Download Lapping up Luxury Goods

Second-Tier Cities Soar
Why companies are targeting Tianjin and Wuhan consumers
By Danny Ng
The phrase “China is booming!” has become ubiquitous in the global business
community over the past decade. But in the last few years, it has become an
understatement. The country has been one of the only bright spots in the world
economy, and it’s not primarily coming from the biggest, shiniest or most
famous cities.
While first-tier cities like Beijing and Shanghai are expanding at a steady pace,
the real growth is happening in second-tier cities like Tianjin and Wuhan.
Second-tier cities (China’s 15 biggest cities after Beijing, Guangzhou and
Shanghai) account for roughly six percent of China’s population, but they
contribute about half of the country’s total foreign direct investment (FDI).
Second-tier cities have some common advantages that are driving their rapid
growth. Low operational costs and large, developing consumer and industrial
markets are attractive to both producers and sellers. Meanwhile, local
governments are supporting their cities, often in successful attempts to attract
foreign investors.
In Wuhan and Tianjin, the strong, competitive business environment is the
foundation for FDI. Their international finance industry is well established. The
question now is why international foreign companies are buying into the
Chinese market and how are they able to compete.
Specifically, second-tier cities are becoming a first move advantage for many
foreign banks that have moved away from the highly concentrated banks
dotting first-tier cities. This environment has created less competition and thus
more market share for foreign banks to enjoy. With the Chinese government
opening the floodgates in the banking sector to fullfledged competition,
international banks are swarming in to seek the potential in the growing
Chinese economy. China’s domestic banks are also facing barriers, which
cause international companies to swoop in and take Chinese consumers. As a
result, domestic banks are taking steps to upgrade their management and
information systems according to international bank standards. When
international banks came to China, they provided better quality service,
improved and convenient ways of operating, and targeted a specific group of
high income consumers where they provide higher and more attractive interest
rates for saving. With these determinants in mind, it is no wonder international
banking has thrived successfully in second-tier cities.
Chasing the Chinese Consumer
China’s stimulus package, (which was put in place to fend off a recession in
the wake of the financial crisis), has benefited Chinese in second-tier cities
greatly. Wuhan, for example, has witnessed rapid economic development
since the opening up of the Yangtze Economic Belt and the construction of the
Three Gorges Dam project, as well as a high-speed rail to Guangzhou. The
result of these and other factors has been an average annual growth of just
over 10.5 percent. Furthermore, an increasingly wealthy consumer population
and low operational costs help investors in second-tier cities to maximize their
profits.
In the midst of all of this second-tier city growth, foreign companies face
significant challenges in China, including
the complex regional discrepancies in market behavior. The recent and rapidly
growing Chinese economy has made marketing research a vital player for
international companies in understanding the needs and trends of the Chinese
consumer. Research on market attractiveness, service quality and consumer
behavior are all becoming critical in this highly competitive market, especially
for those in the luxury or branded goods industries, which are increasingly
successful in cities like Wuhan and Tianjin.
Lapping up Luxury Goods
The rapidly growing purchasing power and appetite for high-end products has
caught the attention of top international companies, who are now increasingly
gravitating to second-tier cities. The demand for luxury products is so high in
some second-tier cities that it is outpacing demand the in their first-tier
counterparts.
One example is Louis Vuitton. The company entered China about 20 years
ago and now has more than 15 boutiques spread across 13 cities. The fact
that luxury brands like Louis Vuitton were able to not only survive, but also
thrive during the global recession, indicates how brandhungry Chinese
consumers are.
Furthermore, compared to Europe and the US, China’s second-tier cities have
very large markets. China has over 100 cities with populations over one million.
This opens up the floodgates to immense possibilities for international market
development. The 15 secondtier cities are even bigger, usually with
populations larger than most American cities.
Differences in Consumer Preferences
Recently, Force Research surveyed one of our successful clients, a luxury
product retailer of branded accessories. We polled 10 regions: Beijing,
Qingdao, Chongqing, Tianjin, Guangzhou, Hanzhou, Shenyang, Shenzen,
Shanghai and Nanjing. In each region, we interviewed 10 respondents under
the age of 50 with high personal income, to describe the service and
environment they prefer. The results of our research reveal that residents of
secondtier cities desire proactive sales people in a quiet service environment
with a wide array of product choices. In contrast, first-tier city residents prefer
to choose products by themselves, before getting a salesperson’s
recommendation. Interestingly, second-tier customers held lower expectations
of service level compared to their first-tier customer counterparts (see page 9).
When visiting second-tier cities, you will notice branded products, including
casual wear, are retailing faster than many other countries in Asia. Hugo Boss
and Burberry are just a few of the foreign companies that have successfully
managed to expand their brands into second-tier markets. Meanwhile,
women’s beauty products, such as Estee Lauder, are surging as well.
It’s worth noting that many important factors distinguish second-tier cities from
their first-tier counterparts, from product understanding to market exposure.
They simply expect less from their shopping experiences. In this aspect, these
rapidly developing cities are easier to cater to than Beijing, Shanghai and
Guangzhou.
Growing Importance
As second-tier cities continue to soar, Tianjin and Wuhan are hot spots for
investment, with both cities playing key roles in fueling China’s FDI. Tianjin is
the leading city for an increasing demand of international products, while
Wuhan has experienced the fastest GDP growth among second-tier cities.
Both government and business investors are supporting their economic
potential and technological developments. While each second-tier city
contributes differently, they are all playing a vital part in accelerating China’s
economy.