Penetrating a market as large as China means reaching beyond the most-popular retail districts in Shanghai and Beijing. While some global brands are building storefronts across scores of second- and third-tier cities, even the top brands have learned that e-commerce efficiently extends their marketing reach.
Smaller companies have no choice. The cost of going online is far less that the cost of building one store.
Here, we’ve collected five reasons lower-tier cities matter, and how e-commerce can help you find those customers.
1. Speed to market Yigal Azroue, a clothing designer who sells his work in a Shanghai boutique, talks about the prospects for expansion:
“I have barely tapped into the market, but the opportunities that you hear about today are reaching the second- and third-tier cities much faster,” he says. “China is certainly not just Shanghai, Beijing and Hong Kong.”
Azrouel acknowledges that when new markets first open, consumers are initially label-driven and like to flash logos.
— From a China Daily report by Mary Katherine Smith on The Villa, a Shanghai boutique.
2. Wealth High-priced goods dominate the best retail blocks in the top cities, but the market extends deep into the next group of Chinese cities.
The phenomenon isn’t limited to Beijing. Drive through most dusty provincial capitals now and you’ll see high-end shops in the center of town, often alongside the People’s Square — a popular name in deference to communist tradition. In Chongqing, a city once famous for its revolutionary zeal, a five-story Louis Vuitton shop opened in September, overshadowing the iconic Liberation Monument.
— From a Los Angeles Times article by Barbara Demick on the growing market for luxury goods.
3. Growth Sales increases will come even more rapidly outside the top metro areas.
Geographic expansion holds promise too. Many companies can acquire consumers in China’s poorer cities, which the government has targeted for development. For example, 15% of consumers in and around the city of Chengdu said they had started using personal care products only in the past year compared to just 1% in the more developed region around Hangzhou. That’s important for growth; many multinational companies still operate only in a handful of top-tier cities in China.
— From a McKinsey report by Max Magni and Yuval Atsmon on Products Chinese Consumers Want.
4. Decision makers Women in third-tier and fourth-tier cities are eager to buy products that connect them to the wider world:
More Chinese women are getting into online shopping. Although the rate of increase of the penetration of online shopping in low tier cities are not as high as tier 1 and 2 cities, the former still boasts a 77% increase, moving from 13% penetration in 2007 to 23% in 2011. The Internet is a source of information for 56% of females in tier 3 and 4 markets, providing them with more details about brands and their products. Although they are still quite traditional, with 62% of women saying that traditions and customs are most important, 73% believe it is important to keep on learning new things. In terms of impulsive purchase (39%) and desire to be trendy and modern (52%), their scores are even higher than their tier 1 and 2 counterparts.
— From an AsiaMediaJournal report on a Study of E-Commerce in Lower-Tier Cities
5. Follow the Leaders Solution: E-Commerce. Case Study: Armani
While there are high concentrations of luxury consumers in urban centers like Shanghai and Beijing, it takes time to build brick and mortar boutiques to meet the needs of China’s luxury consumers who reside in second and third tier cities. Given the limitations on expansion, Armani was missing out on an opportunity to reach potential customers beyond the scope of their existing operations.
— From a report in the China Observer about Armani’s e-commerce initiative.
Key to the Armani lesson: online retail enabled Armani “to expand its reach into third and forth tier cities where it could connect with young technology savvy luxury consumers” and “regardless of whether they were located in Beijing, Harbin or Urumqi.”
As you think about your strategy to reach new customers, these five lessons may bring clarity to your plans: Speed to market, finding customers with high levels of discretionary buying power, focusing on high-growth areas, finding the woman who make the spending decisions for their families and following the examples set by top global brands.