Tackling the Tiers in China

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Anyone who has any interest in China will already know that hundreds of millions of Chinese people are entering the middle classes and that hitherto unknown cities in the lower tiers are becoming boom towns almost overnight.

Shenzhen transformed from a fishing village into a modern metropolis in little more than 25 years

Shenzhen transformed from a fishing village into a modern metropolis in little more than 25 years

The international consultancy firm, McKinsey & Company, predicts that by 2030, 350 million new people will have joined China’s urban population. By this point, there will be at least 220 cities in China that have populations greater than one million people. There are only 35 European cities of this size. Of those 220 Chinese cities, 23 will have more than 5 million people.

Incomes are set to quadruple over the next twenty years and it is self-evident that brand loyalties will rise accordingly. In short, we will see a whole new generation of empowered Chinese consumers. However, for every opportunity in China, there will be as many challenges and the country is just too big and diverse for any one single marketing strategy. It is imperative to understand Chinese consumers, their wants and needs in order to formulate successful approaches. However, studying any culture requires years and it is highly recommend to partner with someone else on the ground in China who can provide you with inside information and guidance. What’s more, China’s culture is no more static than any other and Chinese consumers are increasingly looking at the quality of good rather than simply price. It is changes such as this that experts like Resonance can explain and keep you one step ahead of the competition.

Tearing Down the Tiers

Until now, the most common approach among foreign brands in China is to focus their attention on the first tier cities which, at a glance, seems like a perfectly sensible strategy; tier one cities contain the highest concentration of China’s middle class. However, market saturation has already begun to take place.

What’s more, according to The Demand Institute, the government support which has enabled so many cities to grow so quickly is becoming less effective as diminishing returns on investment coupled with fiscal restraints make such policy-led growth increasingly affordable. This means that stark disparities will remain between China’s cities. What’s more interesting (and perhaps disturbing) is that the wealth of the richest and poorest cities will to some extent converge over the next decade, as is typical for a developing nation.

How to Proceed?

Deciding how to expand in China can be incredibly tricky. The needs of consumers across the various tiers can be very different and marketers need to take these difference into consideration. For higher income cities in tiers One and Two, brands should aim for higher levels of penetration and repeat purchases.

Four Points to Consider

  1. It seems certain that the double digits rates of growth in China have gone forever. In this “new normal”, rates of consumption are likely to be lower as well.
  2. There is increasing uncertainty about the growth of Internet penetration in China; the government’s Internet Plus initiative suggests that it is committed to increasing access to the Internet in China but much can change this.
  3. While online and mobile technologies are helping China’s consumer financial service sector to grow, it still remains underdeveloped considering the size of the country’s economy. Until a sophisticated regulatory framework is created, it will continue to have a stunted growth. However, it is distinctly uncertain as to whether government regulators will continue to support private-sector participation in household finances.
  4. The government’s narrative of the “new normal” suggests that they are pursuing government-led solutions to the country’s economic problems. This could easily jeopardize the idea of a consumption-led economy.

Ultimately, it will become increasingly advantageous to create strategic partnerships with local business who have a deeper understanding of the Chinese market and help ensure a successful entry into the market.


About Author

Not yet an 'old China hand', Sam Elliott is a British man who is passionately curious about the Middle Kingdom. He's a recent transplant to LA and has made it his mission to spread the word about great Chinese brands. When he's not working, he loves to keep active, eat vegan and learn study Chinese.

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