Lower Tier Cities

Vast Opportunity Requires Understanding the Consumer

Over the last four years, the economy of China has grown by over 30 percent in real terms. It has become the world's second largest economy and is fueling the country's global growth. However, its domestic consumption rate remains notoriously low while saving is astoundingly high as a share of GDP. As the global financial crisis subsides, China's leaders realize they must recast China's economic focus from export-led to domestic consumption-driven in order to maintain sustainable growth. In 2011, China began its twelfth fiveyear plan, designed to encourage consumer goods imports, foster urbanization and optimize the consumer market. It plans to nurture 10 million new consumers each year to enter the market.

Until recently, most of China's wealth has been concentrated in the higher tier cities. The average disposable income of a higher tier family is about three times higher than that of a lower tier family. However, the consumer market in the higher tier cities is fast approaching saturation. Fortunately, China has more than 100 lower tier cities with populations in excess of one million. As their incomes rise in these cities, as a result of favorable government policies, consumption patterns will be the main driver of China's domestic economy. In fact, across all product categories, lower tier cities are already beginning to account for a significantly larger proportion of consumption.

In China, higher and lower tiers are generally accepted terms for organizing such a large and diverse country into a comprehensible hierarchy of population centers. Tier one includes the great coastal cities—Beijing, Shanghai and Guangzhou. Historical provincial capitals comprise some of tier two. Factors including history, population and income determine other tier designations. What's most clear is that the golden age of growth of China's consumer class appears to be taking place outside the higher tier cities and in the lower tiers cities. Any business serious about establishing a meaningful presence in China's consumer market must acquire a deep understanding of the purchase behavior of consumers in the lower tier cities. One way to understand this behavior is to compare it to consumer purchasing behavior in the more familiar higher tier cities.

Key Highlights

1. Purchase intentions are more family centric.

The majority of lower tier consumers focus their shopping on the purchase of family items first, according to the CNRS-TGI tracking study. With relatively larger families and lower disposable income, these consumers seek products and packaging that are designed to satisfy family consumption and fit family budgets.

2. Kids have less say for routine items, more say for specialty products.

In order to keep their limited budgets under control, parents in the lower tier cities give their kids less say in purchasing decisions for routine items, such as clothing and food. When purchasing new or trendy products like electronic gadgets however, lower tier parents are more likely rely on their kids as information sources.

3. Value-for-money and functional attributes influence more than brand.

Although price is the most important influence on purchase decisions across all tiers, lower tier consumers will spend more for products with more or better functional attributes, while higher tier consumers will pay more for brand. For example, lower tier consumers ranked "image quality" and "technical performance" most important when purchasing a digital camera. Higher tier consumers, in contrast, ranked "image quality" and "brand" as the most important purchase criteria.

4. Brand, ads and word-ofmouth exert a greater influence on purchasing.

Lower tier consumers show a higher tendency to treat ads as a fair source of product knowledge. They even click online ads more frequently. With fewer channels for obtaining product information, and greater apprehension about purchasing mistakes that will stretch limited budgets, lower tiers consumers are more eager to seek reassurance from wordof- mouth or from brand. In more expensive or safety-related product categories, such as automobiles or baby formula, the need for brands to play the quality assurance role is even greater.

5. TV is still the most effective mass media for product ads or infomercials.

Unlike higher tier viewers who watch TV mostly for entertainment, lower tier viewers are more serious minded. They usually watch news and utilitarian programs to acquire knowledge, perhaps for career advancement. CCTV (Chinese Central TV) is especially dominant and popular in lower tier cities.

6. Higher tier or global brand fame doesn't guarantee lower tier success.

What consumers in lower tiers look for in a brand is quality assurance or prestige. However the qualities that connote prestige in a lower tier city may be specific to the locality and different from the qualities that confer stature in higher tier cities. To succeed, a brand requires a communication strategy that assimilates local culture. Blind replication of strategy from other markets can sometimes create only the adverse perception of expensiveness without the value for money.

7. Online purchasing is more prevalent.

Many popular brands or retail chains have not yet expanded into lower tier cities. Sometimes online ordering is the only access channel for these consumers. Yet they may desire trendy products and brands as much as consumers do in the higher tier cities. With relatively limited product selection available in local stores, consumers in lower tier cities are more likely to shop online.

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Methodology and valuation by Kantar Millward Brown

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