29 June 2015
Breaking into the Mainland Consumer Market – HKTDC’s Top 30 Cities (2015)
- Figure 1: Correlation between per-capita GDP and per-capita retail sales in prefectural-level cities
- Figure 2: Correlation between per-capita savings deposits and per-capita retail sales in prefectural
- Table: Economic indicators of the top 30 consumer markets (2013)
- Figure 3: Comparison of spending power and market size of the top 30 cities (2013)
Development of Urbanisation on the Mainland
According to the National New-Style Urbanisation Plan (2014-2020) announced in mid-March 2014, China's ratio of permanent urban residents to total population should increase from 53.7% in 2013 to about 60% by 2020. The urbanisation plan has three clear priorities, each relating to about 100 million people: granting urban residency to around 100 million rural people who have moved to cities, rebuilding rundown city areas and villages inside cities where around 100 million people now live, and guiding the process of the urbanisation of around 100 million rural residents in the central and western regions. According to this plan, China will systematically ease household registration requirements for cities with an urban population of 500,000-1,000,000 people, rationally ease such requirements for cities with an urban population of 1-3 million people, and strictly control the population of big cities with an urban population of over 5 million people. In future, increases in the permanent urban population will mainly take place in small and medium-sized cities.
China's urbanisation has, in fact, seen swift development these past years, with the urbanisation rate (i.e., ratio of urban population to total population) rising from about 20% in the early days of reform, increasing to 54.77% in 2014. As urbanisation gathers speed, the number of large and medium-sized cities (prefectural-level cities) has increased from 236 in 1999 to 290 in 2013. The high population density in cities has brought about a concentration of demands. In terms of location of sales outlets, urban areas account for over 86% of total retail sales of consumer goods.
As economic development shifts to the lower-tier and inland cities, the economic level and consumption power of cities at different levels are going up steadily. Although very few cities can match the big coastal cities in term of consumption power, many of the large- and medium-sized cities have moved significantly upmarket with regard to consumption and can now afford higher-end consumer goods. A number of international brands have now found their way into second- and third-tier inland cities.
Top 30 cities with Largest Market Potential
Among the numerous cities on the mainland, the HKTDC, based on a set of scientific criteria, has selected the 30 that offer the most promising consumer markets for Hong Kong companies. This is intended to provide easy reference when it comes to identifying targets for business expansion. These cities are mainly located in the three major economic regions, namely the Pearl River Delta (PRD), the Yangtze River Delta (YRD) and the Bohai Rim. Both the PRD and YRD are now home to a large number of affluent cities within a relatively small area. The development of retail channels and supporting facilities in these cities has reached a certain level of maturity, facilitating the development of new markets.
While the overall market size of a city is proportional to its population, its consumption level depends on the income and wealth of its residents. According to statistics, the per-capita retail sales in any given city are closely related to the local per-capita GDP and per-capita residents’ savings deposits. Figures 1 and 2 below show that per-capita retail sales are highly correlated with per-capita GDP and per-capita savings deposits.
According to the above analyses, a city that achieves high levels in all four indicators (i.e. total retail sales of consumer goods, per-capita retail sales, per-capita GDP and per-capita savings deposits) can be regarded as having a relatively mature consumer market, with considerable demand for most commodities and significant growth potential. It can thus be classified as a target city for development. However, as consumer demand for certain higher-grade branded products and consumer durables is smaller than that for mass merchandise, the sale of such products has to be supported by the purchasing power of a larger region. Hence, the target city must have a clustering effect, drawing together the purchasing power of its neighbouring regions.
In order to identify the top 30 cities on the mainland with the greatest market development potential, two steps are required. First, 50 cities with the highest retail sales and consumption level have to be chosen. Specifically, all cities on the mainland are ranked according to four indicators, namely total retail sales of consumer goods, per-capita retail sales, per-capita GDP, and per-capita savings deposits. The higher the ranking of a city, the higher its score. Then the 50 cities with the highest total scores are selected.
Second, a comparison of the capability of these 50 cities for drawing in the purchasing power of their neighbouring regions is made. The purchasing power of the neighbouring regions is based on the economic strength and market demand of the neighbouring cities. Meanwhile, the accessibility of a city can determine whether the city is a hub with busy people flow and whether residents in other areas would go there for consumption purposes. If the city is a provincial-level political and economic centre or transportation hub, it can normally attract more consumers and draw in more consumption power from neighbouring regions. Some large cities (or cities which are tourist destinations) can even attract visitors from all over the country, as well as from overseas. The accessibility of a city can be reflected by its passenger throughput.
The 50 cities are then ranked according to four indicators, namely GDP, total retail sales of consumer goods, population and passenger throughput (including all cities at the same level or a lower level within a 200-km radius). Again, the higher the ranking, the higher the score of a city. Finally, by adding the total scores obtained in the first and second steps, the top 30 cities with the highest scores are selected. Except for the big cities that enjoy an obvious lead, the scores of many second- and third-tier cities are actually very close. In light of this, although some cities do not make the top 30 list, their market potential is still worthy of attention.
Based on 2013 figures, 30 cities with the largest consumer market and highest spending power were chosen. These cities were: Beijing, Shanghai, Guangzhou, Tianjin, Shenzhen, Wuhan, Chengdu, Suzhou, Nanjing, Hangzhou, Shenyang, Qingdao, Changsha, Wuxi, Jinan, Ningbo, Zhengzhou, Dalian, Chongqing, Foshan, Yantai, Nantong, Changzhou, Zibo, Shaoxing, Jiaxing, Weihai, Zhongshan, Zhenjiang and Zhuhai. These 30 cities together account for 40% of the consumer market on the mainland. Among these cities, there are megalopolises such as Shanghai, Beijing and Guangzhou. In terms of administrative level, there are four municipalities directly under the central government and eight provincial capitals. Geographically, apart from Beijing, Tianjin, Shanghai and Chongqing, there are five cities in the PRD, 10 in Jiangsu and Zhejiang, five in Shandong, two in the three northeastern provinces, three in the six central provinces, and one in the western region.
Comparison by Market Potential
The 30 cities selected by the HKTDC are the cities with the largest consumer market and highest spending power. To prioritise the cities for development, the market size (total retail sales of consumer goods) and spending power (per-capita retail sales) of each city were compared. We can see from Figure 3 that the market size or per-capita retail sales in Beijing, Guangzhou and Shanghai are obviously greater than other cities. The mid-tier cities next in line after these three are Shenzhen, Nanjing, Wuhan, Hangzhou, Shenyang, Suzhou, Tianjin, Qingdao, Wuxi, Jinan, Changsha, Ningbo, Dalian, Zhengzhou, Foshan, Yantai, Chongqing and Chengdu. Other cities include Changzhou, Zibo, Nantong, Dongguan, Shaoxing, Jiaxing, Zhenjiang, Zhongshan, Weihai and Zhuhai.
Beijing, Shanghai and Guangzhou have always been considered as the entry points for breaking into the domestic market. The consumer market of these three cities is characterised by a large urban population and a high urbanisation rate. With their large population and market size, these cities have no lack of consumer groups with high consumption power. In fact, these cities feature a broad range of consumption levels and may be divided into a number of commercial belts with distinct grades. Hence, consumer goods with different positioning can all find an appropriate commercial district.
Beijing, Shanghai and Guangzhou, however, are not only national business and shopping centres attracting consumers from all over the country, they are also cities with the highest concentration of middle-class consumers. This, coupled with their well-developed modern services sectors, has created huge high-income groups. Such residents have more exposure to foreign brands, media, movies and trends and are more receptive to new ideas.
Although the other cities cannot match Beijing, Shanghai, Guangzhou or Shenzhen in terms of size, they have all made significant headway in recent years. This is reflected not just in their GDP and other macroeconomic indicators. Marked quantitative expansion and quality improvement can also be seen with regard to their commercial development, especially in the retail sector. Under the general trend of urbanisation, cities at all levels are expanding their urban planning and building new city centres and shopping districts and developing modern consumption venues, such as large shopping malls. As living standards go up, retail channels in these cities are not only becoming more diversified, but are also moving upscale. A number of traditional department stores, for example, are upgrading themselves by introducing more brands. Supermarkets are also developing in the direction of gourmet offerings in order to cater to the needs of different consumer groups. These factors will all generate new opportunities for enterprises targeting the mainland market.
 Chinese cities are classified into three levels, namely centrally-administered municipalities, prefectural-level cities and county-level cities. Prefectural-level cities can be further divided into provincial/autonomous region capitals, sub-provincial cities and general prefectural-level cities. Prefectural-level cities must meet the following criteria: i) an urban non-agricultural population of over 200,000; ii) gross industrial and agricultural output value of over Rmb3 billion, with industrial output accounting for more than 80%; iii) GDP of over Rmb2.5 billion; iv) well-developed tertiary industry with an output value exceeding that of primary industry and accounting for over 35% of GDP. For a county-level city to be upgraded to a prefectural-level city, it must have become the central city of a number of cities and counties and its local revenue must be over Rmb200 million.