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    Third- And Fourth-Tier Cities China's New Luxury Battleground

    Having followed domestic Chinese brands first into second-tier provincial capitals over the past several years, many international brands are looking more seriously at expansion into third- and fourth-tier Chinese cities.
    Workers put the finishing touches on Hefei's Louis Vuitton store
    Jing DailyAuthor
      Published   in Finance

    Similar Spending Power, But Different Spending Habits#

    Having followed domestic Chinese brands first into second-tier provincial capitals over the past several years, many international brands are looking more seriously at expansion into third- and fourth-tier Chinese cities. Often considered luxury "blank slates," third-tier cities in particular have come into focus as their small proportion of wealthy shoppers has shown strong demand for high-end items -- becoming regular sights in second-tier "magnet" cities like Shenyang or Harbin, where they've developed a reputation as shelf-clearers.

    But what, to brands, separates “Tier-One” and “Tier-Two” China from lower-tier cities? Generally, top-tier cities include Beijing, Shanghai, Guangzhou and Shenzhen, while second-tier cities include provincial capitals. (For more on tier-two China, see Jing Daily’s “Second-Tier Spotlight” series.) From there, separating third- and fourth-tier cities is fairly inexact, but as AdAge noted this summer, agencies and marketers generally go by average income and a city’s development. As such, third-tier cities are the largest or wealthiest non-capital cities within a given province, while fourth-tier cities tend to be the next largest, generally in terms of population.

    Despite rising demand in interior third- and fourth-tier cities -- particularly in coal-rich central China or the southeastern coast -- most luxury brands have been slow to invest there, due to a dearth of quality retail space, unproven consumers, and the simple costs involved in the expansion effort. However, Louis Vuitton has a presence in third-tier cities like Suzhou and Wuxi (which are considered by some to be second-tier owing to their wealth), while Cartier has expanded into lesser-known cities like Anshan, Boutou, Jiangyin and Nantong.

    This week, the Chinese trade site Fashion Trend Digest looks into the strengthening trend of major brands moving beyond first- and second-tier cities and China's less glitzy interior, placing bets on a nebulous and often poorly understood demographic (translation by Jing Daily team):

    At an event in Shanghai a couple of months ago, the major question was whether brands should expand into non-tier-one cities in China. It was brought up that a large number of luxury brands have moved from second-tier cities into fourth-tier cities, because they boast hundreds of millions of potential customers. "There's not just one singular China, but rather 2,859 counties and 40,800 townships," one pointed out, noting that these figures are enough to excite any luxury brand. Though relatively few brands have made the leap into third- and fourth-tier cities, attendees noted that any brand taking a long view of the market understands that it's a clear trend.



    Still, the particularities in defining first- and second-, third- and fourth-tier cities are hard to pin down. While they're often delineated in terms of mega-cities like Beijing and Shanghai (first-tier) and provincial capitals (second-tier), there are many exceptions. For example, Suzhou and Wuxi -- due to their wealth -- are widely considered second-tier cities despite not being provincial capitals, while Hefei, capital of Anhui province, is seen by some as a third-tier city.



    Within third- and fourth-tier cities, consumers remain highly diverse and they are far from a single market. To use the example of Wuxi and Suzhou, despite being relatively small urban areas, I know some government workers, entrepreneurs and doctors who have two houses, one or two cars, and a strong passion for luxury brands. At the same time, their spending power doesn't mean they have the same spending habits as their counterparts in other cities. For example, wealthy executives like to bring women or friends to accompany them to luxury boutiques and make purchases based on their suggestions. This advice often plays a decisive role in the purchase of a recognizable brand, and can kick off a peripheral trend [if the customer is highly influential]. Due to the lower cost of living in third- and fourth-tier cities, wealthy individuals there have more disposable income, and their shopping choices are limited, so they tend to spend a great deal on "early adopter" brands.



    However, it would be wrong to look at these cities as provincial backwaters. The gaps between cities in China are getting smaller and smaller. Change is king. Businessmen who set up factories or businesses in smaller townships are moving to cities, the emerging wealthy are moving to even bigger cities; housewives are taking trips to go shopping in Hong Kong; the children are sent off to school in top-tier cities or even abroad. Everything is changing.



    But for brands, moving too rapidly into third- and fourth-tier cities means risking losing out in first-tier cities. At the same time, focusing only on first-tier cities and looking down at smaller interior cities risks missing out on the massive growth there. A balance must be struck.
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