Rising disposable income levels across China's second- and third-tier cities mean more opportunities for purveyors of branded goods.
First-tier or second-tier city? Many foreign analysts and strategists fall into the standard practice of categorizing cities in China to determine which markets to enter or how to expand beyond the traditional entry points, such as Beijing or Shanghai. A far more effective approach is to target the "first-tier consumer"—a consumer defined more by spending behavior, income, and lifestyle than by home geography.
Though the qualifications that define a first-tier consumer lack standard guidelines, analytical frameworks for this research often include savings, car ownership, ownership of luxury goods, and disposable income.
This approach is particularly effective for marketing and selling luxury products and branded goods in general.
- Instead of targeting Tier 1 cities, companies that sell luxury goods and other branded goods should focus on reaching top-tier customers in all cities.
- Though companies may need to adjust their marketing, distribution, and human resources plans, they musttap consumers in second and third-tier cities to expand sales and remain competitive.
Given the rapid pace of development throughout China, many companies find that negotiating a successful brandlaunch in a first-tier city is no longer a sufficient market-entry or expansion move. Cities such as Beijing, Guangzhou, Guangdong and Shanghai have a large share of first-tier consumers—but they no longer have them all. More than 50 percent of the richest Chinese live outside traditional centers of wealth. Given current macroeconomic trends that support broad-based growth across the country, growth in China's middle class and wealthy consumers over the next five to seven years will occur primarily outside the traditional first-tier cities.
The question that remains is how to tap the first-tier customers that live outside Beijing, Guangzhou, and Shanghai. These customers have the desire and ability to consume branded products. They are also able to allocate a larger share of their income to these products because the cost of living in second- and third-tier cities is generally lower.
Written by Matthew Smith (LJS President) and Francis Bassolino (Alaris Consulting). Originally printed in The China Business Review.