China's Growth Opportunities in 2020 Lie in Cities You Never Heard Of
New York, Paris, Tokyo, Suqian.
One of these things is not like the other, one of these things is not quite the same. For now.
Unknown to most of the Western world, cities like Suqian in Jiangsu province are examples of prosperous third and fourth tier Chinese cities which will be the only engines of growth in a COVID-hit 2020. Suqian, with a population of around 4.88 million (more than that of New Zealand) is the fastest growing city in China demographically.
An important transport hub and customer service base for eCommerce giant JD.com, Suqian’s population grew 36.6% since 2015 due to the abundant job opportunities in the city. Its residents were ranked sixth in China in terms of spending over the 2019 Chinese New Year festival shopping season, creating a puzzle for global retailers:
How can we sell to people we know nothing about?
Making Money was Easy for Overseas Brands in the Boom Years
China used to be easy for big foreign brands. The key markets were the shiny boom cities of Beijing, Shanghai, Guangzhou, and Shenzhen, that make up the current tier 1, colloquially known as “Bei-Shang-Guang-Shen”.
Global marketing strategies were easily modified for the cosmopolitan populace, many of whom had lived, studied and traveled abroad. This was the China that the expats which lead their brands through the country’s hyper-growth period knew.
Then Everything Changed
Thanks to skyrocketing living costs and household debt, retail growth has now flattened in tier 1 cities. The next big wave of consumption in China is now coming from cities in the third and fourth tiers of the hierarchical ranking system used by the Chinese government.
Once looked down upon for being undeveloped, these cities boast a burgeoning aspirational middle class with considerable disposable income. According to McKinsey, from 2010-2018, upper aspirant and mass affluent households in lower-tier cities grew at a 38% compound annual growth rate (CAGR), dwarfing the 21% found in tier 1. There are close to 80 million people living in tier 1 cities, compared to 1.31 billion people in the rest of China, representing vast amounts of untapped potential.
Relative Spending Power of Lower Tier Consumers is Likely to become Stronger
Recent research has shown that due to the current pandemic, consumers outside of tier 1 will be less affected financially and will become even more important to brands looking for growth opportunities.
Shanghai based consumer insights firm, Taeltech, surveyed 2000 users from their own platform across 254 cities. They combined responses with actual behavioural and demographics data that they collected through usage of their services. This gave them a much richer snapshot of consumer sentiment than what is produced by traditional online panels.
Respondents were asked whether the COVID-19 crisis will make them adjust expenditure and if so, what was the reason. 50% of respondents in the tier 1 cities of Shanghai, Guangzhou, Beijing and Shenzhen plan to adjust their budgets, compared to 46% elsewhere in China.
The starkest differences in the groups of consumers were their justifications not to save money. The most popular reason given by consumers in tier 1 (67%) was that they already were living pay cheque to pay cheque so had no disposable income anyway. Conversely, outside of tier 1, the main reason cited by 42% of respondents was that they were not expecting the virus to have much of a financial impact, so had no drive to save.
Clearly, the wallets of tier 1 respondents were being hit harder by the pandemic.
Toto, I've a Feeling we're not in Shanghai Anymore
It seems natural that brands would then want to target consumers outside of tier 1, but the reality is that it’s not that simple. Consumers there have different preferences and world views. Marketing, messaging and channels therefore need to be different. Much of what expats and global brands thought they knew about China has become irrelevant.
For example, the polished marketing content found on the major social networks Weibo and WeChat is mainly targeted for consumers in tier 1 or 2, meaning that lower tier or rural consumers find it hard to connect or be persuaded by it. They prefer the breezier short video platform, Kuaishou, which has its own KOL influencer stars that better reflect the life and habits of this audience.
Pinduoduo, the group buying platform, is the king of lower-tier ecommerce. It rewards consumers with significant discounts on popular products if they buy in groups. Alibaba and JD.com have also recently launched their own targeted platforms to grab a share of the market.
Everything is different. In this fast changing environment, local Chinese brands often have the edge over established global players. They are more connected to the market and are digitally savvier. Take for example beauty brand Perfect Diary, who were unknown in 2016 and in four years became one of the market leaders.
How to Win in Lower Tier Cities in 2020
Consumer product brands looking to salvage their 2020 are of course going to be focused on China, the only major market to have roughly recovered. But - newsflash - the old playbook will not work anymore.
The real global spending power is in Suqian and cities of its type, but you do not understand how the market works or what makes consumers tick. And guess what? Your local Chinese rival does.
Overseas decision makers need to get deep and personal with lower-tier consumers and they need to do it quickly. Taeltech’s consumer data products give consumer-facing companies the insights they need to connect and communicate with consumers in the lower tier cities in the most effective way.
They are able to generate rich consumer insight data based on real consumer behaviour in real-time, giving you an unfair advantage in the market that matters.
Taeltech Insights provides you with the data needed for informed decision-making. For real-time research delivered straight to your inbox, sign up for Taeltech Insights below.