Thursday, December 18, 2008

China's lower-tier markets get a fillip

Published in South China Morning Post, November 24, 2008

Moving to lower tier markets

Concomitant with the spread of economic prosperity from large cities and coastal areas of China to inland and lower-tier cities, the market for consumer products is also expanding to wider geographical areas. While the sword of current economic crisis hangs perilously over China, there are indications to suggest that the economic measures initiated by the Chinese government to stimulate domestic demand (particularly the plan to spend 4 trillion yuan or 586 billion dollars in the next 2 years) will actually accelerate the spread of consumer products to lower tier cities and rural China. For marketing companies, this is an opportunity to move resources and investments in lower tier cities to secure a firm position in these markets of ever increasing importance.

Penetrating China

According to a survey done by AmCamb Shanghai among its members in 2007, 40% of the surveyed companies had no presence in the lower tier markets. Even successful companies like McDonald’s only operate in less than 200 of the over 600 main cities and 20,000 towns in China – not to mention the countless villages which dot the country. The fact remains that the companies operating in the big cities are only scratching the surface the four top cities only account for 3% of the population – in fact the total urban population together is only 45% of the population of China. It is not surprising, therefore, that the most successful companies in China are those who have been able to penetrate the lower tier and rural markets of China.

Though the transition from the large metros to the lower-tier and rural markets is imperative for growth, it is not always easy to implement. The lower tier cities and rural areas differ significantly from the large cities in many ways – not only in lower incomes but also in terms of the profile of the consumers, the way we can access them, the retail infrastructure, consumers’ media habits and the way they think and make brand choices. Marketers need to carefully decide their expansion strategies, and modify their marketing tactics in sync with the local consumer preferences, lifestyle and habits.

Financial crisis and China

In the meanwhile, as the world bemoans its financial woes, after some debate, a consensus has emerged among the economists about the potential impact on the Chinese economy. China, most now opine, can not escape unscathed from the global financial mess. The official figures also suggest a slow down (GDP growth of 9.9% in the first 3 quarters of this year, 2.3% lower than the same period last year) and a shadow of nervousness over job cuts and future uncertainty mars the mood of the Chinese consumers.

The biggest worry comes from the likely impact on Chinese exports. China is the factory of world, and its low priced products sit smugly on the shelves of Walmart in America, from where the consumers have been scooping them into their super sized shopping baskets with a flourish and getting past the tills with their over stretched credit cards. With American consumers losing their jobs, seeing their houses plummet in value, and their credit cards less yielding, the Chinese products seem to sit longer on the shelves, and the orders for factories in Guangdong seem to be approaching a drought.

In anticipation of further accentuation of the impact on growth, the Chinese government is naturally and logically hastening to stimulate the domestic demand. Last month the State Council announced that China will spend a generous 4 trillion yuan over the next two years to offset adverse global economic conditions by boosting domestic demand. This money will be spent on 10 major areas – which include rural infrastructure, build more affordable housing, including rural housing, transport, raising average incomes – particularly in rural areas.

While all these measures are targeted at stimulating the overall domestic demand, their effect is likely to be even stronger in lower tier markets, including rural markets. In essence, the importance of lower tier markets in China has received a big boost from the global economic crisis. This stimulus package will give a fillip to the lower tier markets in a number of ways:

- Firstly, it will provide employment opportunities related to the investment in infrastructure and other accelerated economic activities in rural China. It is estimated that investment in railway construction alone will create 6 million jobs.
- Secondly, the government plans to spend on poverty relief and try to raise the income of the lower income groups to raise their consumption ability, thereby facilitating another objective of the Chinese government – that is narrowing the ever increasing urban rural income divide.
- Thirdly, it will improve physical access to lower tier and rural markets through construction of new and improved road and railways infrastructure and hence ease the expansion of distribution networks. l
- Lastly, by providing low cost housing, it will increase the disposable income available to lower tier residents.

While the stimulus package would boost the overall economy, it would also ensure that the benefits accrue more to the lower income consumers, and those who are away from the more accessible large cities, and thereby paving the way for faster expansion of consumer goods to lower tier markets.

Written by Ashok Sethi, TNS China

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