China is not only the world’s second largest economy but also its dominant engine of growth. However in recent years this economic growth has come under pressure because of multiple reasons, both internal as well as external. This decline in growth rate is having a consequent impact on the way the Chinese government sees as its best way forward. It is striving to increase domestic consumption, encourage services sector and keep a check on inflation.
Adding more complexity to this business context is the more crowded and fragmented market, maturing Chinese consumers, impact of digitalization and smart phone and not to mention declining consumer enthusiasm.
Until recently business opportunity in China was limited to big 3 cities and handful of tier 2 for most multinational companies. The above dynamics means the attractiveness of this opportunity is increasingly fading and multinational brands are being forced to look deeper in to the Chinese landscape for new emerging and hitherto untapped markets in lower tiers.
Are the Lower Tier Cities Next Eldorado?
So this begs the question, do lower tier cities offer the same opportunity as that of their higher tier counterparts? In fact, the opportunity that lower tier cities offer is humungous compared to what their higher tier counterpart’s offer and moreover it remains untapped to a large extent.
Over the last decade or so, Chinese government has embarked on a mission to increase domestic consumption and thereby lower China’s reliance on exports. In the process, they have increased their investments in lower tier cities even in the central and western parts of the country and emphasized urbanization by providing housing and civic amenities.
These efforts have paid dividends. According to one estimate, tier 1 and tier 2 combined only accounts for 17% of the national GDP i.e. to say lower tiers combined account for a whopping 83% of the GDP. However, given the higher tier fixation of most multinationals, it means the focus has been too long and too much on higher tier cities.
Although Tier 3 and 4 have a disposable income half of Tier 1 but given a population approximately 10 times over, it means the potential is not only huge but waiting to be tapped into.
However Opportunity Doesn’t Directly Translates Into Profits
The big question is how to capitalize on this huge opportunity. The challenges are numerous and not very obvious. To begin with, the sheer number of such cities in lower tiers with a million or more is in excess of 200. So which all cities can a brand focus on?
Are these consumers like their higher tier counterparts or do they shop differently with different motivations and preferences? From my experience I can do say that they are definitely different given the context and circumstances that differ across tiers.
So is there a better way to target these consumers? The answer is yes and it’s everywhere around to see.
The Internet Can Make It Possible
Huge proportions of the Chinese population are not only online but are willing to go the extra mile by engaging in it. Lately social media and e-commerce boom has engulfed the country, fueled in part by the high smart phone penetration and also with the more prominence of big players in the market like Wechat, Taobao and Jingdong.
The lower tier cities are not lagging behind on this bandwagon. In fact they are taking to it like a duck takes to water. According to one estimate, the proportion of lower tier city households with internet access is in excess of 50%. This figure is only like to go up and go up fast considering around 85% also have access to a smart phone. These consumers are using internet not just to communicate, exchange or explore but also to buy products and services.
All of the above means, the lower tier cities have opened up for business and are not inaccessible the way they were a few years ago. With a right business strategy and fresh mindset, it is indeed possible to capitalize on this opportunity offered by lower tier cities.
There are as many ways to do it the right way as there are ways to do it wrong. The success depends on the way a brand will understand these consumers, customize its offering and then make itself available through relevant channels.
Article written by Manohar Balivada, Vice President, Ifop, Shanghai