China is not a single, unified market. Instead, the Chinese market is of enormous size, scale and diversity. While a first-tier city like Shanghai boasts a population the size of Australia and a GDP that rivals the Philippines, China is also home to a slew of smaller, lesser-known cities. But in many marketers’ eyes, lower-tier cities are traditionally seen as less developed and less sophisticated markets with limited opportunities. Just a few years ago, pushing what is popular in Tier 1 and Tier 2 cities was the go-to marketing strategy and such efforts were sufficient to capture market share. But as inhabitants of lower-tier cities become richer and more eager to spend, brands must re-examine their marketing and branding strategies if they wish to unlock the potential of China’s familiar yet distinct lower-tier cities.
Many international brands start to recognize the potential of China’s lower-tier cities.
While lower-tier cities are previously less brand conscious and place more importance in economic value, rising disposable income and diversification of spending behavior will slowly change that. International lifestyle brands such as Dyson (#28 in Prophet’s China Brand Relevance Index™) and W Hotels (#26) continue to penetrate lower-tier cities. In 2018, Dyson saw a 118% growth fueled by e-commerce in lower-tier cities, compared with a 21% growth in first-tier cities. W Hotels has plans to open new properties in Changsha, Xi’an, Shenyang, Xiamen throughout 2018 and 2019 to bring the authentic international metropolitan hotel experience to lower-tier cities.
In hope of an increased demand for high-quality goods and premium services, brands are establishing their presence early in the burgeoning markets in China to capture their market potential before they fully mature. But success in these markets are not guaranteed.
The sheer complexity and size of China mean that the term ‘Chinese consumer’ is insufficient by default.
In other words, brands need to adapt their business models and marketing strategies to better fit the unique attitudes, preferences and spending patterns that characterize China’s lower-tier cities. Indeed, Chinese brands have tried to tailor their offerings to cater to the unique characteristics of lower-tier cities. Hema Fresh (#49) has recently announced its plans to develop four distinct retail formats. Most notably, its mini-shops, Hema Mini, aim to submerge and quickly cover the suburbs of not only first-tier but also third and fourth-tier cities. Without the ease of accessibility traditionally found in first-tier cities where transportation infrastructure is sound, Hema Fresh’s mini-shops solve the problem of not being able to reach relatively obscure locations in lower-tier cities.
Another prime example is Pinduoduo. The specialized e-commerce platform has experienced massive success in China’s smaller cities by offering deep discounts on generic products. The business model of Pinduoduo, in particular, has shown the platform’s shrewdness in leveraging the distinct characteristics of lower-tier cities to scale a userbase. Neighborhood communities tend to be more prevalent in lower-tier cities as multiple generations live under one roof and live within closer proximity with each other. Pinduoduo uses this to its advantage and its growth is built around offering huge economic incentives (deeper discounts and sweeter deals if users buy in groups and share purchases through messaging apps), encouraging users to promote the platform to their friends, families and neighbors. As a result, it has persuaded not only individual users, but entire local communities, to shift their shopping online and has since become one of the biggest retail disruptors in a landscape traditionally dominated by Alibaba and JD.com. While Alibaba and JD.com have depended on individual buyers of the fast-growing middle class living in big cities to spend on luxury products, Pinduoduo set its sights on bargain-hunters in lower-tier cities who are often a part of close-knit communities.
Consumers in lower tier-cities are also eager to travel more and know more. Connecting such consumers to the world outside is key to brands’ success in the market.
Take international travel as an example. As it has become increasingly harder to win flight schedules in first-tier cities such as Beijing, Shanghai and Guangzhou, local economies in other parts of China are simultaneously developing and more cities are meeting the requirements to host cross-continental routes. Hainan Airlines (#45) has deployed continental routes from second-tier city airports to international metropolitan city airports over recent years, going as far as to cut frequencies from Beijing and Shanghai to North America in order to focus its growth on lower-tier cities. The move is seen as favorable among consumers, with many appreciating the airline’s efforts to bring more connectivity to the outside world. Hainan Airlines, as a result, is seen as a brand that “always meet [consumers] needs”.
The same desire to bridge the gap closer between China’s lower-tier cities and the international world is also seen across the education and financial industries. By offering more accessible, reliable and personalized services, brands are eliminating the friction between consumers in and available resources. VIPkid (#27), an online oral English education platform, offers access to the high-quality educational resources found in North America that is often difficult to access in lower-tier cities. In the financial industry, China CITIC bank (#8) tailors its overseas study mortgage programs to benefit more families from lower-tier cities, offering financial assistance to those who seek better educational prospects. By streamlining the product through digital offers and tailoring their services to the needs of consumers, brands are fulfilling the need of consumers in lower-tier cities to expand their reach from local to international.
With the advent of the digital economy and more sophisticated connectivity infrastructure, the pursuit of modern life for China’s lower-tier cities has never been closer.
The increased purchasing power observed in lower-tier cities, however, does not equal to the fact that their consumption needs become automatically the same as those in the first and second-tier cities. Contradictory from previous understandings, lower-tier cities are no longer just mere followers of Tier 1 and Tier 2 cities. They are becoming trendsetters in some categories themselves and have shown potential in enhancing their lifestyles in categories such as home appliances, grocery, travel, education and cross-border e-commerce.
Consumers in these markets are increasingly conscious of their purchase intention and have begun to form their own unique consumption patterns. When brands attempt to enter China’s lower-tier markets, drawing from their successful experience in first and second-tier cities are no longer sufficient. Instead, they should consider the real needs of consumers in such markets and create products and services that are suitable and relevant to their unique needs.