This article is sponsored by L Catterton
How has covid-19 impacted consumer demand and behaviours in Asia?
Scott Chen: In Asia, we have for the most part seen a return to pre-pandemic levels of activity and behaviour. China saw nearly 5 percent GDP growth in the third quarter of 2020, which followed a strong Q2. Meanwhile, our exclusive partner, luxury goods retailer LVMH, achieved triple-digit growth in China in Q3 – its online China store has become the largest store for the company globally, which is significant given its large physical presence in Paris, New York, Hong Kong and elsewhere. We expect the rapid growth in consumption by the Asian consumer to continue to drive future growth in global GDP.
In terms of the pandemic’s impact on the Asian consumer, the key takeaway we are seeing is an acceleration of trends that were already underway. We have been tracking many of those trends through our primary and secondary research on consumer behaviour and categories that are best positioned to benefit from these trends.
But this is not to say that covid-19 hasn’t had an impact. We are focusing on three areas where covid-19 has caused shifts, with the first and largest being remote consumption. Whether that is remote learning, telehealth or entertainment and fitness at home, this is a big area of opportunity. Second is an amplified focus on health and wellness, which includes both physical and mental health. That covers nutrition and diet – we see big shifts in Asia towards replacing beef with more chicken and pork, for example. From a mental health perspective, there is a growing focus around companionship in the form of pet ownership, and this has been an area of strength for our firm – we now have 10 pet-related investments in our portfolio globally. All of these trends are areas where we have investment experience.
Third is the evolution of retail. Offline retail is clearly more challenged and how that develops going forward, once covid-19 is behind us, is a question that everyone is asking. But new, entirely online forms of retail, like China’s social commerce, are starting to take off and are now spreading globally. China is arguably more advanced than the West in direct-to-consumer and social consumer marketing, with the Chinese version of TikTok several years ahead of the international version, for example. In such channels, there are influencers who wear branded products that you can click on and buy immediately, closing the loop of that e-commerce experience on your phone.
Chinta Bhagat: To round off where we see opportunities, we have also been looking at what happens to traditional business models, as well as out of favour sectors, asking whether there are counter-cyclical opportunities. Earlier in the year, our firm made an investment in Norwegian Cruise Lines, for example, and our thesis has held up well. We regularly come across traditional consumer businesses under temporary pressures, or with challenged balance sheets and ask ourselves if any of these businesses are worth investing behind. Conversely, if some of the trends occurring now under covid-19 become more structural and permanent, then there may be entire categories that come into question. We are studying these closely to assess when and how we might step in with an investment.
What opportunities are emerging for investing in consumer brands in the region because of these shifts?
CB: Let me answer that by telling you about two of our recent investments, each at a different end of the spectrum, which play into these changing trends.
In June, we invested $250 million in Indian telecoms operator Reliance Jio Platforms. Reliance began its efforts to build a digital technology infrastructure platform in India over four years ago, and earlier this year it decided to sell around a third of the company in an effort to deleverage its balance sheet. Besides L Catterton, the business has sold stakes to Facebook, Google, Silver Lake, Vista Equity Partners, General Atlantic, KKR, Mubadala, Abu Dhabi Investment Authority, and TPG, among other similar notable investors.
We decided to get involved midway through this process, although Reliance decidedly did not need our capital. But after discussions with the company’s senior team, they invited us to participate given our experience in building digitally native consumer brands. Our experience with companies like connected fitness company Peloton and online used car retailer Vroom were important proof points, and the company wanted first-hand access to this expertise. Jio Platforms has made over a dozen acquisitions in different online consumer verticals and it now needs to scale each vertical and make them individually successful. Given our experience here, we believe we can be very helpful.
Jio is a great example of the evolution of retail where technology is impacting which brands will win. We’re very happy with our involvement there and consider it a great addition to our portfolio during covid-19.
Another relatively recent addition to our portfolio is Owndays, an innovative eyewear company that delivers affordable, high-quality prescription glasses in around 20 minutes. It is an essential service, with all the elements of a 21st century branded consumer product. Globally, our firm has similar investments in this category. Owndays is a Japanese brand that has now traversed most of Asia with today over 250 stores in 11 countries. L Catterton has a controlling stake in the business.
Which sectors and geographies are most interesting you in the region?
CB: We are a pan-Asia focused consumer fund that covers all the major economies in Asia. When we look at GDP globally, two of the top three economies are in Asia – China and Japan, as well as two of the fastest-growing economies – India and Indonesia. There is a lot of consumer activity in the region supported by very strong demand tailwinds. In India, for example, the middle class is forecast to grow by 500 million people in the next 10 years. So we’re spoilt for choice when it comes to opportunity, and what we do is prioritise the most attractive investments in consumer categories of interest across these countries, which offer the most compelling risk/return.
SC: Three countries make up about two-thirds of Asia’s consumer GDP – Japan, China and India – and, not surprisingly, they are our primary markets. We will, on the other hand, maintain our opportunistic posture in South-East Asia, Korea, Australia and New Zealand.
We see consumption growth in Asia divided into three stages of evolution. First, unit growth, where the massive growth in the middle class generates more spending by those who can afford it, as exemplified and led by India. The second is spending growth, where people are just spending more money per capita, as seen in China and Korea. The third is wealthy lifestyle growth, as we see in Japan, where there is the emergence of the lifestyle-orientated consumer and brands. That consumer is not necessarily only buying luxury products, but they are improving their lifestyle on a daily basis. While geographies are important, so too are the categories we are investing behind and the stage of consumer evolution.
How has investor appetite for consumer brands in Asia changed in 2020, and what is the fundraising outlook going forward?
SC: We are seeing the shoots of economic recovery across Asia, with Asia-Pacific deal numbers tracking consistently. There were more deals in Asia-Pacific since April than in either the US or EMEA; that is not surprising given where those economies are but it has never happened before in the history of doing deals. Since April, China deals have also grown to be about half the total for Asia-Pacific, illustrating the power of the Chinese economy, which accounted for around 40 percent of the total six months pre-covid.
Furthermore, since April, deals in the region are up in size by about 11 percent, suggesting that it is not just small companies looking to raise capital but larger businesses too. Almost a third of that deal volume is going into consumer tech. That is an interesting development, because in the last few years it was fintech and healthcare that were leading the way, and now it is all about consumer tech.
CB: To build on that, while we are well set up to cover the region across all of these categories, we are focused on delivering the best risk-adjusted returns on our capital. Our investors believe our team and the Asia funds are uniquely positioned to take advantage of consumer tailwinds in both current and emerging categories across the region. We have mentioned a number of them, including consumer healthcare and technology or, more specifically, Chinese social commerce, among others.
With strong teams across offices in Tokyo, Shanghai, Hong Kong, Beijing, Mumbai, Singapore and Sydney, we are very excited about the opportunities in the consumer sector across the region.
How has the pandemic impacted opportunities for brand globalisation out of Asia?
CB: When we think about global consumption trends, we see three major themes: regionalisation; globalisation involving Western brands coming to Asia; and globalisation involving Asian brands going out of Asia. The latter is indeed slower, but most of our focus remains on domestic brands targeting domestic consumption, so much of our portfolio is China for China, India for India, and so on. Where we have an opportunity to help create regional and then global leaders, we do take it, after carefully assessing what it will take to make this a reality.
SC: The globalisation trend for brands is indeed a little bit slower now in terms of Asian brands going outbound. However, we are seeing very strong regionalisation of brands, such as how portfolio company Owndays has expanded from Japan across Asia and then into China.
Given the relatively rapid recovery of the Chinese market, we are also currently helping four of our global portfolio companies enter China, ranging from apparel to cosmetics to restaurants. The opportunity in China is large and our team has built the capability to help these companies. Every category, every channel and every brand are different, but we are trying to set up a playbook to speed that process up from months to weeks. That means that despite all the challenges impacting their businesses at home, Western and Asian companies can grow in China.