Contributed by Kathryn Sloane, Director of Business Development & Growth, APAC, Schawk, Inc.

Kathryn Sloane

China has always held out great promise for retailers, thanks simply to its enormous population. “If I could just sell a million wristwatches at a tiny profit,” the thinking went, “I could make a ton of money.” Trouble has always been, though, that the Chinese didn’t have the money even to buy a wristwatch. That’s changing, and retailers are finding that the best prospects for new markets are among China’s growing middle class and in growing Tier 2 and Tier 3 cities, not in its established metropolises. As put it, “The middle classes are expanding out beyond the largest cities more rapidly and in greater numbers than any market has ever witnessed.” In other words, China is “filling in.”

But as always in China, that path is complicated and not entirely without uncertainty. First, the optimistic news. The Chinese government is aggressively pushing policies to grow its middle class, understanding that this has been the key to economic growth in developing nations worldwide. Consumption by the nation’s middle class will outstrip the U.S. by the end of this decade and the entire European Union by 2027, according to a report from the OECD. And there’s tremendous room for growth, as the middle class in China now represents only a little more than one tenth of the population – compared to an astonishing 94 percent in South Korea, for example.

Combined with the expected growth of the middle class is the growth of Tier 2 and Tier 3 cities in China, as farmers and other small-town residents flock to urban centers to find more lucrative work. Today, four in ten Chinese live in cities. Morgan Stanley has suggested that if this increases to 63 percent, retailers will gain another 300 million potential customers with markedly greater purchasing power in the coming years. Just one indication of the growth in smaller-city purchasing power: eight of the ten fastest-growing cities for the huge eBay-style website Taobao are Tier 2 and Tier 3, according to a report from A. T. Kearney.

And the Chinese government is taking extra measures to increase consumption, such as allowing families made up of children born under one-child-per-family laws to have two children. This kind of social engineering is foreign to the West, but it’s part and parcel of Chinese life. All in all, according to one report, China is in a “megatransition,” and the government’s ambitious and aggressive planning across the board “is likely to spark the greatest consumption story in modern history,” according to Morgan Stanley. “Today’s post-crisis world could hardly ask for more.”

What will the new middle class in fast-growing Tier 2 and Tier 3 Chinese cities be buying? Food, of course, at an expected increase of nearly seven percent annually for the next decade and a half. This is not lost on retailers like Tesco, Carrefour and Wal-Mart, who are quickly learning the finer points of expanding in China. But discretionary items are the faster-growing segment and eventually will comprise a larger percentage of Chinese consumption than food does, perhaps the clearest indication of a nation’s prosperity.

For example, mobile phone reach in China is expected to grow to 84 percent by the middle of this decade, nearly a 50 percent jump. In 2009, China was already the world’s top mobile phone market, with some 700 million subscribers.

China is also the world’s largest automobile market, and by next year it will have doubled its share of the world’s car purchases in just five years. Packaged goods represent a huge potential growth segment, especially for larger retailers. Today only one-fifth of the Chinese market is “organized” by larger retailers: local and mom-and-pop stores prevail. By contrast, 80 percent is organized in the U.S., according to A.T. Kearney.

Household and personal care products are expected to grow as much as 15 percent per year in the near future. And clothes present a particularly interesting case. While it’s a very fast-growing segment in developing economies worldwide, the Chinese historically have had very small wardrobes and still are relatively uninterested in foreign brands, especially compared to India and Brazil, two other nations often offered for comparison in many areas. But this orientation is changing among the desirable 18-to-24-year-old demographic, and that’s precisely the kind of trend clothing retailers want to bank on for the future.

But this “filling in” of the Chinese consumer landscape isn’t a simple thing for brands. Pitfalls and uncertainties abound. Although securing the space and permissions for a large retail store in Tier 2 and Tier 3 cities isn’t the logistical and bureaucratic runaround it is in the biggest cities, it’s still a complicated, sometimes shadowy process that requires developing relationships with the right people (and not wasting effort on posers) in ways that can strike Westerners as unconventional.

In these cities, once a retailer has developed these relationships, things go smoothly. But in crowded Tier 1 cities, there are stories of the government seizing retail property for public use and telling the owner, “We’ll pay you for the bricks.” And the uncertainties extend beyond the local specifics. As Forbes noted, six years ago, a company could reach 70 percent of the middle and upper classes by having locations in 70 Chinese cities. Nine years from now, it will require more than 400 cities, with this mandate: “Not only must companies choose the right locations for long-term growth and scale economies, they must segment and cluster those locations appropriately given the company’s specific business model.”

And there is yet another layer of uncertainty, at the level of broad economic policy. Currently China is dependent on foreign sales, and recent events have shown that those are subject to events like recessions, debt crises and earthquakes. For these reasons, and to promote more self-sustaining growth, China wants its consumers to buy more goods made by Chinese companies. So there’s a chance that foreign companies, no matter how entrenched or what kinds of joint operating agreements they have, could be pinched.

If anything, these realities may encourage foreign companies to move quickly now to become entrenched while they can. But the best course for this singularly modern economic situation might be embodied in an ancient proverb: hasten slowly.

Sources: “Asian Affluence: The Emerging 21st Century Middle Class,” Morgan Stanley Smith Barney, June 2011. “The Emerging Middle Class in Developing Countries.” OECD Development Center, January 2010. “Unlocking China’s Consumer Power.”, April 5, 2010. “Growing China’s ‘Middle Class.’”, July 22, 2011. “China’s middle class still growing … and more may want that new car smell.”, July 11, 2011. “The 2008 A.T. Kearney Global Retail Development Index.” A.T. Kearney, 2008. “The China Files: U.S. Corporates & Megatransition.” Morgan Stanley, Sept. 20, 2010.

Schawk, Inc. is a leading provider of brand development and deployment services, enabling companies of all sizes to connect their brands with consumers. With a global footprint of operations in 26 countries, Schawk helps companies create compelling and consistent brand experiences by providing integrated strategic, creative and executional services across brand touch points. For more information about Schawk, visit Follow Schawk on and

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