Observation 5: Going Deep
Purchasing power, interest in brands rise in lower tier cities
Market-driven brands gain momentum
The popular image of modern China usually focuses on the rapid transformation of its coastal megacities. But less than 10 percent of China’s 1.3 billion people live in Shanghai, Beijing, and Guangzhou. Over a billion people live in other cities, where the Chinese economy is growing fastest.
China’s coastal megacities are experiencing GDP growth near the national rate, which has been around 6.9 percent. The Top 10 cities with the highest GDP growth are all lower tier cities with growth rates that vary from 9-to-12 percent.
These cities are burgeoning as Chinese producers move inland to lower-cost regions. And Consumers in these regions are becoming wealthier. This shift reflects the government’s intention to sustain China’s economic growth, but at a responsible pace and in ways that advance economic equality.
Critically, brand, which has been important in larger cities, is becoming more important in lower tier cities. In 2014, for example, 88 percent of people in Tier 3 cities considered brand important, compared with 98 percent in Tier 1 cities. Today, 94 percent of people in Tier 3 cities consider brand important, while brand importance has remained fairly steady in Tier 1 cities.
And consumers in lower tier cities are not shopping for price exclusively. Recent research by Kantar Worldpanel dispels that notion, and finds that people in lower tier cities pay around the same prices as consumers in higher tier cities across 15 fast moving consumer goods (FMCG) sectors.
Also revealing, across Tiers 1, 2, and 3, the Premium Index—the ability of a brand to command a premium price—is rising for market-driven brands and declining to average or below average for State Owned Enterprises (SOEs) and multinationals (MNCs). Market-driven brands enjoy momentum that is clearest in the lower tiers, where they typically benefit from relatively greater local knowledge and distribution capability.
China’s lower tier cities contain its greatest market opportunities. And profiting from those opportunities increasingly depends on brand. Market-driven brands currently have the advantage because of their strengths in lower tier cities relative to SOEs and multinationals. But all brands, regardless of ownership, may need to adjust their strategic thinking. Describing the potential in China’s lower tier cities sounds as if one massive opportunity awaits. The reality is more complicated. Each lower tier market is different and requires its own marketing and communication strategy. Of course, in an aggregate market of over one billion people, it should be possible to find some economies of scale, eventually. But the immediate concern should be brand building, based on pertinent insights, market-by-market.