Move over, Shanghai, Beijing. Astute global marketers are hustling to second- and third-tier cities as enticing retail expansion opportunities abound. It’s no easy task as the learning curves are steep. There are special consumer dynamics to be considered. Here are five things to know about the retail outlook in China’s 2nd and 3rd tier cities.
1. The big-city shift to smaller cities is about a burgeoning, younger, middle class
The growth of middle class in China is dramatic. McKinsey estimates that 75 million urban households will enter the middle class between 2008 and 2015 ($7,500 US to $18,000 US annual household incomes). Says one retail analyst in a Wharton study: “The Chinese love shopping…new shoppers are born every day. We won’t run out of them.” A McKinsey survey notes middle class consumers between the ages of 25 and 34 is a generation that has seen growth and opportunities, is optimistic, and is enjoying a better life than their seniors. Yet, the younger middle class in Tier 1 cities like Beijing are tired of high real estate prices and shrinking job opportunities and are keen to move to Tier 2 And Tier 3 cities.
2. Think ‘disposable’ incomes
Those with unremarkable incomes are nonetheless driving retail spending right now, says Benjamin Cavender of the China Market Research Group. They are likely to have stayed at home until they married. That means that, relative to what they earn, their disposable incomes are high.
3. Shopping is about hypermarkets and domestic brands…for now
Consumers in lower-tier cities are loyal to what they know best, which are domestic brands. No international brand waging a campaign, however clever, has a chance in the smaller cities unless it’s “on the ground,” says Kevin Lee of the research firm China Youthology.
4. Consumers are mainstream, not experimental or avant-garde
This is where international brands may stumble, according to Lee. Some outside retail hopefuls don’t bother to understand cultural dynamics of narrow social units with limited exposure to foreign brands showcased at international-type Tier 1 malls.
5. The Internet will be a change agent
The Internet is a powerful bridge builder to exposure to foreign brands that may not yet be found in stores in Tier 2 or Tier 3 cities. Over 87 million Chinese made purchases online during the first half of last year alone. Taobao is China’s most popular e-commerce portal and Lee calls it “a big disruption.”