China’s middle class is expanding at an impressive pace, with most new consumers emerging from lower-tier cities. While major cities face economic slowdowns, these smaller cities have remained relatively insulated, driving robust consumption growth.
The Rise of Lower-Tier Cities
The growth of China’s middle and upper classes is reshaping the nation’s consumption landscape. By 2030, an additional 80 million people are expected to join the middle and upper classes, making up nearly 40% of the total population[1]. Notably, 70% of this growth will come from third-tier cities, where economic expansion is driving a significant increase in purchasing power[2]. These cities are creating strong demand for a wide range of products—from premium goods to innovative technologies. As lower-tier cities continue to thrive, they are becoming a crucial frontier for businesses looking to tap into the next wave of Chinese consumption.
Why Focus on Lower-Tier Cities?
While Tier 1 and Tier 2 cities are facing economic challenges due to global macroeconomic headwinds, lower-tier cities have been relatively unaffected. This is an untapped opportunity for growth. With increasing saturation in major cities, many global brands are now looking to emerging markets in smaller cities, where demand is rising and consumer preferences are evolving.
Global Brands Expanding into Lower-Tier Cities
Many global brands are turning their focus to China’s lower-tier cities as a way to expand their market share. In 2023, Yum Brands’ KFC celebrated the opening of its 10,000th store in China. Out of the 1,200 new KFC stores that opened, 60% were in lower-tier cities[3]. This strategy is central to KFC’s plans to expand its Pizza Hut and K-Coffee chains across the country.
Starbucks is also doubling down on lower-tier cities. Despite experiencing a 14% drop in sales at its Chinese stores in 2024[4], the company has announced plans to refocus its efforts on expanding in smaller cities. This move is part of Starbucks’ broader strategy to tap into the growing consumer base in these areas, where the potential for growth and brand penetration is significant.
Shifting Consumption Patterns
An undeniable shift is happening in China’s lower-tier cities, driven by rising disposable incomes and the growth of middle-income households. According to PWC’s Voice of the Consumer Survey China Report, China’s middle-income families are expected to grow and account for two-thirds of the world’s middle class by 2030[5]. As a result, consumer spending is also on the rise. As residents become more selective in their purchasing decisions, electronics, cosmetics, and food are seeing the most significant growth. Both local and international brands are catering to these evolving tastes[6]. Health and sustainability are shaping the consumption patterns of younger consumers, who are increasingly interested in eco-friendly and organic products. PWC’s report highlights a rise in demand for items that promote wellness and align with sustainable consumption trends. This shift reflects a broader cultural change, as more people in lower-tier cities prioritize mindful living and responsible purchasing habits.
A Transforming Job Market
Employment and education opportunities in lower-tier cities are evolving alongside their economic growth. These cities are becoming hubs for manufacturing, technology, and services, with industries diversifying and attracting talent from across the country. According to Deloitte’s China Consumer Trends report, investment is pouring into these regions, with companies setting up operations to leverage cost-effective labour and closer access to regional markets[7]. This has spurred job creation in key sectors such as e-commerce, logistics, and green industries.
The education system in these cities is also undergoing transformation. Government initiatives, such as the “New-Type Urbanization Plan,” have education as one of their key goals. It aims to improve access to quality education in lower-tier cities and bridge the gap between rural and urban opportunities. As a result, there has been a rise in higher education enrolment, with universities and vocational schools expanding their programs. These institutions are increasingly offering courses tailored to the local economy, including tech training and entrepreneurship, to better prepare students for the evolving job market. PWC reports that this focus on education has led to a significant increase in students pursuing degrees and certifications to meet the demands of an ever-evolving job market[8][9][10].
A Growing, Educated Workforce
The evolving employment and education landscape in lower-tier cities is contributing to a more educated workforce that can sustain long-term economic growth. As these cities continue to grow, they are not only raising living standards but also becoming key centers of opportunity for businesses looking to tap into the next wave of China’s consumer-driven economy.
[1] https://mp.weixin.qq.com/s/8a5SxyxWzQafd4Lw-mws2w
[2] https://mp.weixin.qq.com/s/8a5SxyxWzQafd4Lw-mws2w
[3] http://en.people.cn/n3/2023/1212/c90000-20108965.html
[4] https://investor.starbucks.com/news/financial-releases/news-details/2024/Starbucks-Reports-Q4-and-Full-Fiscal-Year-2024-Results/default.aspx
[5] https://www.pwccn.com/en/retail-and-consumer/voice-of-consumers-china-report-oct2024.pdf
[6] https://www.pwccn.com/en/retail-and-consumer/voice-of-consumers-china-report-oct2024.pdf
[7] https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/consumer-business/deloitte-cn-cb-consumer-insight-en-230118.pdf
[8]https://www.mckinsey.com/cn/~/media/mckinsey/locations/asia/greater%20china/our%20insights/in%20search%20of%20pockets%20of%20growth%20in%20china/2024%20mckinsey%20china%20consumer%20report.pdf
[9] https://www.pwccn.com/en/retail-and-consumer/voice-of-consumers-china-report-oct2024.pdf
[10] https://www.gov.cn/gongbao/content/2014/content_2644805.htm
