Oversaturation, excessive product choices dampen sales within big urban centers

Recent economic data coming out of China suggest that the world's second-largest economy is steadily transitioning toward consumption-led development, and in particular, counties and county-level cities are quickly emerging as another key dynamo in China's consumption engine.

The thirst for upgraded consumption and a confluence of socioeconomic developments — such as rising household incomes, shifting demographic trends and improved product-penetration rates — are facilitating the ascent of counties and county-level cities, said experts and executives.

Retail sales, a major gauge of China's consumption vitality, grew 8.2 percent year-on-year in the first half to 22.76 trillion yuan ($3.1 trillion), with a contribution to economic growth of 77.2 percent, said the National Bureau of Statistics.

In particular, retail sales of consumer goods in urban areas represented the lion's share at 19.75 trillion yuan, up 8.1 percent year-on-year.

According to experts and observers, a significant contributing factor to the rise in overall urban consumption was the enormous population in counties and county-level cities, with their rapidly rising purchasing power and expanding market size.

China had 1,866 counties and county-level cities at the end of 2021, roughly twice as many as prefecture-level cities and above, with a permanent resident population of some 250 million, or nearly 30 percent of the total number of people living in urban areas nationwide, said Gao Guoli, director of the China Center for Urban Development.

More rural residents are buying homes and relocating to counties and county-level cities as part of China's ongoing urbanization process, which adds to their steady population rise, Gao said, adding that the rising population in these areas indicates a larger market size and stronger potential consumption.

It is not just about sheer numbers, however. As many as 54 counties and county-level cities had their respective gross domestic product exceed 100 billion yuan in 2022, with cumulative figures amounting to 8.6 trillion yuan — or 7.1 percent of the nation's total economic output — according to a report released by market research firm CCID Consulting in June.

More importantly, residents of counties and county-level cities boast strong purchasing power as most don't shoulder heavy mortgage pressure, and their incomes, which are the main factors determining consumption, remain stable, said Xu Hongcai, deputy director of the China Association of Policy Science's economic policy committee.

Average annual household incomes in these regions stand at around 95,000 yuan, while annual household spending amounts to 48,000 yuan, according to a report on consumer demand among young and middle-aged people in county-level markets released by BA Capital, a Shanghai-based venture capital firm focused on the consumer sector, last year.

In addition, 60 percent of people in these regions own their homes and 30 percent reside in their parents' homes, leaving only around 6 percent opting for rental properties. Meanwhile, they are not under a lot of debt stress as the majority are free of debt or receive parental assistance, the report said.

Even though higher property prices tend to correlate to higher consumption, high mortgage payments have the potential to crowd out consumption. A good balance of housing affordability and disposable incomes can be found in China's counties and county-level cities, said Xu.

Therefore, less pressure from mortgage and living costs, as well as more free time for their families, social activities and online and offline entertainment, provide county-level markets the required momentum to expand their consumer base, he added.

With adequate disposable incomes, consumers in these areas are increasingly turning to better products and brands, which has spurred a growing number of consumer goods firms to position themselves in these markets, according to industry analysts and company executives.

Cafe chain Starbucks announced a significant development strategy in China last September, aiming to run 9,000 stores by 2025, with its Co-CEO of China Molly Liu stressing that the company cherishes not only the more than 300 prefecture-level cities across the country, but also the almost 3,000 county-level markets.

In Xingyi, a small county in the Qianxinan Bouyei and Miao autonomous prefecture of Guizhou province, Starbucks opened its first store in late April. Prior to its opening, a WeChat group set up by the store manager attracted 500 people to join, said Tian Chenyang, a 28-year-old local.

As the local populace was intrigued by the freshness of the product offerings and eager to emulate their peers in larger cities, the store had already generated a buzz when construction first started at the beginning of the year, Tian said.

On the first day of business, numerous customers waited in long lines for a cup of coffee at an average price of 35 yuan, while local brands typically sell for less than half that, Tian said, adding that they were also eager to share their opinions and selfies on the lifestyle-sharing platform Xiaohongshu.

People in counties and county-level cities have often yearned for sophisticated and diversified lifestyles presented on short-video platforms like Douyin and Kuaishou. They are willing to pay for such products and services that offer them similar experiences, said Chen Siyu, senior consultant of the county economy research center of CCID Consulting.

Retail chains that are new to county-level markets will likely find receptive audiences if they possess strong brands, good management and sound execution capabilities despite their relatively higher but affordable pricing structures, Chen said.

To date, some 33 percent of the more than 6,800 Starbucks outlets in the nation are currently located in smaller markets, according to Canyan Data.

The big-name brands that once were exclusive to major cities have now made their way down to county-level markets over the past few years due to lower levels of product penetration and improved accessibility to the market, said Yi Shaohua, a researcher at the National Academy of Economic Strategy under the Chinese Academy of Social Sciences.

In the past, brands looking to reach Chinese consumers have typically been focused on cosmopolitan consumers in the country's first- and second-tier cities. However, over the past few years, consumption growth in such cities has slowed as the market has become oversaturated and mature shoppers are overwhelmed with choices, Yi said.

A McKinsey study expects smaller markets, particularly county-level markets, to account for more than 66 percent of China's individual consumption growth by 2030.

As a result of changing consumer landscapes and ongoing consumption upgrades, an eager and ready consumer base in these county-level markets bodes well for strong expansion potential for businesses, Yi added.

There is also evidence of such a phenomenon in the entertainment industry, as 391 theaters opened in the first half, with 150 — or 38.4 percent of the total — being in counties, according to data from the China Movie Database.

While consumer sentiment may be weaker across the country at present, the long-term outlook for China's consumer sector remains attractive. In particular, China's counties and county-level cities, numbering in the hundreds, are stepping up to fuel the growth engine that once relied heavily on megacities, Yi said.