China’s private consumption / domestic market is slated to double by 2030, from $4.7(1) trillion currently, with two-thirds of the increase coming from third- and fourth-tier cities. These numbers are just one instance of the potential of China’s lower tiers, driven by three key macro factors; population growth (lower tiers account for 70% of China’s total population), rising affluence (share of middle class in lower tiers is rising to 39% in 2022, from 18% in 2008) and higher spending patterns brought about by urbanization.
To fully seize the opportunities of China’s lower-tier growth engine, we have to take a micro look at the defining growth drivers.
The power of an emerging new generation
The young and free spenders (under 35 years old) constitute 25% of the population, but by 2021, they will be contributing to 52% of the lower-tier retail consumption, representing 69% of the growth(5). Optimism runs high amongst this demographic, despite the pandemic, due to the carpe diem mindset—to enjoy life while they can.
Consumers from the lower tiers are also more prone to upgrading as they believe newer, more expensive products are generally better than older models, and that new products will enhance their lifestyle and social status. If we delve deeper, we see that quality as a brand value is a top purchase-criteria as consumers catch up with first- and second-tier markets in valuing quality over price. However, it is interesting to note that unlike Tier 1 and 2, lower-tier consumers consider mainstream as “good quality” whereas the higher tiers incline toward distinct, niche brands. Another clear development is the need for a “self-enhancing” upgrade, driven by pressure mostly due to the hyper-competitive environment.
Lower-tier consumers have more time for entertainment because of less commuting time and a longer noon break, although they start work earlier and sleep later, which results in more leisure time to spend on consuming entertainment. For Tier 3 and below, 96% see entertainment as a vital need versus 89%(6) in Tier 1 and 2. Both offline and online entertainment show great potential in penetration/distribution growth and spending level. For example, China Evergrande Group is aiming to build 200 cinemas in the lower tiers over the next five years.
Lower tiers show a huge e-commerce growth potential as 57.4% of e-commerce contribution comes from lower tiers, while 77% of the online sales growth and 84% of the category orders growth will come from the lower tiers in the next three years.(7) Driven by COVID-19, e-commerce even has gained higher penetration among lower tier markets.
Social circle targeting
The prevalence of smaller social circles in the lower tiers form a tighter community of individuals with close inter-relationships influencing each other. These smaller social circles stimulate extrovert social needs which benefits categories demanding higher social status and identity expression like luxury products, apparel, cars, holidays and education.
How to reach and engage consumers?
For brands, these drivers present a huge opportunity, however, success largely depends on an adapted marketing approach that incorporates the nuances of consumer behaviour in the lower tiers. This involves an adaptation or customization in the brand message but also using a different media mix, of channels and platforms that shows higher usage by lower-tier consumers.
In terms of message, communication of tangible benefits takes priority over articulating brand values. Vivo, for example, uses creative with very tangible benefits for lower-tier markets, often endorsed by celebrities, and leaves the pure play of brand activities like events, installations and popup brand stores for the higher tiers. Feihe, an instant formula brand, focuses on the lower tiers by communicating 'high-quality' USPs only, instead of emotional messages. Nio, China’s answer to Tesla, plans to open 100 offline small-format stores in the near future, where consumers can see the car and its features, but without the brand experiences it offers in first-tier cities. This explains why a high number of mimic brands are still successful in the lower tiers.
Simplicity of messaging in the buying process and a healthy and increasing measure of national pride are also keys. For example, Tangeche (a buying platform for cars) offers a highly digitised purchase process via a one stop O2O service, and Tsingtao's 'From China to the world' messaging show how brands are adapting to the lower tiers.
In terms of media, lower-tier consumers show higher resonance with entertainment touchpoints and related media. A great example of a brand embracing entertainment in the lower tiers is Miniso. It constantly and intensively collaborates with entertainment, comic and movie properties to engage lower-tier consumers.
When it comes to platforms, short video is extremely popular, with higher duration and attachment versus higher tiers. Consumers spend 56 minutes per day with a frequency of 7.4 times a day, versus higher-tier consumers who spend 30 minutes and visit 2.5 times a day. E-commerce platforms are quickly increasing penetration in lower tiers, particularly Pinduoduo (China's third-biggest e-commerce site) as it combines social circle shopping, entertainment, and livestreaming. Besides the digital touchpoints, television, particularly CCTV, and OOH remain key offline touchpoints.
As we can see from the examples cited, Chinese brands have fared better in implementing a differentiated strategy, as compared to Western brands. This clearly highlights that the one-size-fits-all approach doesn’t apply to this huge and fast developing market. With more than two-thirds of consumers coming from the lower tiers in the years to come, the retail growth potential is still huge in China, accelerated further by COVID-19.
If brands are hungry to grab a share of the pie, they have to buckle up and switch their approach.
Dennis Potgraven is chief strategy officer for Greater China at Havas Group.
This article captures and combines comprehensive insights and conclusions from various resources including Havas-owned research Meaningful Brands, Connect, and Prosumer, as well as third-party research both pre- and post-COVID-19. Sources:
- Morgan Stanley bullish China’s lower-tier cities
- Public Data / Morgan Stanley bullish China’s lower-tier cities
- McKinsy middle class is shaping the Chinese market
- Morgan Stanley Smaller cities to drive China’s consumption boom; National Bureau of Statistics, 2019Q3
- BCG China Consumption Survey
- Havas prosumer study; Penguin intelligence;
- Mobtech; Alibaba
- Jianmian news
- Nielsen low tierer research; Questmobile
- Nielsen low tier market insights; Mintel