Leading Chinese e-commerce companies target smaller cities to promote growth
Alibaba, JD.com, Pinduoduo, and Vipshop seeks to expand beyond the main Chiese cities.
As the competitive landscape of e-commerce increases, the major players in the electronic commerce industry of China are focusing on smaller cities to drive sales. This development came at a backdrop of waning growth and an uncertain economic climate.
During the announcement of the company’s revenue for the last quarter of 2018, Pinduoduo (PDD), which is based in Shanghai made an interesting disclosure. The third largest Chinese e-commerce company revealed that the majority of its user base is now from low-tier cities. These are Chinese government administrative units classified based on population, GDP, and administrative hierarchy. Xu Tian, the vice-president for Finance of the company, explained that the residents of the small-tier cities have started exploring various types of products including small luxuries.
Xu further explained that in contrast to previous years, the company is now consistently adding new users and fulfilling orders from low-tier cities. This development serves as a respite to the Chinese e-commerce industry following a decline in the sales generated from the consumers from the first-tier cities. These cities include Beijing, Shanghai, Guangzhou, and Shenzhen. Prominent second-tier cities are Xiamen, Zhuhai, and Harbin, among many others.
E-commerce companies conceived the initiative to expand online retail initiatives to lower-tier cities following Beijing’s dismal economic growth target of 6-6.5% this year. The trade war with the USA, the financial dilemma of private companies and high debt levels might be factors that led to the gloomy forecast.
Statistics from Morgan Stanley shows that the lower-tier cities would account for two-thirds of the increase in national consumption between 2017 to 2030. Robin Xing who is the China Chief Economist of Morgan Stanley laid credence to this prediction in a research article. He said that investors think that the most important consumer base is in the larger cities, but the lower-class cities will eventually become larger, wealthier and more willing to spend.
AgencyChina, a marketing firm based in Shanghai revealed that about 5% of the consumers in the 400 lower-tier cities, already have income parallel to the average American consumer. Michael Norris, the research and strategy manager of AgencyChina, shed more light on the economic power of the lower-tier cities. Michael refers to this group as Lower Tier Living Large (LTLL) - a group enjoys a comfortable life that aligns with the upper middle class. They are able to afford expensive electronics and buy foreign cars and other luxury goods. The buyers in this group are active consumers, they will not hesitate to live the lifestyle they see on TV programs.
Colin Huang Zheng who is the founder and Chief Executive Officer of PDD said that its high time his company tapped into this highly neglected market. He affirmed that in spite of the high potential of the lower-tier market of China, it could not access premium products readily available to the higher tier market. He said that PDD will allocate a reasonable quota of its products from premium quality brands to lower-tier cities.
PDD which is a public traded company listed on NASDAQ is credited for pioneering the “Team Buying Business Model.” This model creates a platform for consumers to share products with their friends on social media and team up to purchase the items and receive a volume discount.
The company shared recent statistics that show that the annual spending of the active buyers in these lower-tier cities has doubled to 1,127 yuan (US$167.70). Moreover, the Gross Merchandise Volume (GMV) has tripled to 471.6 billion yuan last year. The GMV is the PDD metric for the value of gross sales on the platform.
Taking inference from the GMV data and the increase in spending on the PDD platform, it becomes apparent that consumers in the lower-tier cities play a major role in consumer upgrade. The increase in wages and subsequent prosperity in these cities in recent times have led this buyer niche to seek goods of higher quality.
This change in buying trend and the massive potential of this class of consumers have been identified by other Chinese e-commerce companies as well. The Taobao Marketplace, Tmall and Vipshop have on separate occasions admitted the majority of their user growth came from lower-tier cities. Tmall and Vipshop are subsidiaries of Alibaba Group Holding and Tencent Holdings respectively.
Alibaba, a Wall Street-traded company and the largest e-commerce company in China made an interesting disclosure during its latest quarterly earnings publication. The company revealed that almost 70% of the annual increase in the active users came from the lower-tier cities.
Although sales of high-priced items such as the smart devices and home appliances declined, the consumer staples like the beauty, home furnishing and apparels have shown strong growth.
Eric Shen, the Chief Executive Officer of Vipshop, revealed during the latest quarterly earnings call of the company that the strongest growth of the company came from second-tier and third-tier cities.
JD.com which is the second largest e-commerce service company in China has launched a replica of the PDD business model called Pingo-group buying initiative. Xu Lei, the company’s Chief Marketing Officer, claimed that Pino model has been effective in penetrating the market of the lower-tier cities.
Xu further revealed that the company is poised to leverage its position as a major e-commerce player in China to gain a decent market share in the lower-tier markets.
Richard Liu Qiangdong, the founder and CEO of JD.com stated that the company plans to attract more users in the lower-tier cities by sending more stocks to its outlets in those locations.
A spokesperson of PDD said the company is aware of the strategies of its rivals which are trying to replicate the company’s marketing initiatives and also focus more on lower-tier cities. However, he affirmed that the increase in the focus of other competitors on the lower-tier cities has ignited the desire for consumption which has been dormant in those regions over the years.Source