More jobs, housing stimulate migration to lower tier cities
Brands need additional insights to grasp new opportunities
During China’s economic expansion over the past three decades, millions of people left rural areas and lower tier cities to find employment and a better future in the bustling economies of the coastal metropolises, particularly Beijing, Shanghai, and Guangzhou. Now, not only has that trend slowed, in many cases it has reversed, creating new challenges for brands.
Two primary factors disrupted the traditional migration pattern. First, the upper tier cities have become competitive, crowded, and expensive. Second, the lower tier cities are rapidly changing, offering more job opportunities, good salaries, and a more balanced life. For similar reasons, people are moving from villages into nearby small cities.
The improvement of living standards in interior China happened rapidly because it is a top priority of the Chinese government. State-Owned Enterprises and public-private partnerships, have built housing, added high-speed broadband, and improved infrastructure, including better roads, high-speed rail, and more airports. Improved infrastructure has enabled industry to move inland and benefit from lower-cost real estate and labor, and favorable tax policies.
At the same time, the major e-commerce platforms and other internet brands have developed online-offline ecosystems that equalize consumer access to products and services throughout much of the country. Today, residents the in many lower tier cities can often expect one-day delivery on brands they purchase on Alibaba’s Tmall, JD, and other major e-commerce sites.
In addition, both Alibaba and JD have launched businesses to streamline the movement of products from the manufacturer through to the final retailer destination. Greater efficiency in the supply chain results in comparable pricing in the lower and upper tier cities.
Along with these changes, the less stressful lifestyle in lower tier cities attracts inhabitants. Because daily commuting is faster, people have more personal time. Because of lower real estate costs, they can afford more living space. Couples in lower tier cities are more likely to have a second child than couples in upper tier cities.
Lower tier cities are expected to drive China’s population growth and the demand for certain categories, especially those related to raising children, a development with important implications for brands.
Actions for brand
success in lower tiers
- Understand local differences
Because of developments in e-commerce and distribution, lower and upper tier cities should become more comparable in product availability, service levels, and prices. However, brands need to remain mindful that consumer lifestyles differ according to city tier. Understanding those differences remains vital for brand success.
- Personalize communication
Communicating effectively with residents of lower tier cities requires understanding their distinctiveness. They are less transactional than upper-tier residents and prefer personalized, relationship-based shopping. Although many brands may not operate physical stores in lower tier cities, they still need to deliver an engaging experience with personalized messages and creative packaging.
- Premiumize when appropriate
It is no longer axiomatic that consumers in lower tier cities will shop price alone. Parents in lower tier cities are just as likely to want the best for their children and are often ready to pay for a higher-priced product when the premium is merited.
Case Study | Wuhan
and population growth
The population of Wuhan, the capital of Hubei Province in central China, has increased over the past several years, reaching around 10.9 million, while population growth in Shanghai and Beijing has slowed or even declined, in part because of the high cost of living, but also because of government policies that control household registration. At the same time, the GDP growth rate of Wuhan is greater than the rate for Beijing, Shanghai, and Guangzhou.
To drive economic growth, and incentivize people to move to Wuhan, the local government intends to construct new housing and make it available to educated workers for 20 percent under market rates. In addition, the city has issued a schedule of recommended salaries that increase according to level of education.
College graduates would earn 50,000 yuan annually ($7,400), while individuals with doctoral degrees would receive 80,000 yuan ($11,800). (China’s GDP per capita is around $8,800, according to the World Bank.)
Wuhan outpaces upper tier cities in population growth…
Wuhan has increased in population over the past several years, while the population of Shanghai and Beijing has declined.
… And Wuhan outpaces upper tier cities in GDP growth…
The GDP growth rate of Wuhan is greater than the rate for Beijing, Shanghai, and Guangzhou.