upgrading, downgrading or meeting unmet needs?

IN The Southeast Asian retail market has been dominated by e-commerce for the past decade, with major players such as Shopee, Lazada and, most recently, TikTok joining the race. Now giants like Shein and Temu are also eyeing the region for a piece of the pie.

However, with the market wars largely settled, venture capitalists are turning their attention to other topics 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 with 600 million consumers and a growing gross domestic product (GDP) looks like an ideal place for new brands to develop, but the reality is more complex.

The questions that always concern me are: Is a growing middle class in a region with rising disposable incomes driving the growth of brands that sell directly to their customers? Or are consumers turning away from premium brands due to inflationary pressures? Or maybe, just maybe, it’s all about satisfying unmet needs by introducing new options to a market hungry for novelty.

Increased consumption: glamor through brand ambition

Most countries in Southeast Asia are experiencing strong GDP growth, albeit with some hiccups along the way. With a rapidly growing middle class, consumers in the region are climbing the economic ladder and looking to spend a little more. They are attracted to premium products and brands that signal ambition, and are willing to pay for that feeling of luxury.

The go-to-market style here is all about lifestyle appeal. For brands targeting this segment, it is important to create the desired image. Position your product above inexpensive off-brand cheap products to maintain premium appeal; use selective partnerships with influencers; and connect to key digital platforms.

Interestingly, young consumers in Southeast Asia often favor local brands, driven by patriotism and a growing interest in environmental, social and governance (ESG) values. Here, customers feel like they are improving their lifestyle and brands enjoy a nice premium profit.

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

Reducing consumption: all about great deals and smart choices

The concept of “consumption reduction” originated around 2018 when Pinduoduo became popular in China. It was initially aimed at lower-tier cities and eventually gained popularity among wealthier urban consumers.

The idea is simple: As economic growth slows, many middle-class consumers are turning to more affordable products that don’t meet premium brand aspirations—exactly what Pinduoduo offered in its early days.

In Southeast Asia, economic growth is uneven across countries and industries, and inflation affects different consumer segments differently. For example, in Indonesia, between 2018 and 2023, the size of the “aspiring middle class” grew from 49 million to 53 million, while the size of the “middle class” fell from 23 million to 18.8 million. This shift suggests that many middle-class consumers are looking for quality without price, rather than opting for premium brands.

The group’s strategy is based on value for money. Focus on affordability and reliability: Discounts, loyalty programs and value-based advertising are key. Mass market influencers and popular e-commerce channels perform well; This audience group cares about great deals and convenience, not fancy packaging.

With this approach, consumers feel like they are making smart financial choices without sacrificing quality. In Indonesia, Kopi Kenangan usually sells coffee for S$2; they now have a sub-brand, Satu Kenangan, which sells coffee for less than S$1. Products such as S$1 meals also cater to these market trends.

Unmet Needs: A New Frontier with Huge Potential

Discussing whether the middle class in Southeast Asia is “rising” or “falling,” a friend of mine in Chinese venture capital (VC) reminded me, “It doesn’t matter—they’re big and hungry for more.” opportunities and new experiences.”

In contrast to China’s fiercely competitive retail environment, the Southeast Asian market is often less intense, constrained by monopolies led by large family businesses, weak supply chains and slower entrepreneurship growth. This leaves a significant amount of pent-up demand among the middle class, who often have to make do with products and services that don’t quite meet their needs.

A prime example of this is the tea market. In China, more than 3,000 brands and 420,000 stores compete 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 unique experiences. Mixue’s rapid expansion across the region is further evidence of this demand.

Many Chinese brands have made “chuhai” (international expansion) their main strategy since last year; this explains why we are seeing more and more Chinese brands making inroads into Southeast Asia.

Local entrepreneurs are quickly gaining traction, gaining valuable insights from the experiences of these Chinese players and the supply chains they help build.

The approach here is to educate and attract customers. Startups need to offer their unique products; then use a strong storytelling strategy along with product demos and content marketing to show how their products fill existing gaps.

Southeast Asia’s young middle class loves to discover new things; therefore, making them feel like they have found a hidden gem can go a long way.

So, what’s really driving D2C in Southeast Asia?

The themes of increasing consumption, decreasing consumption, and meeting unmet needs each have their own merits and logic. While they all emphasize the quality of the products on offer, there are important nuances: increased consumption levels involve spending beyond basic needs – some light entertainment such as travel or eating out – brand aspiration and competitive prices; downgrades focus on affordability without sacrificing quality; and addressing unmet needs brings fresh, innovative offerings to market.

But unlike the e-commerce boom that gave birth to regional decacorn giants like Shopee, the new retail landscape is likely to produce smaller unicorns or even centaurs given its fragmented dynamic nature – albeit with a more interesting profit profile. There are plenty of opportunities for investors with the right approach to benefit from the emerging consumer market.

The writer is a partner at Vertex Ventures in Southeast Asia and India.