China's Lower-Tier Cities Offer Most Growth
SHANGHAI (AdAge.com) -- Most multinational marketers have cracked China's biggest and most sophisticated first-tier cities, such as Beijing, Shanghai and Guangzhou.
Consumers there are open to foreign brands and these cities have paved roads and massive supermarkets, so distribution, sales and retail promotions aren't all that different from western markets. But these cities are home to a sliver of China's total population.
To keep sales growing by double digits, multinational marketers must "accelerate their move to third- and fourth-tier cities and beyond, where the creation of new wealth has had profound impact on consumer behaviors," said Scott Kronick, Ogilvy PR Worldwide's president, North Asia in Beijing. "Focused marketing efforts on emerging cities will become the norm."
Unilever's Chinese New Year campaign for its Lipton milk tea product line earlier this year, for instance, rolled out in 73 cities and the company has distribution in hundreds of markets nationwide.
Lower-tier cities will 'join the party'
"As incomes rise, consumers in lower-tier cities will continue to join the party and make classic middle-class purchases, beginning with electronics and durable goods and then better quality, fast-moving consumer goods as the decade unfolds," said Richard Ho, a partner at Bain & Company in Shanghai. "These huge urban centers will have an increasingly sophisticated consumer population," Mr. Ho said.
Today, however, disposable incomes, familiarity with foreign brands and products, and retail and distribution practices change dramatically when marketers move from Shanghai and Beijing to Changchun and Wuxi.
These cities may be remote, but they aren't small. China has over 270 cities with populations greater than one million people. They are classified by a five-tier system based on the size, sophistication, purchasing habits, attitudes and disposable income of the population in each city.
Tier two has about 30 cities, with populations ranging from 5 million to 30 million. Tier three spans about 150 county capitals, usually with more than one million people, and tier four includes thousands of towns with more than 500,000 inhabitants. Tier five covers China's smallest towns.
The tier system was created by marketers based on the idea that a white-collar office worker in, say, Guangzhou, has more in common with office workers in Shanghai than poor farmers with little education living in Dongguan, an hour's drive from Guangzhou.
Marketing in China's lower tiers is a challenge. Incomes drop so quickly that even a can of Coke can seem pricey and exotic.
Consumers often have less exposure to western brands and less interest in trying them. Local competition is extremely tough, since sales revolve around price and distribution more than branding, and local companies tend to be better at both.
Domestic advantage in smaller cities
In tier-one cities, with their brand-conscious consumers, multinationals increasingly have an edge over local competitors that have yet to develop strong brand equity.
Outside the top 200 to 300 cities, however, "domestic companies will continue to have a competitive advantage in consumer products for the foreseeable future, as multinationals work to win a foothold," Mr. Ho said.
Distribution is another problem. Hypermarkets like Walmart and Carrefour are scarce in the lower tiers. Marketers have to learn to negotiate with mom-and-pop shops that may not have air-conditioning, refrigerators or freezers -- which makes it hard to sell products such as ice cream bars, soft drinks and beer -- as well as distributors using carts tacked on to motorbikes or bicycles.
Counterfeiting of everything from Hollywood DVDs to western shampoo brands is also a bigger problem in smaller cities. Consumers may not realize they are buying fakes and mistakenly blame big manufacturers for poor quality products.
Purchasing power is growing quickly in lower-tier cities, however. Economic liberalization has encouraged private entrepreneurs with disposable income in far-flung provinces, so marketers such as Procter & Gamble Co., Nike and General Motors Corp. are ramping up operations there.
Luxury brands are finding fertile ground in markets including the Liaoning, Jilin and Heilongjiang provinces, where there is a long tradition of ostentatious consumption. Louis Vuitton bags, Ferrari cars and Omega watches are surprisingly common.
One in 1,700 mainland Chinese -- about 825,000 people -- is worth at least $1 million and Chinese spent almost $10 billion on luxury goods in 2009, according to Chinese luxury business magazine Hurun Report. China's second- and third-tier cities are increasingly important "for brands looking to tap China's high-end consumers," said Hurun's Shanghai-based publisher, Rupert Hoogewerf.