Avoid the bright lights of top cities when entering the China market

The China market has a notorious reputation for being extremely difficult to break into.

And too often, businesses tend to make the mistake of focusing on making a grand entrance into China through the first-tier cities - Beijing, Shanghai, Guangzhou, Tianjin and/or Chongqing, which are seen as the country’s largest and most developed metropolitan areas.

These cities, for one thing, are already heavily flooded with brands. Competition is intense, with companies spending tens of thousands on marketing alone, each fighting for a piece of the same pie.

It doesn’t help that the typical Chinese consumer is also fickle, easily swayed by flashier sales or a more aggressive salesman. Businesses can find it very hard to keep up with ever-changing tastes.

Brands come and go, as a result. Cosmetic brands Revlon and L'Oreal's Garnier have pulled out of China, while electronics retailer Best Buy sold its business there to a local real estate firm. Even globally successful names like Procter & Gamble, Nestlé and Yum! Brands (which operates fast-food chains Taco Bell, KFC and Pizza Hut, among others) have posted disappointing sales.

It’s a consumers’ market out there, where only the fittest - or the smartest - will survive.

All of this means that in such a saturated market today, trying to gain access into China through the Tier-1 cities is unlikely to cut it anymore. In fact, if you are in a heavily-contested sector, entering China through these top cities would be suicide.

Instead, taking a less conventional route through the fast-growing second-tier cities may just be the answer.

Just look at fried chicken chain Dicos. The Taiwanese-owned firm had started out in second- and third-tier cities, such as Chengdu and Lhasa, and has grown to become the third-largest fast food brand in China today. The company plans to beef up its store count to around 3,700 by 2020.

Dicos pulled an astute, strategic move by setting foot in cities that KFC was slow to enter. It built up a solid branding there and tapped on the network effect to influence consumers across the whole of China. And it worked.

According to Robert Lawrence Kuhn, an investment banker and author of How China’s Leaders Think, the commonly-used term “second-tier cities” is a misnomer.

They should be called “first-class opportunities” instead, he said in a Wall Street Journal article, noting that these cities - such as Nanjing, Dalian and Wuhan - have been growth engines of the Chinese economy, boosted by huge amounts of investment, new infrastructure and an influx of new talent.

The opportunity for business extends beyond the second-tier cities. Morgan Stanley expects China’s private consumption market to more than double to US$11.8 trillion in 2030, from the US$4.7 trillion currently, with two-thirds of the growth powered by the third- and fourth-tier cities.

Spending in the hinterland is already on the rise. In a report by UnionPay and JD.COM, consumption in the third- and fourth-tier cities soared 58 per cent in 2017.

With a total population of over 1.3 billion people and a huge emerging middle class, China clearly spells massive growth opportunities for businesses - though only if they can first get into the market and successfully establish a foothold there.

The key here is this: entering China doesn’t always have to begin with the Tier-1 cities. There is plenty of room for growth starting from within the less glamorous places.

Take the craft beer market in the United States, which came into its own some 30 years back. People had grown tired of the big beer brands then, so when craft beer breweries grew from the periphery of the biggest cities, they exploded. Today, small, independent craft beer brands like Oskar Blues and Bell’s are available and highly sought after across the nation.

China's beer market now stands exactly at the inflection point where the US was years ago. In a market that has long been dominated by the big four beer brands - Tsingtao, Snow, Yanjing, Harbin - consumers are getting thirsty for variety, going by how there are more than 100 beer brands in Shanghai and Beijing.

The time is ripe for a shake-up. This spells an opening for craft beer players who are eyeing the China market.

The most feasible way in? Start with the lower-tier cities.

Such a strategy would mimic how the Chinese Communist Party came to power. It had started out in the 1920s by attacking the cities, failing horribly in Shanghai. Mao Zedong then took the party on the Long March, retreating into the smaller, rural areas of mid-western China. There, he earned the support of the peasantry - a move that later helped cement his position as the leader of China.

Indeed, rather than aiming right for the bright lights of the big cities, it seems taking the underrated route would pay off in a much bigger way.