Exploring the Hidden Potential of China’s Lower-Tier Cities

5 January 2023

In recent years, it has been observed that more and more brands in China are focusing on expanding into the country’s lower-tier cities, in what is sometimes referred to as the “downstream market” through various strategies. For example, coffee chains like Luckin’ and Starbucks have started entering smaller, lesser-known cities, offering more affordable options to attract potential customers. Heytea launched a sub-brand called “Hey Little Tea” in 2020 to target this market, and Hema introduced mini stores focused on smaller cities.

Even luxury brands are expanding to lower-tier cities; recent examples include Burberry opening its first store in Chengdu in 2018, and Louis Vuitton, Prada and Chanel opening their first stores in Nanchang in 2019, 2020 and 2021 respectively. It can be seen that China’s lower-tier cities have become an attractive target market for many brands, evolving into the country’s new hidden mass market.

In this article, you’ll learn:

What (Where) are China’s lower-tier markets
Latest developments in China’s lower-tier markets
Characteristics of consumers in lower-tier markets
How brands can succeed in China’s lower-tier markets

What (Where) are China’s Lower-Tier Markets

The “lower-tier markets” of China refer to markets in third-tier cities and below, which collectively are some of the largest consumer markets in China in terms of population and area. These areas can include the hometowns of many white-collar workers who have been working outside, as well as any land outside of the Beijing-Tianjin-Hebei region. Even first-tier regions have their own hidden mass market, such as the area beyond the Fifth Ring Road in Beijing.

When some people talk about China’s lower-tier market, there is always an implicit assumption that these consumers are at the bottom of the consumption chain, and some brands view this market and its consumers as lacking strong purchasing power rather than with a neutral and equal eye. To put it in perspective, the number of consumers in first and second-tier cities in China is about 500 million, while the number of consumers in the lower-tier cities is 1 billion, distributed across 97% of China’s land, with a total population totalling two-thirds of the entire domestic population.

Latest Developments in China’s Lower-Tier Markets

The competition in China’s first and second-tier cities has become more intense as rising customer acquisition costs and pandemic-related market uncertainty have made middle-class consumers more cautious in their spending habits. As a result, some brands have turned their attention to China’s lower-tier cities in search of new opportunities. In contrast to first and second-tier cities, third and fourth-tier cities have a larger market size, with many industries in their early stages of development. In recent years, urbanisation has led to increased disposable income and consumption capabilities among consumers in these cities. The expansion of internet and e-commerce companies, along with improvements in network and logistics infrastructure and the growth of social media and online channels, has made it easier for big brands to target China’s lower-tier markets and bring their products to these smaller cities.

Characteristics of Consumers in Lower-Tier Cities

Consumers in China’s lower-tier cities are traditionally influenced by a culture of frugality and tend to prioritise pragmatism in their purchasing decisions. However, the consumption philosophy of younger and middle-aged generations is beginning to shift. They may still prioritise cost-effectiveness, but their perception of what this means is changing. Whereas in the past, cost-effectiveness may have simply meant getting the most for the least amount of money, the younger generation of consumers in these smaller cities is increasingly seeking high-quality experiences and is willing to pay for products and services that offer inherent value, culture, and emotional appeal.

When discussing consumers in China’s lower-tier cities, it is important to consider the concept of “hidden wealth,” or “invisible net wealth,” which refers to the population of 25-45 year olds living in non-first tier cities. These individuals may not appear wealthy at first glance, but they often have more disposable income and leisure time due to a lack of pressure from mortgage and car loans and other expenses. They may not have the same level of income or visibility as white-collar workers in first-tier cities, but they still have the financial resources and time to spend on consumption.

Therefore, young consumers in lower-tier cities today often prioritise discernment in their consumption choices. In the past, consumers were primarily focused on finding the best deal or the cheapest option. However, the younger generation of consumers in lower-tier cities have a different motive when it comes to making consumption decisions. They are willing to pay for high-quality products and services that offer a positive and memorable experience. These consumers value the value, culture and emotional appeal of a brand and seek a sense of belonging and identity through their consumption choices. They may also seek a sense of accomplishment and satisfaction from making informed consumption choices that reflect their preferences and social class. As a result, they pay attention to how their consumption behaviour aligns with their values and preferences.

How Brands Can Succeed in China’s Lower-Tier Markets

Global brands from first and second-tier cities may initially attract attention when entering lower-tier markets for the first time due to their novelty, but this does not mean that the difficulty of entering these markets is reduced. Marketing strategies that are effective in first and second-tier cities may not necessarily be effective in third and fourth-tier cities, as these represent new markets with the new competition and consumer groups. Brands entering lower-tier markets may face challenges from both local brands that have already adapted to the regional market and potentially emerging new brands. It is important to recognise that this necessary market expansion to lower-tier cities will come with some new challenges for brands.

In lower-tier markets, relationships based on shared social backgrounds and ample time can be valuable assets for promoting marketing activities. Marketing strategies can include providing special discounts, gifts, or packages to existing customers to attract new ones, or encouraging multiple users to consume together. Group buying and word-of-mouth promotion through social media can also be effective, as people tend to follow the lead of their acquaintances in these societies. It is also important to focus on building and maintaining communities, as private traffic generated within these communities can be a valuable tool for promotion. This can involve guiding users to share promotional messages with their friends, becoming brand members, and joining communities to strengthen their ties to the brand.

In particular in lower-tier cities, it is crucial for brands to collaborate with local KOLs and KOCs who are located in those cities for several reasons.

Firstly, these KOLs and KOCs have a strong influence on consumer behaviour in these cities, as they are often seen as trusted sources of information and recommendations. Collaborating with these influencers can help a brand to build trust and credibility among potential customers in these cities. Moreover, collaborating with local influencers can help brands to reach new audiences and expand their customer base in these cities. With their large followings on social media and other online platforms, working with them can help brands to gain exposure and reach consumers who may not have been aware of the brand before. Local KOLs and KOCs can also serve as brand ambassadors, helping to spread the word about a brand and its products or services in their local community. This can be especially valuable for brands that are new to the market or trying to establish a presence in these cities.

Secondly, local influencers often have a deep understanding of the unique needs, preferences and cultural nuances of consumers in their city, which can provide valuable insights and help brands to tailor their marketing efforts more effectively. By incorporating elements of local cultures and speaking the regional dialect, coverage by these influencers will resonate more strongly with these consumers, enabling brands to build deeper and more authentic connections.

Finally, working with local influencers can help brands build a sense of community and connection with consumers in these cities. By engaging with local influencers and participating in local events and activities, brands can demonstrate their commitment to the local community and build a loyal customer base, enabling them to tap into the growing consumer markets in China’s lower-tier cities, which are often overlooked by major global brands that focus solely on the larger, more well-known cities.

Lower-tier markets have their own unique rules of survival, and for brands, expanding to lower-tier markets is not about lowering or diluting their brand, but about exploring new opportunities in the mass market. Brands need to understand the unique consumption logic and differential characteristics specific to lower-tier markets in order to find growth in these markets.

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About 评价达人 – PJdaren:

Since 2016, PJdaren has helped some of the world’s largest brands build trust, collect insights and drive sales in China by engaging Key Opinion Consumers (KOCs) and Key Opinion Leaders (KOLs) through our state-of-the-art influencer marketing solutions.

Our full-service solutions connect brands with our over 4 million-strong KOC and KOL community. We facilitate targeted, authentic conversations and content, enabling brands to capture the market with measurable results.

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