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Small cities fuel China consumption

News, 24 March 2016

HANGZHOU: E-commerce could be the key to unlocking nearly two-thirds of Chinese consumers who live in Tier 4 cities or below, a recent report has suggested.

More than 800m Chinese live outside of big cities and the internet has afforded them access to new products – but consumers there have been considered "less valuable" than wealthier consumers living in Tier 1 cities, such as Beijing and Shanghai.

However, with 63.5% of China's consumer base now residing outside of major cities, brands are turning to lower tier cities as the next driver of China's consumption boom, Alizila reported.

A common misconception by brands expanding in China is that smaller cities are less valuable revenue generators, with shoppers there wrongly perceived as having limited shopping needs, low brand awareness or not wanting to spend.

However, a survey of more than 1,200 residents in ten lower tier cities by UBS Evidence Lab, the market insights arm of the global banking group, found that consumption in lower tier cities is thriving and brand awareness is high.

Though consumers have lower incomes than their big city counterparts, they are still willing to pay more for quality products, and there is widespread ownership of real estate, cars and home appliances. For example, almost 40% of small-city residents own cars – about the same as tier 1-3 cities.

Although China's slowdown is hitting major cities, consumers in Tier 4 cities are remarkably buoyant and the survey indicated respondents expect to be better off financially in the next twelve months and are looking to spend.

However, though the desire to buy new products is there, China's 200 Tier 4 cities are often challenged by a lack of physical retail stores or by a much more limited range of products than what is available in the bigger cities. This is where e-commerce could step in.

"With good Internet infrastructure and relatively low online shopping penetration, we believe e-commerce platforms will gradually gain market share from offline stores in lower-tier cities," the UBS analysts said.

Data sourced from Alizila; additional content by Warc staff