Affordable brands turn around: raising prices to increase prices

In recent years, the consumer market has experienced wave after wave of price increases. From beverages to instant noodles to the affordable brands we are familiar with, price increases seem to have become a norm. However, behind this wave of price increases, affordable brands seem to have found new development opportunities. By raising prices, they not only eased cost pressure, but also achieved brand transformation and upgrading to a certain extent.

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From "drinks priced below 3 yuan disappearing" to "instant noodles heading towards the 5 yuan era", price increases have become the most common thing in the consumer market in recent years. However, what really concerns consumers is that even the low-priced brands in the past have also raised prices one after another, "backstabbing" the working people.

Public reports show that as of now, well-known brands such as Uniqlo, Decathlon, and Saizeriya have all implemented price adjustments for their related products.

For example, Uniqlo's basic clothing, which was priced at 49.9 yuan, has increased in price to 79.9 yuan and 99.9 yuan; Decathlon's white cotton short-sleeved shirt, which was priced at 19.9 yuan, has increased in price to 39.9 yuan; Saizeriya, known as the "Shaxian snacks in the Western food world", has also increased the price of chicken steak and grilled rice by 1 yuan and 2 yuan respectively.

On social media, the collective price increase of affordable brands has also triggered hot topics such as "XX brand is out of touch with the masses" and "XX brand abandons the poor". Some netizens also said "We must quickly find new affordable alternatives". However, in reality, the relationship between consumers and affordable brands may not be greatly affected by prices. Under the appearance of price increases, affordable brands have unexpectedly gained development opportunities after years of dormancy in the market.

1. Price increase: From "poor people's three-piece set" to affordable brands

Compared with the price hikes initiated by luxury brands in the context of the global economic downturn, ordinary consumers first became aware of the rising consumption costs starting with the "poor people's three-piece set".

Two months ago, many regional retailers across the country received a price adjustment notice from Swire Coca-Cola, which showed that the price of a 300ml bottle of Coke increased from 2 yuan to 2.5 yuan, and the price of a 500ml bottle of Coke increased from 3 yuan to 3.5 yuan. For a time, fans of "fat house happy water" exclaimed that "simple happiness is gone."

On the other hand, Master Kong also announced that the suggested retail price of bagged instant noodles would be raised to 3 yuan, and the price of barreled noodles would increase from 4.5 yuan to 5 yuan. Some consumers recalled that just two years ago, the price of Master Kong bagged noodles was still 2.5 yuan. At the same time, some consumers found that the price of pickled mustard tuber, as the "partner of instant noodles", had already been upgraded: a 70-gram pack of Wujiang pickled mustard tuber sold for 50 cents in 2008, and the price rose to 2 yuan in 2018. Now, a small pack of pickled mustard tuber on the supermarket shelf is priced at 3 yuan, just like instant noodles.

If we want to find an explanation for the "poor man's three-piece set" and the current price increases of affordable brands, rising costs may be the best reason.

As early as 2021, James Quincey, CEO of Coca-Cola, said that he would adopt price increases to cope with the rising cost of commodity sugar. In 2023, the price of domestic sugar once rose to the highest level in five years, reaching 7,094 yuan/ton, an increase of more than 20%.

The rising cost pressure for Master Kong comes from wheat flour and palm oil.

The "Master Kong 2023 Annual Performance Presentation Materials" mentioned that the price of palm oil raw materials has experienced a roller coaster-like trend of change in the past three years. Taking the price in the first half of 2021 as the standard, the price of palm oil increased by 50% year-on-year in the first half of 2022, and began to fall in the second half of the year. By the second half of 2023, the price of palm oil has fallen to 93% of the first half of 2021.

As for wheat flour, the lowest point in 2019 was only 2,200 yuan/ton, and it soared 54% to 3,400 yuan/ton in 2022. Although the price of wheat raw materials is still fluctuating, compared with three years ago, the current price level has reached a new high.

The pressure of rising costs comes not only from changes in the prices of direct raw materials for products, but also from increases in upstream raw materials, freight costs, and inflation.

Ken Okazaki, chief financial officer of Fast Retailing, the parent company of Uniqlo, revealed in 2022 that "the current prices of major raw materials such as cotton and chemical fibers are about 1.5 to 2 times higher than before, while the cost of shipping is 2.5 to 5 times higher than before. Moreover, the cost increase trend that has emerged since 2021 shows no signs of easing. In particular, the rise in crude oil and raw material prices has shaken the cost structure."

In addition, public data also shows that in December 2021, the price of polyester long fiber used in clothing manufacturing in the Asian market reached about US$1.45/kg, up 32% year-on-year. The increase in raw material prices and freight costs has caused Uniqlo to increase the prices of some products in Japan since the fall of 2022.

Saizeriya, an Italian restaurant brand also from Japan, directly pointed out in its financial report that the company is facing operating pressure due to labor shortages, soaring wages and resource prices, and rising food and energy prices due to the weak yen.

Although affordable brands have announced price increases one after another, in a market environment of rational consumption, the revenue of affordable brands has not been particularly affected by the price increases.

Uniqlo's financial report shows that its revenue in the Chinese market increased by 15% to 620.2 billion yen (about 30.3 billion yuan) in fiscal 2023, an increase of 15.2% year-on-year, setting a historical high; operating profit reached 104.3 billion yen (about 5.1 billion yuan), an increase of 25.0% year-on-year.

The price has become higher, but the profit has increased. Behind the seemingly unreasonable market phenomenon, it reflects the consumption decisions made by consumers based on their actual needs.

2. Affordable brands: quietly raising prices and upgrading

A fact that cannot be ignored is that even if affordable brands increase their prices, they are still popular alternatives.

Take Saizeriya as an example. The recent price adjustment of dishes is basically 1 to 2 yuan. After the price increase, the menu still has 12 yuan tuna salad, 16 yuan sausage and meat sauce rice and 25 yuan durian pizza. Maybe people's evaluation of Saizeriya's "30 yuan per person all you can eat" should be changed to "35 yuan per person all you can eat", but the saying "35 yuan for Western food, what else do you want a bicycle" is still very convincing.

In the past few years when outdoor sports have become popular, compared with Lululemon, which is priced at hundreds of yuan, Salomon, which starts at thousands of yuan, and Arc'teryx, whose jackets can easily cost thousands of yuan, even if Decathlon has increased its prices, it is far from reaching the "starting price" of other popular online brands. In other words, although the price increase of affordable brands makes workers feel "betrayed", facing the price increase within a reasonable range, workers ultimately choose to "criticize while buying".

In fact, in recent years, almost all brands in the consumer market have encountered the problem of rising operating costs. Some brands have chosen to directly increase prices, while others have not increased prices on the surface, but have actually reduced costs by reducing the quantity.

In 2019, McDonald's and KFC were on the hot search because of consumers' doubts about "burgers getting smaller and smaller". The "evidence (complaints)" provided by netizens included: "Nowadays, burgers are not as big as my palm. Could it be that my hands have grown as big as the third prince?" "I used to be full after eating one burger, but now I have to eat two."

However, in response to consumers' questions, McDonald's and KFC explained that "the wrapping paper has become smaller and the burger is tied tighter, making it look smaller."

At the end of last year, the hot pot brand Xiabu Xiabu announced a menu renewal, saying that it would stick to the high cost-effective route in the new year, "increasing quantity without increasing price". While the previous set meal price remained unchanged, the weight of beef and mutton plates was increased from 150 grams to 200 grams, and the price of large assorted fresh vegetable platters was lowered to streamline the product categories.

But then some consumers said that although there was 50 grams more meat, the eggs, cuttlefish balls, egg dumplings, and bean curd skin in the set meal had been "streamlined", and the amounts of carrots, white radishes, and frozen tofu were also reduced by half, so they questioned whether the brand was actually "raising prices in disguise."

In the field of economics, situations like "unchanged prices and reduced quantities" are usually called "shrinkage inflation". It is a business strategy introduced by companies to cope with operating cost pressures. Its theoretical basis is that consumers have different sensitivities to commodity prices and product sizes.

In 2014, applied economists Chakel and Balagtas showed that consumers are about four times more sensitive to product prices than to product size. This means that, compared with a direct price increase, it is less likely for consumers to notice a reduction in product size. Other examples of "disguised price increases" based on this theory include the increasing distance between adjacent "peaks" of the famous Swiss Toblerone chocolate and the reduction in the volume of a can of Coca-Cola from 355 ml to 330 ml.

However, "shrinkage inflation" only applies to fast-moving consumer goods, catering and other fields. For affordable brands in the clothing field, if they want to reduce the operating pressure brought by rising costs, price increases are still the most direct solution. But there may be more than one motivation behind the price increase.

3. Turnaround: Affordable brands’ ambition to move upmarket

In the eyes of consumers, the worse the economy is, the more they should reduce prices in exchange for sales. However, the primary factor affecting brand pricing is upstream costs, followed by supply and demand. Therefore, from the perspective of brands, it is more reasonable to increase prices due to increased costs. Secondly, price increases do not necessarily reduce sales, but may also lead to increased sales.

During the Great Famine in Ireland in 1845, potato prices kept rising but sales increased instead of decreasing. British economist Robert Giffen found that potatoes were the main food of the Irish at that time. In order to avoid starvation, many families would reduce their consumption of other foods and use the money saved to buy more potatoes. This abnormal phenomenon in the market economy was later called the "Giffen effect."

Although Chinese consumers don’t have to rush to buy potatoes 180 years later, the demand for affordable goods has shown a strong growth trend, which has undoubtedly brought new opportunities to many consumer brands. A similar situation also occurred in Japan in the early 1990s.

At that time, Japan entered the "Heisei Great Depression" period, and consumer groups began to show obvious consumption stratification: "rich and well-off" consumers still had the demand and ability to consume luxury goods and other high-end products, while "rich but not well-off" consumers began to consciously control their spending and tended to choose low-priced products that could provide additional value.

Especially during the bubble economy, Japanese consumers who pursued brand names and personalization began to favor affordable and simple products. MUJI, which was founded in 1980 with the slogan "Because it is reasonable, it is cheap", just ushered in its own era.

Based on the product development concept of selecting high-quality raw materials, improving production processes, and simplifying product packaging, MUJI is able to provide consumers with high-quality products at a price 30% lower than similar brands. At the same time, MUJI's brand concept of advocating nature, simplicity and simplicity also coincides with the return to rational consumer psychology. Therefore, when the Japanese economy fell into a sluggish 1990s, MUJI achieved double-digit growth in profits and sales every year in the seven years from 1993 to 1999.

It is worth mentioning that Uniqlo, which was established a little later than MUJI, also featured mass production and relied on a low-price strategy to start from a warehouse-style store in the suburbs and gradually move into the center of Tokyo. However, in a similar market context, today's Uniqlo did not insist on low prices, but chose to raise prices. The reason behind this diametrically opposed market action is that Uniqlo's market positioning has changed.

Compared with the popular clothing brand that rose in the suburbs 30 years ago, today's Uniqlo is already a well-known global brand, with stores from Ginza in Tokyo to Sanlitun in Beijing. If a T-shirt that costs 79 yuan can be sold by the millions, if the price is raised to 149 yuan, wouldn't it generate tens of millions or even hundreds of millions of yuan in revenue? Sitting on the global market, Uniqlo is obviously not satisfied with just doing "basic style" business.

In fact, Uniqlo's successive price increases are an attempt to develop into a high-end brand, while leaving the affordable market to its sister brand GU (Excellent).

In early June this year, GU, which belongs to the Fast Retailing Group like Uniqlo, officially opened its first store in Shenzhen. This is also the first time GU has opened a store in mainland China in two and a half years. He Libin, COO of GU China, said in an interview with the media, "Customers are looking for more cost-effective fashion, more affordable products, and GU is quite in line with this trend. This is definitely a new entrepreneurial period for us."

Compared with Uniqlo, GU's average selling price is about 30% lower. To some extent, GU is more like a "substitute" for Uniqlo. Even GU's first store in Shenzhen was built by splitting nearly half of the original 1,400 square meters of Uniqlo store. This approach of Uniqlo makes people feel that "although I have raised the price, I have already found a substitute for everyone."

Decathlon, known as the "Paradise for the Poor", actually tried to go high-end very early. The difference is that Decathlon introduced many well-known brands as a distributor. For example, Decathlon's running sub-brand KIPRUN introduced professional running shoes from brands such as Asics, Nike, and Adidas; its badminton sub-brand PERFLY introduced Yonex products; and its basketball sub-brand TARMAK reached a strategic cooperation with the NBA.

However, due to long-term price positioning and consumers' perception of Decathlon as an affordable brand, these high-end products have always lacked a sense of presence on Decathlon's shelves. In this context, Decathlon chose to raise prices within a reasonable range, which can generate more revenue on the one hand and try to break into the upper-end market on the other hand, which is also a strategy of killing two birds with one stone.

Returning to the essence of the market, although consumers are becoming more rational, consumer demand has never decreased, so the strategy of low-price brands to exchange price for sales has become a competitive advantage. Therefore, even if all brands are raising prices, the price increase of low-price brands is still more likely to attract attention, which is a greater test for brands in the era of "low-price consumption" to defend their own battlefield.

As a negative example, the public incident caused by the "79 yuan eyebrow pencil" is due to the fact that many domestic beauty brands have quietly increased their prices in recent years. The reason for the collective price increase of domestic beauty brands, in addition to the brand purpose of high-end transformation, is that the deeper motivation is that the brands used the price of "big brand substitutes" to exchange sales and seize the market in the early days. Once the brand has a firm foothold in the market, the "big brand substitute" will immediately turn into "big brand expensive substitute" to further harvest the market.

Price is an important factor in market competition and an important factor influencing consumer decision-making and brand recognition. The price increase behavior of affordable brands may have different purposes, but consumers always expect to gain actual value beyond price.