Lower Tier Cities are the New Engine for Luxury Consumption

Wenzhou InTime Department Store. Source: 66wz.com

While China’s top tier cities are highly penetrated, if not saturated, with luxury brands presence, some 1 billion Chinese consumers living in tier-3 and below cities are also demonstrating strong willingness to purchase luxury goods. China’s lower tier city markets show considerable potential and can be deployed as the next growth engine for luxury industry.

Substantial purchasing power & growing appetite for luxury fuel growth

While Chinese top tier city consumers, represented by Beijing and Shanghai, still maintain strong purchasing power, growth in lower tier cities are not to be overlooked. In 2019, tier-3 cities and below took over 44% of China’s total luxury sales, almost catching up with tier-1 and 2 cities. Moreover, tier-4 and tier-5 cities take the lead in luxury consumption growth, with over 20% of consumers purchasing luxury products in the past year in tier-5 cities. The vigorous growth seen in these areas indicates massive potential.

Source: Deloitte-SECOO CIIE Blue Paper 2019

Behind the solid buying power is the ongoing expansion of upper middle-class consumers. In tier-3 and 4 cities, the number of upper middle-class families showed an astonishing 38% YoY growth, a much higher rate than top tier cities. Meanwhile, well-to-do households* now account for 34% of tier-3 and 4 cities’ total population. These consumers living in lower tier cities spend money freely and are less willing to save for the future.

Source: McKinsey, China consumer report 2020

In addition to their adequate purchasing power, lower tier city consumers possess slower pace of life and less professional pressure. Their lifestyle allows them to have more leisure time to discover brands and products and follow trends on social media and through word-of-mouth of friends and families, which nurtures their interest and desire of luxury consumption. Compared with top tier city consumers who look for niche or emerging designer brands, lower tier city consumers are more appealed to classic luxury brands.

E-commerce leads consumption in lower-tier cities

If the lack of physical presence of luxury brands in lower tier cities hinders luxury consumption of local consumers, brands make up for the loss through leveraging the prevailing e-commerce.

According to Quest Mobile, 670 million internet users reside in cities of tier-3 and below, accounting for over half of the total Chinese internet users. Among them are the luxury enthusiasts who have limited or no access to physical luxury brand stores and who thus turn to online purchase. In 2019, 40% and 54% of the luxury consumers from tier-3 cities and tier-4 & below cities purchase luxury products online respectively, the figure doubling that of tier-1 and 2 cities. In the same vein, according to data of SECOO.com, one of China’s leading luxury e-commerce platforms, the top 10 cities in terms of online luxury shopping frequency, rate of repeated buyers and rate of consumers placing 3+ orders in the past year, are all tier-3 and below cities.

Moreover, the online luxury sales growth in lower tier cities far exceeds the growth rate in top cities. The fastest growth is seen in tier-4 and tier-5 cities, with tier-4 taking the lead with their 80% growth rate, nearly a double of the figure of tier-1 cities.

Source: Deloitte-SECOO CIIE Blue Paper 2019

The rapid growth of luxury e-commerce sales in lower tier cities is primarily contributed by the digital native young consumers. 72% of the Chinese netizens in these areas are below 35 years old. According to data from JD.com and Yaok Institute, 34.55% of them are actively purchasing luxury goods online, while only 23.64% are willing to go to physical stores in top tier cities. Together with the service optimization of e-commerce, including well-developed exchange and refund policies and faster delivery service, young consumers possess increasingly open attitude towards online luxury consumption.

Luxury purchasing channels of lower tier city young free spenders
Source: Yaok Institute & JD.com, 2019 Chinese Lower Tier City Young Free Spender Luxury Consumption Report

*Well-to-do household: Annual disposable income between 140K – 300K RMB, including Upper aspirant and Mass affluent households.