China's lower-tier cities still offer plenty of potential for retailers

Speaking at a panel session titled, “Selling to the world’s most populous country: The perfect retail opportunity?” at the World Retail Congress here yesterday, Scott Price, chief executive of Wal-Mart Asia, noted that the CBD [central business district] in first-tier cities is now locked up for value retailers.

“China is changing quickly,” he added. “How to grow tier-3 and -4 cities is the way going forward.”

The panel also included Colin Currie, MD for Greater China at adidas Group; Xu Sitao, director of global forecasting, China, at The Economist Intelligent Unit; Kent Wong, MD at Chow Tai Fook; and Simon Ho, deputy chief executive at CapitaMalls Asia.

The panel agreed that the country lacks quality shopping malls and facilities, and that there are not enough shopping malls, especially in the lower-tier cities. But Ho noted that a lack of capital and human capital are constraints in building more retail space.

In his earlier presentation “The China Challenge”, Currie said marketing strategies must be different between cities of different tiers, especially when it comes to youth markets.

For higher-tier youth, he noted that it is about individuality, while in the lower-tier cities it is about belonging.

“China is one market, but two worlds, split between lower- and higher-tier cities,” he added. “In more sophisticated cities, we’re defending our market share. In lower-tier cities it’s all about opening new stores.”

Smaller, lower-tier cities will represent 60 per cent of overall growth in the fashion market in years to come. Some 45 per cent of consumers in China will be middle class by 2020, and Currie noted that this growth will come mainly from lower-tier cities.

Affluent consumer households will also grow to 140 million by 2020, from the current 50 million, with 75 per cent of that growth coming from lower-tier cities.

Currie also flagged up the shift of wealth from the east coast to the cities in the west, such as Chengdu. Chinese consumers are thirsty for everything their parents never had, and their purchase decisions are set to show their 'status value' and tangible success.

Brands should also be targeting the elderly, Currie said, and they should evolve their marketing strategies for this group of people, as the number of Chinese retirees is the size of the Europe region—and they are rich.

The markets to watch after China, he added, will be Indonesia and India.

In his session “Meeting customer demand: Growing your footprint and profits in China”, Chow Tai Fook’s Wong said a diverse product portfolio is needed to cater to different tiers.

He noted that different tiers and age groups have different preferences for design, and localisation and customisation are musts.

“In first- and second-tier cities, consumers show a preference for modern, contemporary design, whereas in third-tier cities and lower, traditional gold products for special occasions are the preference,” he said. “In the south and west tastes differ again, from the north and east.”

Xu of the Economist Intelligence Unit said that growth in China will slow down if the economy rebalances, and the market should be prepared for 6 to 7 per cent growth in the next five to 10 years, but that this is “perfectly fine”.

In his session “Understanding the impact of the Chinese economy on both the mainland and the global marketplace”, he added that inflation will stand at 4 to 5 per cent.

One of the constraints to growth, he added, is that China is using a third of the world's commodities, while it is only responsible for 11 per cent of global manufacturing output. Other constraints include rising labour costs and falling external demand.

He also predicted an end to currency appreciation in the next two years, based in the prediction of inflation at 4 to 5 per cent.

He was also bullish on the growth of the service sector, which he predicts will vastly outperform manufacturing in the next five years.