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Big Prizes in Small Places

China’s Rapidly Multiplying Pockets of Growth
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The rise of the middle-class market beyond China’s largest cities is well known. But there’s been scant notice of the significant differences between middle-class consumers in large metropolitan areas and those in smaller cities. The Boston Consulting Group’s latest survey, conducted in the spring and summer of 2010, found that middle-class consumers in smaller cities are more likely to increase their spending and to trade up than their counterparts in top-tier cities. This presents a clear opportunity for multinational brands looking for growth beyond China’s biggest cities. But success will depend on how quickly companies can understand and respond to differences in attitudes, spending behavior, and preferences among small-city consumers.

As China surpasses Japan to become the world’s second-largest economy, Chinese consumers are the most confident in the world, but they remain cautious spenders.

  • Consumer confidence returned to the peak levels set in 2007—and even surpassed them in some instances—with a clear rebound in the desire to trade up.

  • Although Chinese consumers are more willing to spend now than they were in 2009, they still plan to exercise caution.

  • Averages can mask important differences. Attitudes about shopping and spending range widely, depending on consumers’ level of income and the size of the city in which they live.

Middle-income and affluent consumers (MACs) residing in China’s smaller cities offer an unprecedented opportunity for companies looking for growth.

  • The willingness to spend and to trade up is significantly greater in China’s smaller cities than in its top cities.

  • The combination of higher living costs and the downturn’s greater impact in China’s larger cities has led big-city MACs—especially the middle class—to have less enthusiasm for spending than their counterparts in smaller cities.

  • Small-city markets—with many local brands and no clear leaders among international brands—are less consolidated than markets in large cities and therefore offer attractive opportunities for new entrants.

  • Companies entering China’s small cities will encounter less intense competition among international brands, along with the potential for higher margins from a fragmented trade structure and the opportunity to shape the behavior of new middle-class consumers.

Companies that fail to venture into China’s small cities will miss out on a significant portion of the middle-class growth explosion and leave an opening for their competitors to fill.

  • The MAC population will increase from 150 million to more than 400 million over the next decade, and two-thirds will reside in small cities.

  • By 2020 there will be nearly 800 urban locations (cities and the urban portions of counties) with real disposable income per capita greater than Shanghai’s today.

  • Today, in order to reach 80 percent of China’s MAC population, a company must be in 340 urban locations. To achieve the same coverage in ten years without falling behind, a company will need to be in nearly 550 urban locations.

Not only is the MAC segment growing faster in small cities than in big cities, small-city MACs will generate an outsize portion of growth in spending on consumer products because of greater consumer confidence and larger discretionary budgets.

  • Small-city MACs are more optimistic in general, have suffered less in the downturn, and experience life as more relaxed and family-centered.

  • Because of the lower cost of living in small cities, consumers there have greater purchasing power and are more willing to spend.

Companies should not assume that their big-city business models will work equally well in small cities, where they will find distinctive spending behaviors, product preferences, and outreach channels.

  • Many consumers new to the middle-income segment are less sophisticated about brands and sometimes require education on product benefits.

  • These consumers do less research before purchasing than big-city consumers and show more trust in local brands and television promotions.

Even the small-city markets are not all alike: regional differences in spending habits, product preferences, distribution channels, and trade structures are significant.

  • MACs in cities clustered around Nanjing (near Shanghai) and Chengdu (in western China) are the most interested in spending more and trading up, while MACs in the cities around Wuhan (in central China) and Shenyang (in the northeast) are the least interested.

  • There is a relatively strong attraction to international brands in the Guangzhou cluster (in the south), whereas MACs in the Xi’an cluster (in the west) clearly prefer local brands.

Because regional differences are so significant in China, companies must define the source of their opportunity carefully and prioritize growth plans before allocating resources.

  • Marketers should be prepared to customize offerings and devise cost-efficient marketing approaches.

  • Companies will need to invest in “push” strategies, such as trade promotions, and leverage local distributors for economical expansion.

  • BCG’s five-step approach to expansion can help companies determine which regions they should move into and in what order.