Lower-tier cities hold great potential for consumption upgrading

Growing consumption demands in lower-tier cities mean great potential for the development of Chinese brands, according to industry insiders.

Lower-tier cities, which include third- and fourth-tier ones and those below, have seen significant consumption upgrading, said Chen Ke, a senior partner with global consultancy Roland Berger.

"If local brands can make products that are cost-efficient and of high quality, based on a deep understanding of consumers and marketing channels in these smaller cities, they will definitely make great progress," Chen said.

A recent report by the AliResearch Institute at e-commerce giant Alibaba Group said that more than 50 million new products from 200,000 local and foreign brands hit the market last year through Alibaba's retail platform Tmall-compared with 12 million in 2017.

These products were mainly purchased by 75 million Tmall users who like to buy fancy, novel items in particular and are more willing to spend than the average consumer, with each one snapping up 17.3 new products on Tmall on average last year.

Some 44 percent of them are from lower-tier cities, the report said.

A recent report by food delivery platform Eleme said the catering industry has also expanded rapidly, and the growth in third- and fourth-tier cities is much higher than that in big metropolises.

As an example, it said the number of orders for goose liver placed in 2017 from Langfang, a third-tier city in Hebei province, was four times the figure for the previous year.

Figures from travel agency Fliggy showed that last year 54 percent of people who bought tickets and other items from its platform were from lower-tier cities.

Chen, a veteran in the retail industry, said sales in many sectors in third- and fourth-tier cities has seen quicker growth than in first-and second-tier ones in recent years, including clothing, food, beverages and home appliances.

He also said that in recent years, with economic restructuring, many labor-intensive industries have moved to lower-tier cities, helping to fuel consumption growth in these areas.

"Many people have moved back from big cities to smaller ones, bringing with them their consumption patterns, including preferences for good quality, service and personalized products," he said. "With lower housing prices in smaller cities, disposable income also rises, which means people have more to spend each day."

Moreover, in recent years, the population in lower-tier cities has grown faster than in major metropolises.

Chen said, "The total population of third-tier cities is about six times that of first-tier ones now. In the future, lower-tier cities with bigger populations will definitely contribute more to consumption upgrading, as the number of consumers, their disposable income and confidence in spending have all been growing."

Wu Jiangang, a research fellow at the China Europe International Business School at the Lujiazui International Finance Research Center in Shanghai, said another important factor that has helped boost consumption in smaller cities is the rapid development of the e-commerce sector, as online retailing has now reached most lower-tier cities, counties and even small villages.

The AliResearch Institute report said online shopping in smaller cities has been growing rapidly. For example, in third-tier ones, 72 percent of internet users made online purchases last year, compared with 58 percent in 2015. In counties and villages, about 45 percent of internet users made online purchases last year.

Wu said, "E-commerce has given people in smaller cities access to the latest consumption trends, more-diversified and new products, which also helps fuel consumption in these regions."

Chen said demand from smaller cities is very different to that in bigger ones, so if domestic companies can learn about specific requirements, there is huge potential for growth.

"For example, in big cities, people are willing to spend one month's salary on an iPhone," he said. "In small ones, they prefer mobile phone brands such as Oppo and Vivo, as they have good functions and designs but are relatively cheaper."