CHINA REPORT: Lower-tier cities and untapped rural gold

This article comes from the China Report. Highlights will appear online throughout the month. The full report is available in the September 2012 issue. Subscribe online or call +852 2122-5227

It may not be far-fetched to say that China is flattening out. Population and GDP conditions of cities change so rapidly that a city can jump from one tier classification to another within a year, making differences in consumers by city tier less apparent. Differences in tiers one to three (prefecture level cities and above) are also narrowing fast in terms of income, aspirations and mindset; and these only account for around 45 per cent of the entire Chinese population, says Jeffrey Tan, national research and insights director at Starcom Mediavest Group China.

While segmentation-by-tiers will continue to be relevant for at least another decade, says Wijaya Ng, the head of Ipsos Business Consulting in Shanghai, it makes marketing sense to take a serious look at the bottom half of the pyramid, as rural dwellers account for 49 per cent of China’s entire population, according to China’s National Bureau of Statistics. This represents a fast-growing market of 650 million consumers worth US$500 billion of untapped spending power.

“China’s rural consumers have been largely overlooked because businesses have concentrated on China’s growing middle class in urban cities,” says Dale Preston, senior vice-president of analytics and consulting at Nielsen Greater China.

“Historically, companies believed it was most important to reach China’s middle class in major cities; that rural villagers have low income and spending power; and that the eventual migration of the rural population into urban centers would eventually bring consumers ‘to the brand’, so it wasn’t necessary to take the brand out to villages.”

But these premises no longer hold true as rural incomes are growing at a faster rate than urban incomes. Taking the Chang-Zhu-Tan cluster (Changsha, Zhuzhou and Xiangtan) as an example, the average annual income per capita there is only slightly above half of Beijing’s or Shanghai’s. Brands need to be “choosy and cherry-pick the most promising areas” to penetrate, says Johan Björksten, chairman of MSL China. Key cities in the greater Shenyang (Shenyang, Anshan, Liaoyang) and Shandong Peninsula (Jinan, Binzhou), and greater Xi’an (Xi’an and Xianyang), are also amongst the list of up-and-coming lower-tier cities.

Ignoring China’s rising rural class may be a costly mistake for fast-moving consumer goods (FMCG) manufacturers. Some brands make the wrong assumption that rural consumers are ‘backwards’ and not exposed to the culture of consumerism, but Tan wants to correct this. “Technology [especially the internet] has become the great equaliser, giving ordinary folks from less developed cities the chance to experience first hand the products available in higher tiers”.

With the advent of the digital era, consumers from lower-tier cities are no longer subjected to trends trickling slowly through geographical borders, adds Phil Mo, insights partner at Mindshare China. Nielsen finds that net income among rural residents grew 11.4 percent last year, compared to urban residents’ income growth of 8.4 percent.

Eve Lo, chief knowledge officer of GroupM China says that considering the monthly average household income of tier-three and -four cities is 5,804 yuan (U$913) and average cost per square metre of real estate in those cities is around 4,600 yuan, this means a household is able to use a month’s salary to purchase at least one square metre of property, which is unheard of in top-tier cities.

Notably, the rural village shopper makes 20 per cent less shopping trips than urban residents, but spends one-third more on each shopping occasion, totalling an average monthly spend of 418 yuan, which is 1,199 yuan less than urban consumers and highlights the growth opportunities with these rural consumers.

“Marketers need to pay close attention to purchasing patterns and align product availability in villages,” says Preston. “One of the best ways to gain traction with rural areas is to target towns and townships for distribution and marketing. Almost half of all rural consumers shop once a month in a nearby urban centre.”

Product assortment and quality are important purchase drivers for the rural consumer — even more so than price. “In the past, companies have focused on low price and often low quality offerings to penetrate villages,” says Preston. This is a common misconception about Chinese consumers in rural markets. “Truth be told, they are also heavily influenced by the quality of a product.”

Preston explains that as village consumers become more affluent, they tend to seek out products that have key features and benefits similar to those in urban centres.

Understanding key product attributes and offering tailored products at a lower cost is key to success for manufacturers. In general, preferences are still skewed towards foreign brands, particularly where safety and prestige comes into play, such as cars, food and luxury products. But Chinese brands are making advances in almost all categories. Scarlett Du, futures and insights director at Carat China, in fact, says lower-tier consumers are less “brainwashed” by foreign brands.

With greater exposure to products not available to rural consumers in village stores, Nielsen finds products such as shower gels, body moisturisers, liquid laundry detergents, jasmine tea, men’s skincare, chocolate and juices to have the greatest growth potential. Many rural consumers are also going through an ‘upgrade phase’ where they are replacing cheaper goods with ones that cost more but have more benefits, categories to have benefited from this include mobile phones.