By  on February 1, 2011

BEIJING — China’s young, emerging middle class, living in second- and third-tier cities, is developing into the target market for retailers.

A McKinsey survey of 15,000 young, middle-class consumers living in smaller urban areas found that 69 percent expect their income to increase in the next five years. More than 30 percent dress to show off their social status, while 47 percent said they are willing to buy branded products if they had more money. Forty-three percent are willing to spend money on products or services to reward themselves.

According to Yuval Atsmon, an associate principal in McKinsey’s Shanghai office, this consumer group, specifically those between the ages of 25 and 34, is “a generation that has seen continuous growth and opportunities, is optimistic and enjoying a much better life than older generations. They are busy, seeking more personal time and convenience, and more demanding.”

But they are also different from their counterparts living in tier-one cities who have become jaded and more frugal amid rising real estate prices and shrinking job opportunities, according to Benjamin Cavender, an associate principal with the Shanghai-based China Market Research Group.

“The people moving back [to smaller cities] will want to bring back venues and environments with them that they had in first-tier cities,” Kevin Lee, the chief operating officer of China Youthology, a Beijing-based firm that researches China’s youth culture, said. “They will bring the experience, the culture and also the products to go along with that.”

Such is the case with Phoebe Zhao, a human resources manager at a hospital in Beijing. Her salary is about 120,000 yuan ($17,647) a year. She owns three Coach purses and enjoys shopping at The Gap, Uniqlo, Wal-Mart and Carrefour. The 29-year-old and her husband, who works for the government, have one child and own two apartments, which were given to them by her spouse’s family.

What makes Zhao notable among the tens of thousands of other Chinese her age living in this urban metropolis of 20 million is that she does not want to live here anymore. She is fed up with the inconvenience of getting around, the pollution and the overall pressure of life in general. Someday, she said, she hopes to return to her hometown of Shijiazhuang, a city with a population of eight million that is the capital of nearby Hebei Province.

Zhao is part of a small but growing group of young, middle-class urbanites who moved to China’s metropolises with big dreams only to find life in the big city was not all it was cracked up to be. So they want to go home. And what makes them important is that they will be the ones at least partly responsible for introducing the more sophisticated, globalized tastes of first-tier cities, like Beijing and Shanghai, to their counterparts in smaller urban areas, or, more specifically, the second- and third-tier cities that countless foreign brands are now trying to infiltrate.

“In many cases, these people are living at home until they get married, and so they have high disposable incomes relative to their salaries,” Cavender said. “This demographic is probably the group most responsible for driving retail spending in China right now.”

With China’s vast geographies, disparate income levels and varying regional cultures, making sweeping generalities about middle-class consumers living in smaller cities is nearly impossible. According to Lee of China Youthology, on the whole, this group is much more mainstream than their urban counterparts, who are influenced by international brands, aspire to “global culture tribes” or are part of more avant-garde, creative Chinese circles.

“There are actually very stark differences,” Lee said. “In the lower tiers, everything is still very mainstream and their entire concept of reality is rooted in a social unit and so you have to engage them on that. They are focused quite narrowly about what they care about but that does not mean they are not aspirational.”

The primary influence channels in smaller cities are hypermarkets where many young people go to socialize, as well as traditional media channels, Lee said. National brands also have a stronghold in the markets.

“The lower tiers are highly dominated by domestic brands. They are the ones that people living in those cities can touch and feel, and no form of international ad campaign can influence them if they [foreign retailers] are not there on the ground,” Lee said.

“There are only a very few people who can travel to the larger hubs, so we are talking about people who are very domestic, and this is why international brands are having serious problems going to smaller cities, because they don’t understand it is not a linear model. It is not just bringing it down to a lower price. It is a different cultural dynamic.”

One major disrupter in second- and third-tier cities is the growing popularity of online shopping, largely on Taobao, the country’s most popular e-commerce portal. This is exposing consumers living outside first-tier cities to brands, including foreign ones, that they cannot find in local stores.

“E-commerce and Taobao. That is a big disruption because all of a sudden these consumers start to know what is out there and not being offered in their hypermarkets,” Lee said.

More than 87 million Chinese made purchases on the Internet during the first half of 2010, according to the China Internet Network Information Center.

Yet even with the Internet and the exposure it brings to the outside world, Zhao, who wants to move home, said she worries she will no longer be able to relate to those she grew up with.

“The biggest difference is they don’t see many kinds of things like I can see, and they don’t have too many choices,” she said. “I think I am a little bit different. That’s just my feeling.”

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