Ten years ago, China’s lower- and first-tier (or “primary”) cities were considered – economically, if not culturally – separate markets. But as Prophet’s 2017 Brand Relevance IndexTM (BRI) suggests, China’s consumer landscape – still streaked with disparities – is converging at a pace few expected.

Of course, life is not a cake walk anywhere, particularly in less-developed areas. Stability is never taken for granted. China’s economic model has proved durable but unreformed, with spending power that is still a fraction of the West’s. Economic interests remain unprotected by impartial institutions. Despite President Xi JinPing’s crackdown, government corruption remains a huge concern, particularly at provincial and municipal levels. Broader concerns about pollution and food safety are also sources of anxiety.

How are Cities Changing in China?

Two major forces are altering China’s lower-tier cities: economic and psychodynamic change.

Economic Momentum

Nonetheless, China’s economic rise, reinforced by consumer-friendly macroeconomic policy, has lifted boats across the nation. Unimaginable until recently, second- and third-tier cities maintain large middle classes. Disposable income among urban households in Tier 3 and Tier 4 markets was 55% of their Tier 1 counterpart’s income in 2016, and it’s expected to reach 64% by 2030, according to a recent report from Morgan Stanley Research.

According to Morgan Stanley, between 2017-2030 lower-tier cities will fuel two thirds of China’s national consumption increase. Ordinary folks are benefitting from a shift of investment in infrastructure and exports to consumer and services. Higher birth rates and changes in lifestyle such as fewer adult children living with parents will help accelerate the pace of trading up and “premiumization.”

Digital connectivity is also accelerating economic growth. Lower internet penetration rates, once seen as a bottleneck inhibiting ecommerce growth in lower-tier locales, have climbed rapidly. According to data from GroupM, the internet’s reach hit 89% among consumers in China’s Tier 3 and Tier 4 markets in 2016, up from 75% the previous year.

Evolving Psychodynamics

Marketers conventionally highlighted “protective” benefits for appeal outside primary cities. Auto manufacturers, for example, relied on fuel efficiency and safety claims to establish credibility amongst first-time car buyers. “Status projection,” a key motivation in Beijing and Shanghai, was less front and center.

Even Anta, China’s largest athletic shoe and apparel manufacturer, encouraged hard-pressed lower-tier consumers to “persevere.” Churchillian advertising campaigns acknowledged that “life was not fair and could be bitter” but progress could be realized “through hard work, sweat and tears.”

Fast forward to 2018. Unidimensional fear- or price-based propositions are ineffective. Aspiration is essential. Ikea, the furniture and home accessories retailer, popular in first- and second-tier cities and poised for further expansion, sells visions of domestic bliss.  Yes, affordability remains an important benefit, but messaging is uplifting. Social media conversations focus on new ideals (“your home, your beautiful heaven”) and advocates transforming houses into dreamscapes.

Uniqlo, the mid-tier fashion brand, now operates almost 600 stores. The majority of store openings are in second- and third-tier cities and Uniqlo’s thematic advertising avoids a heavy-handed focus on discounts. In 2015, for example, the brand’s “Style Your Life” campaign doubled the number of WeChat followers, from 400,000 when the campaign launched more than one million six months later.

Prophet’s BRI Findings: A More “Unified” China?

The results of Prophet’s Brand Relevance IndexTM – a quantitative survey that ranks brands’ relevance with consumers across four dimensions including, “pervasive innovation,” distinctive inspiration,” “ruthless pragmatism” and “customer obsession” — supports the rapid evolution of China’s lower-tier lives and mindsets.

First, digitally-fueled lifestyle liberation is happening everywhere.

The stunning popularity of Alipay and WeChat – Ranked #1 and #2 respectively in our Index, across all city tiers, is testament to this phenomenon. Alipay, the virtual payment system, is rooted in convenience, just like PayPal.  But the freedom to buy “whatever, whenever, wherever” is revolutionary in China.  At large state-owned banks, “customer service” is an oxymoron. So Alipay’s security reassurance and seamlessness represents the ultimate empowerment: escape from the “me too” customer service of the Bank of China.

WeChat, the “all in one” social media platform that boasts a billion users, connects residents of small towns with the world.  The nature of “community,” traditionally conformist and confined by clan and geography, has blossomed into an infinite number of tribes with shared passions.

The popularity of video games across tiers – five companies including Riot and Xbox ranked in the BRI top fifty – points to powerful online liberation. Games are not simply “played.” They are platforms for emotional emancipation and social engagement. In the words of one World of Warcraft fan, “I can finally release the dragon inside my heart.”

Second, the appeal of “status brands” is widespread.

Premium hotels – watering holes at which deals are struck and face is traded — are as relevant in third-tier markets as they are in first-tier ones. For an emerging consumer class brimming with optimism, InterContinental, Grand Hyatt, Marriott, Shangri-La – even the trendy W Hotel — represent the promise of tomorrow. As one focus group participant responded, “I may not be able to afford a night at the Four Seasons now. But just wait.” In China, there is no American-style red vs. blue divide.

Surprisingly, some premium brands, ranging from relatively affordable “lifestyle” goods (e.g., Costa Coffee) to inaccessible luxuries (e.g., Tesla autos), ranked highest in third-tier markets, further reflecting newly-slaked thirst for material progression.

Third, the eagerness to discover the world has spread inland.

The popularity of Disneyland (ranked #42 in our China Brand Relevance IndexTM), a “magical kingdom” which opened its gates in Shanghai in 2016, is a draw across China. And Airbnb, a minor player on the mainland but a game changer for people who crave global travel, projects mystique even for those who have never used the platform. It ranks tenth within the third-tier.

Again, an important caveat: differences between first- and lower-tier cities have not evaporated. The appeal of cheap appliances (Gree, Midea) is greater in the former than the latter, reflecting entrenched price sensitivity, particularly for items consumed in home.

While inland consumers are increasingly enthusiastic about the role status brands play in their lives, first-tier shoppers are becoming more blasé about blatant bling. The desire for understatement in everything from streamlined home décor to sotte voce logos has long been a hallmark of sophisticated Chinese. But the greater appeal of a growing number of local brands – for example, Huawei mobile phones, Lenovo computers and Anta — in primary cities relative to lower-tier ones is eye catching.

Our findings seem to reflect increasing self-possession amongst China’s most experienced consumers, not to mention burgeoning “China pride.” Multinational brands beware: do not rest on your laurels. The implicit quality and cool guarantees of international products should not be taken for granted.

Final Thoughts

Lower-tier markets are no longer hinterlands. Rising incomes, a growing middle class and connectivity with the world have narrowed the coastal-inland divide. Although gaps remain, China’s economic rise has fueled aspiration for an array of brands and dynamic lifestyles that, until recently, were out of reach.

Learn more about which brands stand out as relevant in Chinese markets today.