Buying Power

As Shanghai and Beijing reach retail saturation, international retailers are increasingly looking to smaller cities as their entry-points into China.

According to new research from A. T. Kearney, a Chicago-based management consulting firm, consumers in second- and third-tier cities are ready to embrace Western-style retail concepts and products.

The reason? The influence of television, movies and the Internet, researchers said.

"In China, foreign retailers such as Wal-Mart and Tesco, and Hong Kong-based retailers are branching into smaller mainland cities, such as Yuxi, Weifan, Nanchang and Wuhu," the research company said.

However, companies may need to use different approaches in the smaller cities.

"Retailers should not go into second-tier cities armed with a first-tier strategy," said Mike Moriarty, a partner with A.T. Kearney and co-leader of the GRDI, in a statement. "Successfully entering a new country via smaller cities requires careful identification of cities with consumers who are ready to embrace modern retail formats. But with the right strategy, smaller cities can be attractive targets for retailers that missed the window of opportunity in major cities and for established retailers looking for growth."

For example, in the most obvious difference, incomes tend to be smaller outside Shanghai and Beijing. This means that some products may need to be priced or marketed differently.

In addition, consumers in China's smaller cities live different lifestyles and have different needs than those on the coast. Differences in the quality of public transportation and penetration of car ownership may affect the kinds of products consumers can easily bring home, for example.

And, of course, there are market considerations.

In Shanghai, for example, a new product may be competing against twenty existing brands. The key marketing challenge would be differentiation.

In a smaller city, a new product may be one of the first of its type, and the challenge would be consumer education.

The problem for us business journalists -- and for you business executives -- is the lack of good research about the retail industry in central and western China. Most research reports still focus on the coastal cities, and those that do look west tend to be very broad and infrequent.

This situation is bound to change over time, but, until then, international retailers are relying on custom research reports from some of the smaller research shops that have recently opened doors in China.

Unfortunately, custom research is time consuming -- and expensive.

As a news magazine -- and not a research firm -- we at Emerging China can't hope to fill this gap. But we will try to do our own small part to address it, with special sections on China's retail industry and in-depth reports about particular cities and industry segments.

Also keep an eye out for reports about China's market research firms.

If there is anything in particular you would like to see us focus on, please don't hesitate to write. In fact, we welcome letters to the editor on any topic.