Offline Store Expansion May See Value in China's Tier Three and Four Cities
Increase in consumer spending power, adopting an urban lifestyle, and possible consumer traffic monopolization is three reasons to consider opening offline stores in China's third and fourth-tier cities.
The business environment of tier three and tier four Chinese cities makes opening physical stores in those areas more attractive than their larger counterparts, according to Retail Boss Internal Reference.
As first and second-tier cities’ economic development enter a stable period, opening offline stores in smaller cities is an opportunity a business owner may not want to miss out on.
The article attributes youth consumption power as the driving force behind the allure of smaller cities. If a business owner wants to open an offline store in a third or fourth tier city, the younger generation would be their main consumers. Therefore, it’s important to understand that their spending power isn’t as far from youth in larger cities.
According to China’s National Bureau of Statistics, monthly expenditure of youth in first and second-tier cities exceeds CNY 2,700. In third and fourth tier cities, youth’s monthly expenditure exceeds CNY 2,100.
While those living in big cities have higher incomes, they are also burdened by higher living costs such as housing. In addition, youth from large cities also bear the pressure of buying a house, a strain not felt by those from smaller cities.
Working hours in large cities are also significantly higher than those from third and fourth-tier cities. Therefore, youth from smaller municipalities have more leisure time. Due to shorter working hours and lack of survival pressure, this also boosts youth consumption power.
Adopting the Urban Lifestyle
According to Deloitte, Nanyang Technological University, and RET's published report, the growth rate of branded coffee stores represented by Starbucks and COSTA reached 39.17%. Additionally, in 2017, 46% of new shopping malls opened in third and fourth-tier cities.
Consumer brands represented by Uniqlo and ZARA have also opened new stores in third-tier cities. In addition, consumers have been exposed to urban fashion lifestyles and concepts represented by shopping centers.
This highlights that lifestyles and trends in tier one and tier two cities are slowly being adopted by smaller municipalities.
Possible Consumer Traffic Monopolization
Chinese tea start-up, HeyTea, began in Jiangmen, a third-tier city with a population of no more than 5 million. This is where its popularity took off. Since then, the Chinese tea start-up has expanded to more than 100 stores across China.
HeyTea has also expanded to Singapore in 2018 and plans for further overseas expansion in 2019. Though, recently it’s opening new stores in Shenzhen and Shanghai. Despite HeyTea’s offline store expansion in tier one cities such as the ones mentioned above, their biggest consumer traffic is from Guangzhou at 83.79, according to Jiguang. Though Guangzhou is a tier one city, it’s important to note that Jiangmen is a smaller city within the same province.
On the other hand, Nayuki, HeyTea’s biggest competitor, originated from Shenzhen. Not surprisingly, their biggest consumer traffic also comes from the city at 66.78. This hints that a start-up’s largest consumer traffic may come from their cities close to or at their origins.
A Break from Saturated Markets
Regardless, China’s third and fourth-tier cities shouldn’t be put on the backburner. As businesses look to expand, they may want to consider these overlooked goldmines to escape from the saturated business environment often found in tier one and tier two cities.