Firms told small is profitable

An employee of sportswear company adidas stands near a display at a store in Beijing. The company is one of many multinationals that plan to expand into China's lower-tier cities by riding on explosive growth in disposable income. [Photo / Bloomberg]

BEIJING - China's middle-class consumers in smaller cities are more likely to increase their spending and to trade up than their counterparts in top-tier cities, presenting a huge growth opportunity for multinationals, said a report released by the Boston Consulting Group (BCG) on Monday.

Companies that fail to venture into China's small cities will miss out on a significant portion of the middle-class growth explosion and leave openings for their competitors, according to the report, called Big Prizes in Small Places.

"In the next decades, the population of China's middle-class and affluent consumers, whose annual household incomes exceed 60,000 yuan ($9,016) will nearly triple, from 150 million to more than 400 million, and two-thirds of them will reside in small cities," said Carol Liao, Hong Kong-based partner and managing director of BCG, and one of the primary authors of the report.

Middle-class consumers in smaller cities are expected to become the new lifeblood of China's domestic consumption, Liao said.

Small-city markets - with many local brands and no clear leaders among international brands - are less consolidated than markets in large cities and therefore offer attractive opportunities for new entrants, said the report.

The report also demonstrated that by 2020, there will be nearly 800 urban locations, including cities and urban portions of counties, with real disposable income per capita greater than Shanghai's at present.

The per capita disposable income of urban residents in Shanghai was 28,838 yuan per annum in 2009, according to data from the Shanghai branch of the National Bureau of Statistics.

However, to achieve the same coverage in the next 10 years, a company will need to be in nearly 550 urban locations," said Hubert Hsu, senior partner of BCG.

In fact, seeing the clear opportunity provided by small-city markets, some multinationals are taking steps to adapt their marketing strategies by moving into lower-tier cities in China.

Adidas AG Managing Director Christophe Bezu told China Daily that the company's future strategy will be to spread its influence throughout new areas of the country.

"We are planning to widen our product offering in lower-tier Chinese cities. Even though we are a premium sports brand, we plan to offer competitively priced products to different segments of the market," Bezu said.

However, companies should not assume that big-city business models will work equally well in small cities.

Success in small-city markets will depend on how quickly companies can understand and respond to differences in attitudes, spending behavior and preferences among small-city consumers, said the report.

The report was carried out in the spring and summer of 2010 with some 7,000 consumers across 28 cities in China.

Bao Chang contributed to this story.