do: acting as mentors to a China that is trading up.

The consultants' business advice is just as blunt: "Why would (consumers) bother with something that offers neither a price advantage nor a functional or emotional benefit? Companies that make such products are on the brink of death."

Images in this article are from 100 Good Things, 100 Basics, Zhi Ri: Zakka, Starbucks, The Paper, Archdaily

Cover image sources: amara, politiken