Two-year-old Lipton Milk Tea is a rare success story in China for marketers 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.
When marketers enter China, they typically evaluate the country's cities, giving each locale a tier designation -- most advertisers use a four- or five-tier system, although one marketer actually has 10 classification levels. A city is relegated to a tier based on the size, sophistication, purchasing habits, attitudes and disposable income of its population.
Tier one is reserved for Beijing, Shanghai, Guangzhou and sometimes Shenzhen, a small, prosperous town just across the border from Hong Kong. Tier two has about 30 cities, mostly provincial capitals that have more than 5 million people.
Tier three encompasses about 150 county capitals, each of which has more than 1 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 refuges of farmers and very few brands. Annual salaries from tier-two to tier-four cities average $2,000 to $4,000.
Moving down the tiers, said Tom Doctoroff, JWT's CEO China, Shanghai, "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 within this general framework, marketers segment China differently. Anta, one of China's leading sportswear brands, segments the country into 10 tiers based on the price of real estate for its retail outlets in each town. So Dalian, a posh seaside resort, ranks 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 depending on a company's products and goals.
"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," said Matt Brosenne, international-business director at CSM Media Research, Beijing. "It gets pretty messy, but it's cool because there are great rewards in lower-tier cities."
Lenovo, for instance, is wrapping up a yearlong roadshow that visited 1,000 fourth- and fifth-tier cities. Those areas accounted for much of the company's double-digit growth in China during the past year, despite ongoing price wars with local rivals.
Consumers in cities such as Hangzhou, Shenzhen and Dongguan often have greater spending power than Shanghainese or Beijingers because of their lower cost of living. While that trend lets luxury marketers like Louis Vuitton open profitable shops in a dozen second-tier cities, smaller cities remain an enormous challenge for mass-market brands. Local competitors are fierce, better at distribution and charge less.