Why Tier-3/4 Cities Are Still China’s Wild Wild East

on September 16 2013 | in Trends | by | with No Comments

Wuxi, China, 3rd tier cities,

What’s in a Tier? Depending on which marketer you ask, the answer will be different. While everyone is in agreement that there are only five Tier One cities, everything after that is open to debate – there are thought to be as many as 60 or as few as 35 Tier Two cities, for instance. But most experts agree that Tier Three and Four Cities have the greatest potential for international brands to grow and expand.

China’s smaller cities are home to more than 300 million people. The country has 13 cities with a population of more than 10 million, 88 cities with more than five million inhabitants and 335 cities with more than one million people, WWD reports. “I see a lot of growth coming in the future, and given the low level of penetration of international brands, there’s even more growth they can tap into,” says Kevin Chong, a Shanghai-based partner of Bain & Co.

The middle class is expanding rapidly as the nation urbanizes. It is thought that the number of households with an annual income of more than $11,730 will grow from 141 million in 2010 to 400 million in 2020, and the Boston Consulting Group (BCG) believes that second- and third-tier cities will pass out first-tier cities in wealth accumulation and consumption in the next few years.

According to BCG, 60 percent of China’s economic growth will come from Tier Three and Tier Four cities by 2020, and 80 percent of the nation’s market for mid- to high-priced fashion will originate there.

Foreign Policy, the global magazine of economics, politics, and ideas, recently released its list of “75 Most Dynamic Cities of 2025.” More than one-third of them – 29 cities – are still considered third-tier, including Foshan (ranked 13), Wuxi (36), Xuzhou (62) and Tangshan (72). In relatively close proximity to Tier One cities, these locations serve as popular test markets for international brands that don’t want to get lost in places that are too remote, reports Ogilvy & Mather.

Foshan boasts a population of 7.1 million and is the third-largest manufacturing base in the Pearl River Delta region. Wuxi, in Jiangsu, is close to Shanghai, Nanjing and Suzhou. It has been called a “third-tier city with second-tier importance,” and brands like Louis Vuitton have already established locations there. Many of Wuxi’s population of 6.4 million earns their livelihoods in textile manufacturing or solar technology. Xuzhou, with 8.6 million people, is considered a transportation hub as it links Shanghai with China’s northern provinces. Tangshan was nearly destroyed after a 1976 earthquake, but the rebuilt city in the northeastern Hebei province hosts 7.5 million people today. Now, it is one of northern China’s most important industrial cities and is historically a major coal mining center.

WWD notes that these cities have “highly mobile and increasingly wealthy populations numbering in the many millions of people,” which will make them focal points of the luxury industry going forward.

Fabrice Weber, president of the Asia Pacific Region for the Estée Lauder Cos. Inc., has the perfect vantage point from which to observe this kind of growth. Estée Lauder brands are currently sold in 69 Chinese cities, and consumers have demanded that at least one of his lines be available in as many as 350 locations within China. Weber believes that lower tiers are now the best place to position stores. He explains, “Tier-one and tier-two consumers have migrated to shopping through different channels, many of them abroad and online, which leads to a softening of the domestic market. Tier three is very meaningful because the spending power is there. We see great potential in the years to come.”



image credit: lei han

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