2nd-4th tier consumers hold the key to not only China’s, but the World’s economy

“China Beyond – Change & Continuity” book finds that branding strategies need to be based on emergent consumer confidence, their voracious appetite for change and new forms of consumption behavior driven by digital technology and e-commerce to profit from opportunity amongst small town consumers

SHANGHAI — With 200 million households belonging to the consuming classes, China’s second to fourth tier cities are arguably the most important consumer segment in the world. but they are tight-fisted. In 2011, first tier markets had a disposable income value of 1 trillion RMB, while second to fourth tier cities had a combined disposable income value of roughly 8 trillion RMB.1 It is no surprise that advertising spend in Tier 2 to 3 markets was more than four times greater than Tier 1 markets, as the consuming class population is 7 times bigger.2

Ogilvy & Mather China’s consumer insights and trends team Discovery revisited lower tier markets in their most recent study, “China Beyond – Change & Continuity,” marking the third time in the last seven years that the team has focused on lower tier cities. Based on research over a span of nine months, the 200+ paged book is packed with data, illustrated with photos and rich in stories about the everyday lives of the people who inhabit these cities.
“‘China Beyond - Change & Continuity’ is sweeping in its scope, a book that leaves no nook or cranny in the lower tier landscape unexplored. From the intimate domestic spaces to the online bridge to the world, from the frenetic warren-like wholesale markets to the expansive parks where the young whizz on rollerblades in the shadow of granite statues of revolutionaries, this is a record and commentary of a China that is once again poised at the brink of change,” said Scott Spirit, Chief Strategy Officer, WPP Group.

1 ACNielsen China: “Winning in China in 2011,” 2011
2 Ibid.

The book finds that while some constants remain, a lot of change has occurred as well. While traditional values such as family ties remain intact, a new breed of youth has emerged who do not necessarily wish to abide by their families’ expectations. Spurred by job creation, the availability of high quality housing and education, and a relaxed pace of life, the first wave of reverse migration is now in full swing – particularly those who migrated to Beijing, Shanghai and Guangzhou a decade ago and have now realized that after years of hard work, they are still unable to afford homes, cars or their child’s education. With these interests at heart, shoppers are embracing e-commerce with enthusiasm and snapping up deals on products that are unavailable in their local stores. Alibaba’s Tmall, a hugely popular e-commerce platform for local and international brands to sell in mainland China, have rendered bigger brands as more accessible to these lower tier consumers. These lowertier Residents are hungry for new experiences and have time at their leisure, so that local businesses able to can often occupy these consumers for hours.

“China’s lower-tier settings are no longer a world away,” said Shenan Chuang, CEO of O&M Greater China. “The changes in the consumer landscape are driven by the expansion of the Internet and other digital innovations that have allowed Chinese consumers to be much more cognizant of the world outside their cities or towns than they once were, even if they’ve never migrated themselves.”

Notably, the study finds that:

Food safety, environmental pollution and the rising cost of property and healthcare are the top concerns. These fears are based on the residents’ own experiences, amplified by the rapid sharing of experiences through the Internet. Some local brands are tapping into this anxiety by marketing their products as “ecologically safe” or natural – even if the consumer are skeptical of those claims.

There is a rise in compassion and belief in community values that is leading to community action. Many young people, particularly the post 90s generation that was once labeled as being selfish and ungrateful, are coming forward to make a difference. As social media has given this generation the means to express themselves, especially in smaller cities where the youth have few other channels available for expression, they are now much more outspoken with usually very emotional responses to current events. In addition, their solutions to problems can be quite creative.

Lower tier residents appreciate their more natural and relaxed environment. In comparison to second tier cities, many of which are currently in the midst of a construction boom, those living in Tier 3 and 4 cities believe that their towns are less polluted, offer a more relaxed lifestyle, lower living costs, smoother public transportation and higher public security. Interestingly, a majority of fourth tier residents want to be entrepreneurs, whereas those in
second and third tier cities prefer stable jobs in the government or SOEs (state-owned enterprises).

There is a seasonality in purchasing trends that goes beyond Chinese New Year. The seasonality is most marked when teenagers leave home to attend university, or – more importantly for the lower tier – join the army. Parents buy their children new mobile phones, laptop computers, sportswear and new clothes for the challenging years ahead. China has also come up with its own version of Cyber Monday deals: Singles Day on November 11, when online retailers rack up huge sales mainly from Tier 2 to 4 shoppers, many of whom have taken advantage of the discounts on winter wear at the onset of the season.

The affinity with open spaces continues to be strong. As reported in the previous studies about lower tier cities, many engagements and interactions happen in public. However, there are now many more opportunities and spaces for people to spend time with their families and friends. New public parks have emerged, as have Chinese government-designated scenic spots near the cities. New shopping malls have large interactive and entertainment zones where brands encourage visitors to sing, dance, roller-blade, fly kites, and graffiti on walls.

Counterfeit brands have taken their game upmarket. Three years ago, fake brands stayed in the realm of FMCG and consumer durable goods. Perhaps due to crackdowns on harmful products by local authorities, these brands were not as visible this time. Instead, copycat luxury hotels have erected, including Hiyatt (a fake Hyatt) and Marvelot (a fake Marriott) as well as counterfeit fashion brands such as Jack Walk (right next door to a real Jack Jones) and SSquared (a fake D-Squared). As the first wave of luxury shoppers takes root in lower tier markets, the emergence of these new fake brands serve as a learning experience for them.

The mobile Internet has taken over and online shopping requires local connectors. Across the city tiers, youth and itinerant entrepreneurs alike are using Tencent QQ rather than sending text messages, comparing prices before making a purchase decision and listening to music on a digital device. Apple enjoys universal recognition as a great brand, but few people own Apple products as they say that other brands were “good enough for their needs.” As much as they appreciate the choices, deals and convenience of e-commerce, many are uncertain about the quality of their purchases and seek guidance from trusted sources within their wider social circles.


Kunal Sinha, Chief Knowledge Officer, O&M China, who has led all three editions of the agency’s research in lower-tier markets, observes, “Four or five years ago, we found that people in China’s small towns were fiercely protective and proud of their traditional crafts and culture. Now they remain proud, but want to embrace modernity in not only what they wear, but also in the way they’re doing up their homes, in their consumption of entertainment, and even in what they’re eating. The local versions of Starbucks are doing roaring business!”

Strategies and Implications for Businesses
A few examples of what these insights mean for businesses in China:

• Brands should fuse health and beauty benefits in their branding. Consumers are suspicious that beauty products might be unhealthy, toxic, and unnatural – thus seeking reassurance about ingredients. The brand messages could be about “being beautiful is good for you,” or when these products are being bought as gifts, that “I care about you, as much as your health.”
• Involve the local community in public sanitation drives: organize clean neighborhood contests (with brands as sponsors and support from the local government). These initiatives create corporate social responsibility opportunities as well.
• Position technology brands around the themes of empowerment, connectivity and being smart. Lower tier residents want to feel that they have the same opportunities as those in bigger cities.
• Recruit and educate online connectors to become a brand’s champion. Help them master their Weibo, Weixin and other blogging skills. Keep them updated with product news, as they are vital in instilling confidence amongst those who are just beginning to shop online. Provide assurances about product delivery and return policies.
• Build the short-distance travel destination market, enabled by bus and car travel. Seed ideas in the lower tier resident’s mind about local destinations and start creating a range of options for various interest groups, such as cycling, camping, hiking, fishing, fresh fruit and vegetable picking, adventure sports, local music festivals and heritage exploration, etc.


About ‘China Beyond Change & Continuity’
“China Beyond” is an in-depth ethnographic and quantitative study into consumers, brands, communication and retail opportunities in China’s second to four tier cities. From August 2011 to March 2012 the Ogilvy & Mather China Discovery team, in cooperation with TNS China, conducted field research in three provincial capitals (Chengdu, Changsha and Shenyang), three prefecture level cities anD three county towns in Sichuan, Hunan and Liaoning provinces, covering a diverse expanse of geographic, cultural and economic regions. The study was conducted through home interviews with 48 families, 60 retailers and 15 internet cafe owners, combined with observations in shopping malls and public parks. Eighty percent of the respondent families were native to their city, 20 percent were migrants. The quantitative study, amongst 2,200 middle class Families, surveyed their beliefs and attitudes towards family, life, risk, novelty, ambition and fashion. The study also aims to map out their shopping, media and entertainment habits and identify influences on purchase decisions.

About Ogilvy & Mather
Ogilvy & Mather is one of the largest marketing communications companies in the world. In 2012, O&M was named Cannes Lions Network of the Year and Most Effective Agency Network by the Effies Global Effectiveness Index. The company is comprised of industry leading units in all of the following disciplines: advertising; public relations and public affairs; branding and identity; shopper and retail marketing; healthcare communications; direct, digital, promotion and relationship marketing; consulting, research and analytics capabilities; branded content and entertainment; and specialist communications. O&M services Fortune Global 500 companies as well as local businesses through its network of more than 450 offices in 120 countries. It is a WPP company (NASDAQ: WPPGY). For more information, visit www.ogilvy.com, or follow us on Twitter at @OgilvyWW and on Facebook.com/Ogilvy.