Involution In China Consumer Market Sparks New 'Races To The Bottom'

Key Takeaways: A Chinese toymaker is finding big profits by ditching premium pricing and selling licensed blind box toys for just $1.50 KFC is introducing pizzas costing as little as $3.30, straying from its core chicken menu and highlighting a fierce price war to capture cautious consumers image credit: Bamboo Works We're witnessing a couple of new so-called "races to the bottom" on China's retail scene, driven by irrational competition, also known as "involution," that's quite common in the country. Whether it's the trendy toy sector or the fast-food industry, companies are finding extreme ways to entice thrifty consumers. On one end, a toymaker called Bloks (0325.HK) has rolled out a new line of opaque blind boxes costing just 10 yuan, or about $1.50. On the other end, a much higher-profile name, Yum China (NYSE:YUMC) (9987.HK), has seen its flagship KFC chain roll out a new line of cheap pizzas for as little as 23 yuan. Both moves highlight how brands are frantically cutting prices to survive in a tough consumer market. We'll start with Bloks, which is one of a new generation of Chinese toymakers finding big business in their home market. Unlike the higher-profile Pop Mart (9992.HK), creator of the Labubu sensation, Bloks is decidedly focused on the lower end of the market. Pop Mart owns Labubu and most of its other characters, which it sells at premium prices. In contrast, Bloks licenses characters from other creators — including Transformers, Ultraman, and Disney (NYSE:DIS) properties like Toy Story and Zootopia — and sells them at rock-bottom prices. We wrote about this company not so long ago, and one of the things that struck us was its dramatic financial turnaround. The company lost money for years while selling higher-priced items. But after changing its strategy to target smaller-tier cities with cheaper toys, it experienced a massive profit swing of about 1 billion yuan. We think they've successfully found a niche where it's a lot easier for parents to afford toys than in major hubs like Shanghai or Beijing. There are questions about whether this will pressure peers like Pop Mart, Miniso (NYSE:MNSO) (9896.HK) with its Top Toy brand, or another competitor called 52Toys, to follow suit. Pop Mart has established a premium brand and likely wouldn't gain much by going down market. Miniso, however, is already in the business of selling cheap goods, making it a potential follower. We're also watching how this plays out overseas. Bloks is expanding into non-China markets in Asia, particularly Indonesia, where its revenues more than tripled within a year. While markets like Vietnam might be difficult to compete in due to cheaper local production, these affordable toys are gaining traction in countries with lower living standards, such as Malaysia and Thailand. KFC's surprising pivot to pizza highlights fast food involution Next, we look at fast-food. KFC is rolling out a new line of pizzas priced as low as around $3.30 to keep attracting Chinese customers. The move might leave some scratching their heads, as it's quite a distance from the Southern U.S. fried chicken products that Colonel Sanders pioneered. More surprisingly, these pizzas look almost certain to compete directly with Pizza Hut, the company's other main brand. It feels like involution taken to a new level. However, we believe Yum China's management is highly savvy and has a great track record. They've surely conducted market studies and wouldn't build a business that completely cannibalizes an existing one. It's possible that KFC has a stronger physical presence in certain cities compared to Pizza Hut. Pushing a brand in a new geography requires expensive investments in facilities and advertising — a tough sell when the Chinese consumer has become very financially cautious. Leveraging KFC's existing footprint and cooking technology to offer pizza might simply be the most efficient solution. We don't view this as a traditional localization story — where foreign chains adapt menus to local tastes, like KFC's popular rice dishes — because pizza isn't a Chinese staple. Instead, this is the result of a strong focus on exactly what the consumer base currently wants. Looking at broader trends, big chains in China collectively grew just 2% in revenue terms last year, underperforming a 3.2% increase for the whole restaurant sector. This counterintuitive data suggests that fast food is adjusting to a new Chinese consumer frugality. When things start going bad globally — as we're seeing in Europe and the U.S. — consumers default to cheaper options. This triggers a price war to attract and retain them. McDonald's (NYSE:MCD) recently rolled out a much cheaper meal option in the U.S. after years of not offering it for exactly the same reason. Ultimately, even the biggest chains have to adapt and come up with better-priced options to survive. Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.