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Reaching Chinese Consumers Beyond Beijing, Shanghai and Guangzhou

In a Q&A With AdAgeChina, Bain & Co.'s Richard Ho in Shanghai Shares Marketing Strategies for China's Lower Tiers

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SHANGHAI (AdAgeChina.com) -- Marketers need to find new strategies for marketing, sales, distribution and product development to penetrate China's smaller cities and towns.

AdAgeChina Editor Normandy Madden recently sat down with Richard Ho, a partner at Bain & Co. in Shanghai and a member of the firm's consumer products practice.

This is the second in a two-part series based on their discussion about China's consumer markets and the country's role in the global economy.
Bain's Richard Ho in Shanghai
Bain's Richard Ho in Shanghai
Multinationals have become very adept at marketing, sales and distribution in tier-one and even tier two cities. The challenges change abruptly as they go into third- and fourth-tier cities. What do you tell marketers who want to expand into these areas?
The most fundamental question companies need to ask is what's the right business model for lower-tier cites. They have to start from the business model, because that will dictate what kind of marketing and promotions they should do to win market share from local competitors.
Consumers are very different, the way the trade works, meaning how do wholesalers and retailers work, is very different. Local competitors are different, they are normally very low-cost. Can you really compete with them? Marketers need to ask themselves that.

How should multinationals view the different tiers?
Broadly speaking, you can put these tiers into three buckets. China has about 2,000 cities. The first bucket has Beijing, Shanghai and Guangzhou and some tier-two cities. They are alike enough that you can treat them with one business model, using advertising and marketing to build your brand and start to convey the functional benefits as well as the emotional benefits of your brands to make consumers feel good about themselves.

In the second bucket are the other tier-two cities and some tier-three cities, about 200 to 300 cities in total. They are not that sophisticated now, but within three to five years, they will be more like tier one. That's true for mass-market products. For luxury products, it may take another five years.
Fourth-tier cities are more rural and less developed. There are about 1,500 of them, each with less than a half million population. They are very different. You don't just have to fight local competitors, you have to fight fake products and products that are not fake but are not branded at all.

How do media habits change in the lower tiers?
Consumers in fourth-tier cities want to see your products advertised on CCTV (China Central Television) or provincial TV.
Sometimes consumers confuse satellite TV with CCTV. As long as it's not local, consumers think it comes from a very authoritative source, therefore, whoever advertises there, their products must be good.
Marketers ned to understand which channel gives them the best bang for the buck to reach their target consumers. I've heard advertisers say they want to advertise low-end products on CCTV right after a program about rural villages. That may not work, the people watching that programming may be living in tier two and tier three and won't necessarily be attracted to that product.

So it's important not only to have the right marketing message in the lower-tier cities, but to have the right product?
Absolutely. Marketers need to start by understanding consumers and their needs and how much they are willing to pay and then work backwards, while also understanding the distribution and retail landscape. With all that in mind, they need to figure out how they can make money and be competitive.
For most multinationals, that's still not happening in fourth-tier cities. The only exceptions are companies that have been in China over ten years at this point, such as the global soft drink companies and some apparel brands. These companies now get 30% or more of their business beyond the top 300 cities. In five years time, tier-two, tier-three and to some extent, tier-four cities will be very important to their business.

Consumers in lower tier cities may not have as much money as their counterparts in tier one and tier two, but because of their access to the internet, they aren't necessarily less sophisticated. Do multinationals underestimate consumers in the lower tiers and treat them as unsophisticated peasants?
You're absolutely right. Very few senior managers at the multinationals have spent much quality time in tier-two and tier-three cities. They've been to maybe five or ten cities, maybe 20, but very few have set foot in all 200. They don't see enough yet, but if you go to those cities, you will see how much consumers are learning about products and brands. They aren't as sophisticated as tier one consumers for sure but you will see that they are willing to spend money.
Richard Ho
Richard Ho
Once you go to tier four, is it a different story?
Indeed, a lot of consumers there are not well paid. It's a matter of figuring out how to sell to them. One example is, instead of selling them a whole bottle of shampoo, sell them a sachet. Some companies have done that successfully in China as well as India. They can't spare enough money to buy a bottle but they can buy a sachet.
They only consume 10% [as much as] their counterparts in tier-one cities this way, but given the huge number of consumers in these cities, the sheer number, it's still big business.
You can lower your retail price to appeal to consumers and they can compensate the low frequency of consumption with the higher number of consumers. However, this doesn't get away from the challenge of figuring out how to get the sachets into the hands of consumers.
In tier one cities, you have a sales force to cover the Carrefours and other big retail sites, but in tier-four cities, you can't do that. You have to use wholesalers.
But wholesalers in China are not that well behaved. Once you reach a certain scale, the wholesalers start to cut prices in order to generate sales at the expense of other wholesalers, and the whole system collapses.

How should marketers decide how to approach these markets?
It depends on how companies want to develop their business in China. If you think about Chivas or brandy or whisky, for example, the way it's drunk overseas is about having a small sip. In China, it's very different. It's more a party drink you can easily mix with green tea.
One could argue that's really deviating from the whisky tradition but guess what, by deviating from the whisky tradition today, you can grow your business three or four-fold.

Is it worthwhile deviating from your brand's traditions to that extent?
Probably yes, because as consumers become more sophisticated, you can offer a higher, better whisky and still maintain a strong volume and at a much higher price point in China.
So you need a different approach for China. There are ways these things are supposed to be consumed. But if your consumers in tier-four cities don't really care about those traditions and can pay for it, and it doesn't raise your costs, maybe that's okay.
There are many things you can do and whether it's right or wrong depends on your objectives and what you are trying to accomplish in the near term. It's exciting and challenging.

Mr. Ho also discussed the impact of the financial in the U.S. and Europe on multinationals in China.

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