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Lower Tier Cities

Enormous opportunities await in China’s towns, villages and smaller cities

To help comprehend a country as large as China, with over 1.3 billion people inhabiting a land area that stretches across Asia, marketers often categorize cities according to tiers, which are roughly based on size, population and economic development. Until now most attention has been focused on the Tier 1 cities like Beijing, Shanghai, Guangzhou, and Shenzhen. But there are pockets of wealth and buying power scattered across the country in third and fourth tier cities.

These cities are smaller, but many are the faster growing markets of tomorrow. Foshan in Guangdong Province in the south, and Wuxi?in Jiangsu Province near Nanjing, are both third tier cities. But small is relative. Each city is home to about six million people. And their affluence rivals those of consumers in Tier 1 and 2 cities. As marketers expand into lower tier cities, there are a few things worth considering.


Development in lower tier cities

In the past, third and fourth?tier cites were often isolated. In the 11th Five-Year Plan in 2005,?the government had zoned 11?city clusters to promote tighter economic collaboration between big cities and smaller cities?within the clusters. One of the factors forming city clusters is transportation infrastructure,?with highways and high-speed?rail linking core cities together.?For example, high-speed rail will soon shrink the roughly 200 miles between Hohhot, Ordos and Baotou, in Inner Mongolia, into a one-hour commercial circle. Not only are the distances between?the three hub cities reduced, the route also connects other third and fourth tier cities as well as towns and villages.

These towns and villages are now focusing many of their commercial activities and consumption behaviors around the hub cities.

A mother in Ulanqab City, a surrounding third tier city, may bring her son to Hohhot, a second tier city, for KFC once a month. For her, it is only a day trip and she enjoys the shopping malls of Hohhot as much as her son enjoys KFC. Clustering also allows lower tier cities to benefit from the flow of talent and skills from nearby larger cities. A piano teacher from Ningbo, a municipality with independent planning status in Zhejiang Province, could drive?for an hour on the highway every Tuesday to Shangyu, a fourth tier city, to teach five students to play the violin.


The segmentation of lower tier cities

Consumers of third and fourth?tier cities are still at the initial stage of brand consumption, which is characterized by a strong desire to consume, but a lack of brand knowledge. Brand loyalty tends to be low. The homes of consumers from third and fourth tier cities contain a mix and match of international, local and shanzhai, or fake, brands. These consumers also display interesting transition behavior, adopting new products and brands while keeping some of the old.

There are at least three distinct population segments in third?and fourth tier cities: middle and affluent classes (MAC); general mass consumers; and migrants, rural people who move to cities?for work. The following example is over simplified to clearly illustrate the differences in consumption behavior among the three segments: each member of a?MAC family wants his or her own personal brand of liquid shower gel; the mass consumer household is looking for a better liquid shower gel that the entire family can use; while the rural migrants still use soap bars.


The rising middle class and the affluent

A large number of consumers in lower tier cities are rising to MAC status for the first time. A rough estimate is that by 2020, two-thirds of the MAC population will live in lower tier cities. MACs have high expectations of their own future, and they will strive for all kinds of transformations in their lives. The desire to transform, for example, is expressed in consumption?and trading up to better brands and products, especially for discretionary items such as home decoration, appliances, apparel, and travel.

Often MACs have worked and lived in Tier 1 and 2 cities for a period of time. Inspired by that experience, some of them move back home to start their own businesses. Manyof these businesses, such as spas, health clubs, fancy hair salons,?are new ideas for lower tier cities. MACs are often the trendsetters in their markets.


The general population of mass consumers

The general mass consumers are more traditional and conservative in their consumption. They are in the early stages of satisfying their desires for goods and services?that exceed basic needs or that fulfill functional needs at a higher standard. Many are trying new categories or new products— perhaps fabric softener or ice cream mooncake—for the first time.

They advance into middle class status together with a social circle of friends. Since China is mainly?a collectivist society, when their social circle graduates to a certain consumption level, everyone in the group tends to do the same?to save face, or maintain respect. Take a group of 13 friends in Jungar Banner, a fourth tier city in the North, for example. One day, one of them says that she wants to get a driver license. The next thing you know, all 13 friends enroll in a driving school.


Rural residents who migrate to cities

People from rural areas do not travel very far from their land and end up in surrounding third and fourth tier cities, where they are often among the poorest inhabitants. However, other than spending in the cities where they work and live, they also stimulate spending in their homes in the rural areas.

Some of what they earn, they?send back home. They care a?lot about face, so when they go home, they tend to bring new and better products back. Although they do not earn a great deal, their consumption is not entirely of low end products. With the right marketing mix, these consumers can help drive scale in third and fourth tier markets.

Marketers need to understand lower tier cities and the clusters of towns and villages that surround them. These places will be the fastest growing markets over the next few years and their inhabitants will drive brand growth.


Theresa LooNational Training Director Ogilvy & Mather China
theresa.loo@ogilvy.com

About Ogilvy & Mather

Ogilvy & Mather is one of the largest marketing communications companies in the world, providing a range of marketing services.

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