Capturing a part of the $56 trillion in consumer spending that The Demand Institute projects will take place in China over the next decade will depend critically on deep insight into the country’s highly varied urban landscape. That business insight requires more than simply understanding a given city’s current economic status. Geographic location, infrastructure, demographics and even local history can dictate the potential of any consumer market—a future that will be vastly different from one city to another.
So what’s the best way for companies to know which will flourish and which may not? For starters, they should look beyond the traditional tier system that they’ve historically relied on to formulate growth strategies. Its limitations have become increasingly obvious in recent years. While the similarities between the few wealthy megacities in Tier 1 are clear, the more numerous Tier 2 cities have little discernible connection beyond their status as provincial capitals. Cities in Tier 3, which are three times more numerous than those in Tier 2, suffer from the same lack of coherence. They’re not grouped geographically, nor do they have similar levels of wealth, logistical capability, Internet penetration or many other important features of market development. And Tier 4 cities seem to only share the fact that they’re not included in other tiers.
All in all, the tier system says more about a city’s relationship with the central government and its importance as an administrative or logistical hub, or even as a military outpost, than about its current or future strengths as a consumer market. Consequently, following this path can lead to wrong assumptions about the characteristics of different markets within each tier and wrong-footed strategies.
To help companies navigate opportunity and prioritize their investments across China’s cities, The Demand Institute has replaced the tier system with a City Strata framework that identifies and ranks 11 different city strata in terms of their consumption prospects. The framework incorporates the analysis of 200 variables in 286 prefecture-level cities that are home to 1.3 billion Chinese consumers. Listed from strongest to most challenged, the strata are: Super Cities, Affluent Cities, Satellite Cities, Regional International Cities, Integrated Industrial Cities, Inland Core Cities, Resource-Exhausted Cities, Tourism Cities, Modern Agricultural Cities, Frontier Cities and Traditional Agricultural Cities.
The City Strata system, however, shows that the best opportunities for multinationals and local giants will be within 40 to 79 of the cities in our database, all within the top three to five strata of our hierarchy. Some of those cities come from the lower tiers, but many are Tier 1 and 2 cities, which we project to continue providing the bulk of consumer spending over the next decade. Companies should proceed with considerable caution if considering cities lower down the hierarchy—and most should avoid the last three strata entirely, at least until the opportunities elsewhere have been fully realized.
For additional insights, download The Demand Institute’s No More Tiers report.