In a new report, financial-services firm Morgan Stanley finds that by 2030, the spending power of consumers residing in China’s lower-tier cities is expected to reach US$9.7 trillion. That will be almost on par with the size of the country’s gross domestic product in 2015 ($9.96 trillion).
The gigantic consumption power driven by the increase of individual disposable income in these lower-tier cities will have dramatic implications for the luxury sector in China. Growing incomes will lead to a diversification in spending behavior, and result in an increased demand for high-quality goods and premium services.
Taking into account the GDP along with other criteria, Chinese cities are generally divided into four tiers. Tier 1 cities have a GDP of more than $300 billion, while Tier 2 cities have a GDP ranging between $68 billion and $299 billion.
First-tier cities include metropolitan areas such as Beijing, Shanghai and Guangzhou. There are 26 second-tier cities, including Hangzhou and Xiamen. Morgan Stanley excludes both of those tiers in its definition of lower-tier cities.
Lanzhou, the capital city of Gansu province in northwestern China, has a population of 3.6 million. Last year, its annual GDP grew by 8.3% to 226.4 billion yuan (about $33.2 billion), beating the national average level of 6.7%, according to the annual report published by the Lanzhou Statistics Bureau on its official website. The disposable income of the urban population rose 9.5% to 29,661 yuan during the same period.
In the future, per the report, cities like Lanzhou (a primary example of the market discussed in the Morgan Stanley study) will contribute 59% of China’s annual nominal GDP and hold 70% of the nation’s urban population.
Income growth in these small Chinese cities will accelerate in the next couple of years to catch up gradually with the big ones. A breakdown of this $9.7 trillion consumer market shows that by 2030, per capita disposable income for urban households will reach $8,261, nearly doubling the current level of $4,482. The former figure represents a 55% increase from the income level in 2016.
In recent years, some luxury brands have established a presence in lower-tier cities by opening stores there. For instance, Louis Vuitton has boutique stores in third-tier cities such as Kunming, Shijiazhuang and Zhengzhou.
However, even though these companies have set up business there, their priorities still lie with customers in the first- and second-tier cities. The result is that too often, buyers in smaller cities visit luxury shops only to find outdated products and receive insufficient services.
Against the backdrop of the country’s attempts to transform itself from an export-oriented nation to one driven by consumption, these expected changes will make demands of luxury brands. They will need to adjust their online and offline business strategies and adapt to the needs of these emerging consumers.