Source | Lingshou Retailers Target Lower-Tier Markets "The lower-tier market is indeed highly attractive." This is not only the personal insight of retailer Li Nan but also the consensus of many large retail enterprises. Ten years ago, Li Nan opened a lifestyle supermarket near the South Fourth Ring Road in Beijing. However, after the pandemic broke out, he decided to close his store in Beijing and return to a county in his hometown of Jiangxi. Through a distributor in Beijing, he got to know local channels and resources, and started his old business again. Within six months, Li Nan was already preparing to open his third store in the county. "In first-tier and provincial capital cities, the competitive pressure is too high. Although sales seem stable, the actual profit margins are quite low," Li Nan told the author. For example, a supermarket with around 3,000 SKUs operates much better in a county-level city, especially when it masters differentiated products and price advantages. Since it can meet consumers' one-stop shopping needs, customer traffic is not pessimistic. Li Nan's example is just a microcosm. In the retail industry, there is a "time machine theory" that if a successful business model in a big city is replicated in a small county, it can also achieve good performance. This view has broad consensus in the industry. Not only individual retailers like Li Nan, but also large enterprises do not want to miss the "fat meat" of the lower-tier market. Taking several specific companies as examples, Jiajiayue opened a discount store with a business area of 3,000 square meters, stocking more than 5,000 SKUs, basically covering all categories of a hypermarket; and Hema, which is "persistent" in the lower-tier market, after trial and error with mini and neighborhood formats, has locked onto Outlets as an important strategy. Also, Wumart, which entered with a discount store format, focuses its product categories on daily groceries, rice, flour, and cooking oil. When these retailers explore new business models, they seem to be imitating the successful case of ALDI in China on the surface, but the underlying operational logic is actually focused on reducing SKUs and lowering operating costs. The core is to adopt a low-price strategy to penetrate deeper into the lower-tier market. Specifically, by reducing product costs at the source through large-scale procurement, and further reducing overall costs by optimizing store operations and reducing waste. In this way, they can not only attract consumers at lower prices but also more effectively develop the lower-tier market to meet broader consumer demand. This is how local enterprises are entering the lower-tier market. In contrast, foreign enterprises are more confident and bold. According to reports, Sam's Club has signed contracts to open new stores in multiple locations, including Liaobu in Dongguan, Jingkai in Jiaxing, Yuecheng in Shaoxing, Lixia in Jinan, Lucheng in Wenzhou, and Chidian in Jinjiang. Notably, Jinjiang City became Sam's Club's second foothold in China's county-level market after Kunshan. This move by Sam's directly indicates that it is no longer limited to core cities like first-tier and new first-tier cities; instead, it is gradually refining its store location strategy, turning its attention to second- and third-tier cities, viewing them as new strategic highlands. Looking back, before 2013, Sam's expansion was not fast, opening only one store every two years on average. After 2013, due to the increase in per capita income of domestic consumers and market competition factors, Sam's accelerated its expansion pace, opening an average of 4-5 new stores per year. It was during this high-speed growth phase that Sam's began to shift its focus to the lower-tier market. Looking at the convenience store market, Zhang Sheng, Vice President of Lawson China, once directly revealed, "During the pandemic, the performance of Lawson's stores in East China achieved a 30% month-on-month growth, with the growth rate in third- and fourth-tier cities far exceeding that of first- and second-tier cities." These data and trends indicate that the lower-tier market, due to its broad consumer demand and relatively low competitive pressure, has become a strategic highland that cannot be ignored by both local and foreign enterprises. From individual retailers to large enterprises, various formats are seeking incremental space here. The Reasons Behind "The promotion efficiency in the lower-tier market is very high. Many supermarkets or community stores can accumulate dozens of 500-person groups before opening," Li Nan told the author. In addition, county-level retail businesses have huge cost dividends. Whether it is rent or labor, there is relatively more room compared to first- and second-tier cities. Moreover, competition is not as fierce as in provincial cities. In contrast, first-tier and new first-tier cities are key battlefields for major retail enterprises. Although the layouts of different enterprises vary, from the current situation, brand saturation is very high and involution is severe. Taking Shanghai as an example, whether it is foreign or local membership-based hypermarkets, such as Sam's Club, Metro, Costco, and Hema, the number of stores has exceeded 16. In such a highly competitive environment, brands must go all out to attract and retain members. However, turning to the lower-tier market, that is, third- and fourth-tier cities and towns, the situation is completely different. Taking Sam's as an example, its first county-level membership store in Kunshan not only opened successfully but also set a record for the highest turnover of new stores on that day. Perhaps this is also an important basis for it to turn its focus back to the county-level market and choose to open a new store in Jinjiang. In the lower-tier market, relatively less competition provides retailers with more business opportunities, but it is particularly noteworthy that cost advantages play a core role here. A senior executive in the community group buying industry said, "Due to obvious cost advantages, brands can more easily find a sustainable profit model in these lower-tier cities." This cost advantage mainly comes from three aspects: rent and utilities, human resources, and product loss. Specifically, in third- and fourth-tier cities and towns, rent and employee salaries are generally significantly lower than in first- and second-tier cities, which means operating costs are greatly reduced. According to statistics, employee salaries and rent usually account for more than 60% of a retailer's total costs. Because operating costs in these areas are relatively low, retailers have greater profit margins, which not only lowers the threshold for entrepreneurship but also allows these stores to quickly achieve success in the lower-tier market. In addition to cost advantages, third- and fourth-tier cities also have huge consumption growth potential. According to statistics, although young consumers in third- and fourth-tier cities account for only 25% of the national total, the total population of these regions accounts for 70% of the national population. "In the lower-tier market, consumers have both purchasing needs and time for consumption," Li Nan analyzed. Although the average income of residents in the lower-tier market may not be as high as in first-tier cities, their disposable income is relatively higher because they do not have the burden of mortgage and car loans. This also provides a good market environment for foreign retail enterprises to go down. Specifically, consumers in third- and fourth-tier cities have strong demand for exquisite life and internet-famous products. Statistics show that nearly 80% of consumers in third-tier cities are willing to apply for membership cards of warehouse supermarkets, coupled with the natural foreign enterprise filter, which provides a market with lower education costs for their downward expansion. Moreover, the fact that the demand in the lower-tier market is not fully met is also a key factor. Unlike first-tier cities, consumers in lower-tier cities have relatively fewer choices, especially in terms of internet-famous products. Therefore, with price and product advantages, foreign retailers are more likely to succeed in these markets. Combining the above factors, the core reason why retail enterprises choose to shift their attention from first-tier cities to the lower-tier market and actively seek new business opportunities and profit space is that the cost advantages, less competitive environment, and huge consumption growth potential make it a strategic layout for the future of the retail industry. Possible Impacts In the strategy of retailers going down to the lower-tier market, an indispensable key factor is the rent dividend. "At present, there are a large number of vacant shops in shopping centers with an area of more than 1,000 square meters, and the tenant formats are clearly insufficient," a commercial real estate person in charge told the author. For example, in the past, large shops were generally leased by education and training institutions or fast fashion brands, but in recent years, the situation has changed. These stores have successively withdrawn from shopping centers, and the shops have begun to be vacant. For these vacant shops, most are relatively large in area and are more suitable for large supermarkets to lease. Shopping centers are also willing to attract tenants at relatively low rents, which to a certain extent reduces the operating costs of supermarkets going down to the lower-tier market. Large supermarkets have very strong customer traffic attraction. Consumers can not only buy daily necessities here but also have various leisure and entertainment options, such as dining and watching movies. This not only promotes the sales of other merchants in the shopping center but also forms a virtuous business cycle. In addition to location and rent advantages, large supermarkets usually have efficient supply chain management and a variety of product categories, providing consumers with a one-stop shopping experience. These factors work together to attract a large number of consumers, thereby further increasing sales and profit margins. Of course, despite various favorable conditions such as the right time, place, and people, which seem to give retailers a considerable advantage in the lower-tier market, in fact, market growth and the ability to actually capture market share from competitors are completely different concepts. Although supermarkets often use "price wars" as a signboard, attracting consumers is not easy. They must also compete with diverse competitors, such as online e-commerce platforms and community group buying. Secondly, retailers that want to attract the lower-tier market with low-priced fresh products, such as Hema and Jiajiayue, also face huge challenges. According to data analysis from Analysys, in 2020, more than 70% of fresh food e-commerce consumers came from first-tier and new first-tier cities. Among them, consumers in first-tier cities accounted for as high as 40.9%, and new first-tier cities accounted for 28.9%, with a significant increase in first-tier city consumers. This means that the lower-tier market has not become the main battlefield for fresh food e-commerce, so using low-priced fresh products as the main product may not be an effective strategy. Furthermore, the natural elimination of the market is also a risk factor that cannot be ignored. For example, some stores focusing on discount near-expiry food, such as Prosperity Market, have already been eliminated in the fierce market competition. Even supermarkets like Hema, which itself faces considerable profit pressure, are now investing a lot of resources and attention into the lower-tier market, but the risks are still not small. Most importantly, going down does not mean low quality. "In many first- and second-tier cities, when going to Sam's to buy goods, people mainly choose bakery, fresh, and meat products, while in fourth-tier cities, the goods purchased on behalf are mostly packaged goods," a county-level purchasing agent for Sam's told the author. This also reflects the consumption power of lower-tier cities from the side. Overall, the lower-tier market is both a new battlefield full of opportunities and a complex environment full of variables and challenges for retailers. Especially as the retail market in first- and second-tier cities gradually becomes saturated, the lower-tier market appears particularly important. However, one fact is already clear: First-tier cities like Beijing, Shanghai, and Guangzhou may no longer be the only stage that determines the rise and fall of retailers; the lower-tier market cannot be ignored.