Consumption potential in China’s lower-tier cities: young urbanites opting for suburban villas; Lululemon penetrating into low-tier markets
Consumption potential in China’s lower-tier cities: young urbanites opting for suburban villas; Lululemon penetrating into low-tier markets
In today’s post, we will delve into the shifting dynamics of China's market. Under the existing trend of consumption downgrade in China, as traditional urban giants like Beijing, Shanghai, Guangzhou, Shenzhen, and other first-tier cities become saturated, with escalating living costs and diminishing growth margins, many young people are moving low-tier cities, and our previous articles also mentioned population outflow from top-tier cities and the influx of talent to small towns like Jingdezhen, which reflect the shift is not a wholesale downgrade; instead, lower-tier cities may emerge as new growth areas with untapped consumption potential.
Our post is enriched by two stories about why young individuals opt for more personalized and fulfilling lifestyles in smaller towns (Source)and how international brands like Lululemon pioneer these "sinking markets" in low-tier cities(Source). The “reverse” consumption trend of young people may indicate a profound shift in the mindset and living preferences of China's younger generation; Lululemon's approach, often seen as a barometer for market dynamics, may also underscore the potential of these low-tier cities as the next frontier for market expansion and investment.
Small city, big spend: unveiling the surprising buying power of lower-tier cities
Residents of county towns are experiencing lighter economic pressures (less debt and lower living costs), which may mean their spending power is not necessarily weaker than that of people in first-tier cities.
1. Narrowing urban-rural income gap: According to National Bureau of Statistics data, the growth rate of per capita disposable income in rural areas generally surpasses that of urban dwellers. Consequently, the income disparity between urban and rural areas is gradually narrowing.
2. Higher living costs in big cities: The financial strain of purchasing and renting homes is significantly greater in big cities than in their lower-tier counterparts.
a) From the perspective of house prices, international norms suggest that a reasonable housing price-to-income ratio should be between 3 and 6 times. Since 2010, the ratio in China’s first-tier cities has remained above 15 and has shown fluctuations upward, while in second and third-tier cities, it has stayed above 5.
b) Regarding rent, by September 2023, the average rent in first-tier cities like Beijing, Shanghai, and Shenzhen exceeded 100 CNY / Sq.m. per month, while the average China Residential House Price(HPI-100) was below 30 CNY / Sq.m.per month. First-tier cities face a structural shortage of housing supply, leading to high property prices and a significant "sandwich class" of people who cannot afford to purchase commercial housing or bear high rental costs.
3. Long-term upward consumption trends in rural areas: In contrast, due to the shift of the industrial structure to the tertiary sector and the increase in average income, urban residents have a relatively stable willingness to spend, resulting in a long-term downward trend in their average propensity to consume(APC).
The “sinking” of consumption concepts: young returnees reshape rural markets
As population dynamics shift, so do people's ideas, habits, and lifestyles. Young people moving from big cities to county towns are importing "big city" consumer habits to these smaller locales.
Coffee, once an exotic import in China seen as a symbol of the petty bourgeoisie and middle class, has in recent years become mainstream across a broader geographical spectrum. Coffee brands, such as China’s top coffee chain Luckin Coffee, have hastened their expansion into lower-tier cities, aiming for a larger market share.
Distinctive consumer scenarios in low-tier cities
Questing for a better life, constrained by the high cost of living in large cities, the youth can find fulfillment in county towns through attainable luxuries like buying villas, gathering around the stove for tea, or enjoying outdoor barbecues, all at a more relaxed pace. This contrasts with the consumer scenes in big cities.
County comeback: young urbanites trading city skyscrapers for suburban villas
In September 2022, Daxiu, upon a fortuitous return to her hometown county from Shenzhen, discovered a villa listed by a real estate agent for 630,000 CNY on social media. With a payment of just 200,000 CNY—within her and her husband's financial reach—they found this villa well-located and free of the usual high property management fees, costing only 800 CNY annually for maintenance. Within ten days, from viewing to purchase, they negotiated the price to 570,000 CNY and secured the three-story, 320-square-meter villa with their savings.
"It's a steal," remarked Daxiu, noting that the same amount might only buy a parking space in first-tier cities like Beijing or Shanghai. This villa, now a serene abode in the county and a retirement home for her parents, can host lively family gatherings and provide space for gardens, embodying the fulfillment of a lifelong dream of home ownership without the relentless urban hustle.
Unremarkable county, unbelievable comfort: the hidden paradise of small-town life
After experiencing the bustle of big city life, Daxiu chose to "lie flat" in a seemingly mundane small county town, purchasing a villa that revealed a most comfortable lifestyle. With a monthly mortgage payment of only 1,800 CNY and a mere five-minute commute, she enjoys a yard for barbecuing, a terrace for moon-gazing, and a garage free from parking woes, boosting her happiness by 99%. She's realized her dream of a courtyard life, with two beautiful 30-square-meter gardens. In winter, she can invite friends to sit around a charcoal stove for tea in the garden; in summer, they can enjoy beer while barbecuing outdoors. Transforming a 70-square-meter basement into a home cinema and relaxation area with a Japanese-style study and a mini-bar, Daxiu has crafted her ideal space for leisure.
Lululemon with dynamic vitalities leaps into diverse regions: targeting 'county town ladies' for marketing
In pursuit of increased growth, some brands with keen insights into the market environment choose to reach a broader customer base through the Douyin channel.
Lululemon is a prime example. From 2021 to 2022, the main target of Lululemon is upmarket white-collar workers. Its brand strategy is to open brick-and-mortar stores aggressively, conduct community events, and strengthen the construction of channels such as Tmall and JD.com.
On January 12, 2024, Lululemon officially opened its flagship store on Douyin. This platform has a more extensive user base than Tmall and JD.com, positively affecting Lululemon's live broadcast sales. Although the number of live broadcasts in January decreased by eight compared to December, the total sales remained steady, ranging between 10 million and 25 million yuan. As a result, Lululemon's rank in the sports outdoor market improved, moving from 84th place to the top 50.
Where Tmall represents the consumption demands of delicate white-collar workers in first-tier cities, Douyin has the potential to tap into a broader and more diverse market in lower-tier cities.
When examining the top 10 cities for live streaming audience distribution, it is noteworthy that from Lululemon's initial Douyin live show in October 2023 through February 2024, Lululemon's live stream attracted new users from provinces with fewer stores or even low-tier cities without any Lululemon offline stores like Taizhou, Zhenjiang, Weifang, Jining, and Baoding, as well as other lower-tier cities.
Tailored Product Tactics for Consumer Contrast: Timeless on Taobao, Trendy on Douyin
Differences in consumer groups contribute to the diversity of popular products.
We observed some interesting trends by comparing the top-selling items from Lululemon's Tmall and Douyin flagship stores. Tmall's popular items are primarily classic styles. For instance, in January 2024, two of the top three best-sellers in Lululemon's Tmall store were Align Women's High-Waist Tight Pants (yoga pants), a product line introduced as far back as 2018. Over the years, Align has blossomed into a billion-dollar classic series for Lululemon. However, Douyin's sought-after items are not yoga pants but flare pants, jackets, down jackets, and wide-leg pants. Three of the top 10 products are from the Spring Festival limited series.
Additionally, Lululemon's product release frequency on Douyin outpaces Tmall, indicating the brand's focus on the Douyin channel and its importance to consumers in lower-tier cities. Taking February 2024 as an example, lululemon's official flagship store on Douyin rolled out 18 new products almost every day, averaging four new products per rollout, which far surpasses the rate of new product introductions on Tmall.
Epilogue
Moving back to county towns is a lifestyle choice for urban youth, not a step backward. For some, it offers a slower pace of life, less financial stress, and increased discretionary spending. County towns, home to a significant portion of China's population, represent a large consumer market segment. As these areas repopulate and e-commerce progresses, the understanding and habits of consumers in urban and rural zones will likely become more aligned. Thus, more brands may find new growth opportunities in these regions.
