Marketers dig into rural China

New consumers exist in smaller cities, but reaching them is hard

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SHANGHAI--Soon after Unilever launched Lipton Milk Tea, a single-serving bag of instant tea and milk powder sold only in China and Hong Kong, two years ago, it dominated the category across scores of Chinese cities. It is affordable for middle class consumers, the prepackaged format is easier to prepare than traditional Chinese loose tea and, surprisingly in a nation that has adored tea for centuries, its foreign origin lets thrifty consumers feel worldly.

The product has grown “super fast,” said Frank Braeken,Unilever's Shanghai-based chairman, Greater China, particularly in regional capitals known as second-tier cities. “The sheer potential of this brand is enormous.”

Lipton Milk Tea is a rare success story in China for advertisers trying to move beyond the three first-tier cities--Beijing, Shanghai and Guangzhou--that are home to China's most well-heeled consumers.

"Unilever has done a great job with Lipton, but a lot of marketers haven’t been looking enough at second- and third-tier cities. They've been an underserved market by multinationals, but it's difficult to get the right management talent to go into and even live in those markets and come up with the right strategies," said Shaun Rein, managing director of China Market Research Group in Shanghai.

While few executives are rushing to move to China's smaller cities, where modern conveniences remain sparse by Western standards, multinationals and major local companies like Lenovo Group are getting better at tailoring product lines, marketing strategies and distribution channels in less developed cities.

Disposable incomes growing 10%

Companies selling everything from luxury goods to detergent are trying to make the same leap to provincial capitals and municipalities dotted around China and even smaller cities.

China’s smaller cities “represent tremendous opportunity” for multinational marketers and retailers, said Shanghai-based Brian Negley, executive director, retail measurement at ACNielsen. “Growth is supported by the steady rise of disposable income in these less developed markets, increasing at around 10% annually.”

These days, it’s not uncommon for consumers in cities like Hangzhou, Shenzhen and Dongguan to have greater spending power than Shanghainese or Beijingers, because of the lower cost of living there. While that trend has allowed luxury markets like Louis Vuitton to open profitable shops in a dozen second-tier cities throughout China, infiltrating smaller cities remains an enormous challenge for mass market brands. Local competitors are fierce and better at distribution, and their prices are lower.

While consumers in places like Shanghai, especially the younger ones, often know as much about global brands as the average American, their rural counterparts probably have never heard of brands like Lipton, Minute Maid or Kraft until recently, if at all. They also read fewer newspapers and magazines, shop in small mom-and-pop stores, may not own refrigerators or microwaves, and their purchasing decisions are more influenced by friends and family.

Advertising, products, packaging and distribution strategies often have to be rewired as marketers move from China’s prosperous eastern seaboard to its interior. Distributors for companies like Wrigley and Cadbury have even resorted to pedaling through congested city streets to reach small retail outlets by bicycle. It’s not uncommon to see carts pulled by horses and donkeys transporting goods, even in some second-tier cities like Kunming.

Lenovo, for example, is wrapping up a year-long road show to 1,000 cities targeting fourth- and fifth-tier cities. They account for much of the company's double-digit gowth in China over the past year, despite ongoing price wars with local rivals such as Founder Technology Group Corp. and Tsinghua Tongfang Co.

Five tiers--or ten?

Despite the country’s massive size, cultural differences between the provinces are surprisingly small.

“When people arrive in China, many fall for the red herring of geography,” warned Tom Doctoroff, JWT’s CEO, China in Shanghai. “People come here with the assumption that China is an aggregation of different countries. It is relatively homogenous in its culture, but there are two key dimensions that you have to adjust marketing strategies for--age and income, and keeping brand messages simple in less developed cities.”

Within each province, marketers commonly slice China into four or five tiers, based on population, sophistication, purchasing habits, attitudes and disposable income. Tier one is Beijing, Shanghai, Guangzhou and sometimes Shenzhen, a small, prosperous town just over the border from Hong Kong. Tier two includes about 30 cities, the provincial capitals, most of which have populations greater than five million.

Tier three encompasses about 150 county capitals, most home to over one million people. Tier four covers thousands of towns ranging in size from 100,000 to one million people, and tier five includes China's smallest towns and villages, the refuge of farmers and very few brands. Annual salaries from tier two to tier four cities range from $2,000-$4,000, on average.

As they go down the tiers, said Mr. Doctoroff, “pennies are more pinched, so pricing becomes paramount and you have to adjust the brand portfolio” to include more value products and fewer premium items.

Even in industrialized Guangdong, the country’s richest province surrounding Hong Kong, there are “vast differences across different tiers of cities,” said Darryl Andrew, Shanghai-based managing directory of Aegis Group-owned research company Synovate.

Per capita gross domestic product in Guangzhou, for example, tops $8,000, but in nearby Shanwei, a third-tier city, it’s just $1,300 and in Qinxin, a fourth-tier town, it’s a mere $800. That doesn't mean opportunities don't lie in the lower tiers, however. Shanwei is home to over two million consumers.

Even within this general framework, marketers segment China differently. Anta, one of China’s leading sportswear brands, segments the country into ten tiers, based on the price of real estate for its retail outlets in each town. So Dalian, a posh seaside resort, is ranked as a first-tier city, said Samuel Xu, Anta’s Fujian-based marketing director. Most marketers would consider Dalian tier two, or lower.

Tier definitions vary dramatically from company to company, said Matt Brosenne, international business director at CSM Media Research in Beijing. "It's always a function of their reach or coverage as well as their priorities, so everyone has a different understanding of the local tiers. It gets pretty messy, but it’s cool because there are great rewards in lower tier cities."

P&G's tiered pricing for a tiered market

Why bother fighting to get into China's smallest cities, even if they do have millions of potential consumers?

“If you have the right product at the right price, you can make a lot of money," said Mr. Doctoroff. "These are markets that can help you generate scale. Procter & Gamble is the master of this.”

After getting trounced by local competitors a decade ago, the company pulled ahead of rivals with the introduction of a tiered pricing structure in 2003, when P&G introduced a 320 gram bag of Tide Clean White for 23 cents, compared to 33 cents for 350 grams of Tide Triple Action.

While the Clean White version did not offer all the stain removal and fragrance benefits of its pricier cousin, it was more affordable and still outperformed other brands at that price point. P&G’s tiered pricing strategy has been extended to other brands like Crest and even to other emerging markets like India. At the same time, it has conquered another major obstacle by snapping up local companies, particularly shampoo manufacturers, to gain control of their distribution platforms.

“It’s not just about price, it’s about understanding those consumers and how their laundry habits are different,” said James Stengel, P&G’s global marketing officer, based in Cincinnati, Ohio.

In fourth-tier cities, for example, two out of 10 homes still fetch water from a communal well, and do not have running water at home, according to Synovate's Mr. Andrew. But China is a "changing kaleidoscope. Those are tomorrow's tier one cities."
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