The Business Times' Column | South-east Asia’s evolving retail trends: upgrading, downgrading, or filling unmet needs?

This column was first published on The Business Times.

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In South-east Asia’s retail scene, the past decade has been dominated by e-commerce, with major players such as Shopee, Lazada, and, more recently, TikTok joining the race. Now, giants such as Shein and Temu are also eyeing the region for a slice of the pie.

However, with the marketplace wars largely settled, venture capitalists are shifting their attention to other themes, such as direct-to-consumer (D2C) brands, innovative food and beverage (F&B) concepts, and new retail formats that go beyond traditional models.

On paper, a region of 600 million consumers with growing gross domestic product (GDP) figures sounds like the perfect playground for new brands, but the reality is more complex.

Some questions that always bother me are: is it the region’s rising middle class with growing disposable income that’s fuelling the growth of brands that sell directly to their customers? Or are consumers downgrading from premium brands due to inflation pressures? Or maybe, just maybe, it’s all about filling unmet needs by introducing fresh choices to a market hungry for novelty.

Consumption upgrading: Going glam with brand aspiration

Most South-east Asian countries are experiencing solid GDP growth, albeit with a few hiccups along the way. With a rapidly expanding middle class, consumers in the region are moving up the economic ladder and are eager to splurge a little more. They are drawn to premium products and brands that signal aspiration, and are willing to pay for that sense of luxury.

The go-to-market style here is all about lifestyle appeal. For brands targeting this segment, it is essential to build an aspirational image. Position your product above lower-end unbranded cheap products to maintain a premium allure; use selective partnerships with influencers; and tap into key digital platforms.

Interestingly, South-east Asia’s younger consumers often show a strong preference for local brands, motivated by patriotism and a growing interest in environmental, social, and governance (ESG) values. Here, customers feel like they are elevating their lifestyle while brands enjoy those sweet premium margins.

A global example of this “upgrading” thesis is Tmall’s evolution from Taobao; while Taobao became synonymous with budget products, Tmall positioned itself for branded goods associated with quality. Locally, Vertex Ventures’ investment in CoolMate in Vietnam recently follows a similar play – offering high-quality products at affordable prices with excellent customer service and a commitment to ESG values.

Consumption downgrading: All about good deals and smart choices

The concept of “consumption downgrading” took off around 2018 with Pinduoduo’s rise in China, initially targeting lower-tier cities and eventually gaining traction among wealthier urban consumers.

The idea is simple: as economic growth slows, many middle-class consumers turn to more affordable products that do not carry premium brand aspirations – exactly what Pinduoduo offered in its early days.

In South-east Asia, economic growth is uneven across countries and industries, and inflation is affecting different consumer segments in varying ways. For instance, in Indonesia, between 2018 and 2023, the “Aspiring Middle Class” grew from 49 million to 53 million, while the “Middle Class” shrank from 23 million to 18.8 million. This shift suggests that many middle-class consumers are looking for quality without the price tag instead of opting for premium brands.

The strategy for this group is all about value for money. Focus on affordability and reliability – discounts, loyalty programmes, and value-driven messaging are key. Mass-market influencers and popular e-commerce channels work well; this audience group cares about deals and convenience over fancy packaging.

With this approach, consumers feel like they are making savvy financial choices without compromising on quality. In Indonesia, Kopi Kenangan usually sells S$2 coffee; now they have a sub-brand, Satu Kenangan, that sells coffee for under S$1. Products such as S$1 meals also address such market trends.

Unmet needs: The new frontier with huge potential

While debating whether the middle class in South-east Asia is “upgrading” or “downgrading”, a Chinese venture capital friend reminded me: “It doesn’t matter – they’re big, and they’re eager for more options and new experiences.”

Unlike China’s fiercely competitive retail environment, South-east Asia’s market is often less intense, held back by monopolies led by large family businesses, weak supply chains, and slower entrepreneurial growth. This leaves a significant amount of unmet demand among the middle class who often have to settle for products and services that do not quite meet their needs.

One striking example of this is the tea market. In China, there are over 3,000 brands and 420,000 stores competing for customers. While Singapore is already considered a competitive market, the crowd outside the Chagee store in Singapore (and other countries) shows that even in the ultra-competitive tea industry, there is still room to create a unique experience. The rapid expansion of Mixue across the region is another testament to this demand.

Many Chinese brands have made “chuhai” (overseas expansion) a core strategy since last year; this explains why we are seeing an increasing number of Chinese brands entering South-east Asia.

Local entrepreneurs are catching on quickly, gaining valuable insights from the operational experience of these Chinese players and from the supply chains they are helping to build.

The approach here is all about educating and exciting customers. Startups need to establish their unique product offerings; then leverage a strong storytelling strategy along with product demos and content marketing to show how their products fill existing gaps.

South-east Asia’s young middle class loves discovering new things; hence, making them feel like they have found a hidden gem can go a long way.

So, what’s really driving D2C in South-east Asia?

The themes of consumption upgrading, consumption downgrading, and filling unmet needs each have merit and logic behind them. While they all emphasise quality in product offerings, there are important nuances: consumption upgrading is about spending beyond basic needs – some light indulgence such as travelling or eating out – brand aspiration and competitive pricing; downgrading focuses on affordability without sacrificing quality; and filling unmet needs brings fresh innovative offerings to the market.

But unlike the e-commerce boom that produced regional decacorn giants such as Shopee, the new retail landscape will likely yield smaller unicorns or even centaurs given its fragmented dynamic nature – albeit with a more interesting margin profile. For investors with the right approach, there are plenty of opportunities to capitalise on an evolving consumer market.

*Edited by *Rahul Thayyalamkandy, Director, Vertex Ventures Southeast Asia & India.

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