There are many relatively unknown cities in China with GDPs as large as countries. For example, the city of Zibo has an economy the size of Panama’s and Tangshan’s GDP ranks up there with New Zealand by some measures. These smaller cities are helping drive China’s consumer demand, and by proxy, the global economy. Morgan Stanley forecasts that lower tier cities will account for two-thirds of the increase in consumption between now and 2030.
As China’s biggest cities have become the most crowded and contested markets on the planet, more and more brands are looking to cities like the Zibos and Tangshans where growth is often faster and competition less fierce. We only need to look at FMCG which has been growing 2-3 times faster in lower tier cities than big cities over recent years. In tourism, the 10 fastest growing airports by passenger numbers are all tier 2 cities and below. A third of all Cadillacs sold in China were bought in tier 3 & 4 cities.
Yet while it’s become common to talk about China’s less-competitive lower tier cities, brands shouldn’t just be throwing darts at maps and reviewing GDP figures in determining where to focus. Consumers in many lower tier cities don’t yet have a level of sophistication to demand many products and services.
Before looking to the hinterland, brands should critically assess consumer behaviour and preferences in those cities. Lifestyles, climate and travel habits are often as much of a contributor to demand for a product than GDP per capita. Ecommerce data, although much less developed than tier 1 and 2 cities, can also provide hints into potential demand. Even local government policy can impact consumer demand – just look to Electric Vehicles, where six cities contribute to 40% of sales.
In many cases, the hyper-competitive cities like Shanghai and Beijing can still be the most lucrative markets to target. They have become incredibly wealthy with GDP per capita adjusted for purchasing power now comparable to Switzerland. They have been wealthier longer, were allowed to travel abroad sooner, and as a result, have much more mature and sophisticated tastes. As a result, they are more ready for some Western products and services.
With both cities having more than 20 million people, just focusing on specific demographics or districts can itself produce material sales and a beachhead for further expansion.
A good example is American wholesaler Costco. Four years of testing the water with cross border commerce has given them confidence in demand for their products and formats. This month they announced they will launch two large Costco bricks & mortar stores in Shanghai. Unlike most of the 226 brands who opened their first stores centrally in Shanghai last year, Costco is opening in the outer districts of Minhang and Pudong New Area.
The bulk sales model like Costco hasn’t really taken off in China yet. Consumers have smaller kitchens and less storage than in the US, lower car usage for shopping, and a preference for freshness. However Costco is likely to have evaluated the last 4-years of ecommerce sales data to make informed decisions. If it will work anywhere, Minhang and far-flung Pudong are good bets. They are affluent areas with many large villa residences and a population who is more reliant on driving for daily needs. Costco’s first 33,000 square metre store opening in April 2019 will have 1,000 carparks. One would hope that they are integrating New Retail into their stores to ensure they are relevant and engaging for consumers.
Whether you are Costco, a fashion brand or selling vitamins, there is no consistent answer about which city is best to target. Brands would be wise to analyse different cities and regions before making a call. The cities a brand chooses to target should be an important factor in developing localised marketing strategies, selecting distributors and even lawyers familiar with local laws and regulations. Agencies such as China Skinny can assist with that. Go to Page 2 to see this week’s China news and highlights.