Retail Development in China’s Second-Tier Cities

College-educated Chinese workers are commanding salaries comparable with their counterparts in first world countries, while young Chinese in second-tier cities are finding themselves with a ready supply of money to spend on personal indulgences. The expendable personal income accumulated as a result of the burgeoning economy is creating a lucrative opportunity for extensive retail development in China’s second-tier cities.

Steady but Uneven Growth in the Chinese Retail Industry

China is a giant retail market, with sustained growth substantially greater than that of developed countries. With retail sales of 17 trillion RMB ($2.58 trillion) in 2011, China’s retail sales are the equivalent of over half the retail sales of the United States in 2011 ($4.7 trillion). However, whereas the United States has maximized its retail sales growth rate at 8 percent, overall retail sales in China have been steadily increasing by approximately 15 percent year over year since 2007. Relative to a worldwide average retail growth rate of 3 percent, this demonstrates that in addition to having a sizable existing retail base there is extremely strong growth in retail sales in China.

A Map Detailing the 33 Administrative Divisions of China

The 33 Administrative Divisions of China. Source:

Retail sales growth in China is not spread evenly across the country, but is instead highly fragmented by region. Of the country’s 33 administrative divisions (provinces, municipalities, autonomous regions, and special administrative regions), 42 percent of retail sales are concentrated in Guangdong, Shandong, Jiangsu, Zhejiang, and Henan, primarily heavily populated and industrialized eastern provinces. In contrast, China’s interior divisions such as Tibet and Gansu demonstrated the weakest retail sales over the same period.

China’s Second Tier Cities and their Growth Potential

Although capital investment and industrialization are primarily concentrated in China’s first-tier cities, second-tier cities possess the greatest opportunities for growth. Second-tier cities possess underdeveloped retail markets, and are experiencing an influx of government and corporate investment to drive faster urban development.

The City of Chongqing

The City of Chongqing, a second-tier city in China. Source:

Second-tier cities offer an attractive opportunity for Chinese workers to settle down. Due to the difficulties of immigrating to first-tier cities, Chinese workers are just as eager to migrate to fast-growing second-tier cities, giving companies access to a ready supply of labor and consumers. Surveys indicate second-tier cities actually offer stronger job placement prospects than larger first-tier cities, because the increased pace of urbanization and the rapid growth in the manufacturing sector translate directly into an increased demand for workers.

China’s second-tier cities possess vast retail growth potential. With an influx of new workers to second-tier cities, these workers and their families will only contribute to retail sales growth by becoming consumers in the local economy. Business Monitor International predicts that from 2009 to 2014 total retail sales in China will grow by 74 percent due to expansion into second- and third-tier cities.

The Growing Urban Middle Class

China’s middle class is growing at a staggering pace. The middle class in China is expected to increase in size from current estimates of about 200 million to 650 million by 2015, double the overall size of the United States. By 2025, 400 million more people will live in China’s cities than do currently.

Because of this rapid growth centered in second-tier cities, an exponential growth in retail capacity is necessary for China to satisfy its citizens’ demand for consumption.

Consumption Patterns in China

Across China, the most profitable retail industry sector is overwhelmingly motor vehicle sales, fuel, and auto parts, contributing to 39 percent of China’s total revenue in 2008. Food and beverage, clothing and apparel, hardware and furniture, and pharmaceutical and medical device retailers form the bulk of the remaining revenue, but face intense competition while profiting less.

The maturation of the retail market in China provides greater profit opportunities for established international brands to retail in China. Although retail as a whole is no longer an emerging market in China, the lack of established consumer preferences and high trend volatility in consumer purchasing patterns in second- and third-tier Chinese cities still bear significant similarities to emerging markets. Consumer confidence is increasing across the country, most notably in less-developed regions of the country. Increased consumer confidence leads to better brand recognition, which favors retail sales due to premium pricing and higher margins.

Expansion as a Determinant of Profitability

Due to the incredible growth projections, both in sales and volume, of the retail sector in China’s second-tier cities, investment into retail development will inevitably result in profits for the investor. With the trends of increasing urbanization, a growing middle class, and an ever-increasing pace of competition, the earlier that an investor enters the retail market in a second-tier city, the earlier they can establish their lead over subsequent entrants. By entering the market immediately, and planning to accommodate for both future growth in population and shifting consumer demands in second-tier cities, retail developers can gain a significant foothold on the retail market in China.

Déjà Vu – Craft Brew in Mexico

Across the border there is a growing movement for premium, unique beers, brewed in small batches and with less orthodox ingredients. Learning from the American craft brew revolution, the emerging craft brew industry in Mexico has created an exciting new opportunity for new entrants to establish themselves in a decades-mature alcohol market.

The Craft Brew Revolution

Craft brewing is a unique niche of alcohol production, characterized by explosive growth and small but profitable sales figures. Market contenders are limited by definition to brewers who produce “6 million barrels of beer or less” annually, which in conjunction with a wide variety of taste preferences and brand differentiation prevents larger companies from fully utilizing economies of scale to crush smaller competitors and . Although the movement initially started in the United Kingdom in the 1970s, craft brewing exploded in popularity upon reaching the United States in the 1980s.

The term “Craft Brewery” is applied to the smaller breweries that began springing up in contrast to the larger, multinational breweries producing commercial beers such as Budweiser, Miller, and Pabst. These larger commercial breweries were the eventuality of the consolidation of breweries following Prohibition in the 1920s. In contrast to the generic lagers that were produced on a massive scale by these companies, craft brewers were able to experiment and produce beers in smaller batches for more specific palates.

Craft Brew in the United States

In the United States, the Craft Brew market is extremely fragmented and specialized. As of July 31, 2009 there were a total of 1,596 craft breweries operating in the United States. By 2011, that number had risen to 1,938. Portland, Oregon, arguably the national capital of craft brewing, has 30 microbreweries operating within its city limits.

Widmer Craft Beer for sale at a bar in Portland

Widmer Brothers, a craft brewery successfully established in the United States, is a popular request in Portland's bars. Source:

The US beer market has been steadily moving towards higher end beers for the past decade. Despite the large number of craft brewers operating within the United States, according to data provided by the Craft Brew Alliance craft brew still commands a very small, but increasing, percentage of the overall beer market. With a steady annual increase in market share, craft beers have increased their joint market share in the US beer market to 8 percent in 2011, compared to 14 percent and 78 percent for import and domestic non-craft beers, respectively.

Mexico’s Beer Market

Whenever the genre “Mexican Beer” is brought up at a bar, the two labels that immediately come to mind are Corona and Dos Equis, a light beer and a lager that have become established hallmarks of Mexican brewing in the United States. Belonging to Cerveceria Modelo and Cuauhtémoc-Moctezuma Brewery (owned by Heineken) respectively, the parent companies of these two brands also dominate the market in Mexico.

Mexico’s beer market shares many similarities to the beer market of the United States at the cusp of its craft beer revolution. Similar to the craft brew movement in the United States circa 1980, Mexico’s craft brew sector is practically nonexistent. More than a dozen microbreweries operate within the country, however their overall market share represents less than 1 percent of the overall beer market. Cerveceria Modelo and Cuauhtémoc-Moctezuma Brewery combined control 98 percent of the alcohol market in Mexico, providing a similar backdrop that Budweiser and Miller provided to the fledgling American craft brew industry.

Craft Beer branding "inspired by the golden era of lucha in the 1950's"

Craft Beer branding "inspired by the golden era of lucha in the 1950's." Source:

Mexican craft breweries first began cropping up in 2009, and have since learned how to maneuver their way through the market at an accelerated pace by building on the business models of American craft breweries. Some have adopted the strategy of combining brewery with bar to increase brand identity and availability to consumers, while others have learned to stick to kitschy branding and premium prices in order to drive up demand.

The success of new craft brew entrants in Mexico’s emerging craft brew market is protected by the lack of interest from Mexico’s commercial breweries. Mexico’s two largest commercial beer manufacturers are responding to the country’s emerging craft brew industry in the same way that commercial beer manufacturers in the United States reacted in the 1980s: by going about business as usual, without adapting to stem new entrants into the market. The rationale for noninvolvement is very sound from their business perspective; with the entire craft brew industry comprising a market share of less than 1 percent, Cerveceria Modelo and Cuauhtémoc-Moctezuma Brewery would rather devote resources to outmaneuver rival commercial breweries rather than develop new product lines to compete with the wide variety of offerings provided by the craft brew community.

Craft brewers in Mexico suffer from certain disadvantages relative to their American counterparts, however the premium positioning which craft beers command allow them to mitigate some of these obstacles. As a small supplier, craft brewers are often unable to obtain shelf space at retailers and bars, and as a result find it difficult to distribute their brand among a general consumer base. Additionally, small breweries in Mexico are not given the same tax breaks that their American counterparts receive, squeezing their margins even further. Fortunately, craft breweries are able to disseminate information about their upcoming products through social media outlets and their company websites, which allows them to gain visibility and thus sales in spite of these difficulties. The higher price consumers are willing to pay for craft beers also help craft beers to command nearly one percent of the revenue in the beer market, despite only being consumed at a rate of 8 bottles per 100,000 bottles of beer consumed overall.

Why Craft Brew Now

With striking similarities to the infant United States craft brew market of the 1980s, craft brew in Mexico is a market ripe for new entrants and sustainable growth. The nature of craft brew allows anyone with an idea for creating beer and a fresh perspective on ingredients to enter the market with relatively little effort, and the premium pricing inherent in the market allows them to make higher margins per bottle sold than their commercial competitors.

Craft beer has just emerged in Mexico as the newest and most attractive premium alternative in an industry dominated by established giants. By maneuvering around the established positioning of commercial breweries, new craft breweries can quickly earn market share and profit from the impending growth in demand for craft beer in Mexico.

Socially Responsible High-Tech Manufacturing in China

Although China is synonymous with cheap labor and mass-produced goods, in recent years there has been a gradual trend towards higher wages and increasing consumer awareness of worker abuses throughout the country’s manufacturing facilities. In this new climate, Original Equipment Manufacturers (OEMs) based in China could, for the first time, monetize socially responsible workplace practices as a way to secure international contracts.

Increasingly unable to stay out of the public spotlight for the rights violations of its Chinese contractors, large international firms are beginning to see the advantages of supporting the rights of workers. With huge capital investments already committed to the country and increasing pressure from consumers, they must increasingly collaborate with the demands of workers instead of relying on the age-old strategy of moving operations to another lower-cost country.

Plentiful Labor in China

Since China began reopening itself to the West in the wake of its Cultural Revolution, it strived to establish a position of global dominance in manufacturing. Decades of bloody war and colonialism prevented substantial capital assets from developing in most of the country, however it did have an overabundance of one crucial asset: manpower.

China’s economic factor conditions have been predicated by an overabundance of labor. Between 1980 and the present day, the population of China has increased by over 350 million people, more than the entire current population of the United States (309 million in 2010). In order to capitalize on its strengths and expand its global market share, both the government and factory owners have generally turned a blind eye to worker abuses in all but the most egregious of incidents, with a focus instead on increasing productivity. This trend has led to a historically low cost of labor, lack of worker rights regulations, and an emphasis on manufacturing output over worker rights.

A Shift in the Tide

Average Manufacturing Wages in China

Manufacturing Wages in China have been increasing at a steady rate of 14 percent annually. Source:

China’s factories are undergoing a sweeping transformation to more advanced and technical fabrication. As China’s manufacturing sector expands, it is beginning to produce high-quality products in addition to the standard textiles and low-end finished goods that form the bulk of its exports. With an influx of high technology manufacturing contracts, automakers and equipment manufacturers are demanding more skilled and specialized labor. Additionally, the increased mechanization of the manufacturing industry exponentially increases the productivity of the typical Chinese worker, significantly increasing the wealth generated per working hour.

The trends of greater worker productivity and higher margins for international firms contracting Chinese manufacturers are at odds with the continued suppression of workers’ compensation and rights. Since 2005, there has been a steady increase in manufacturing wages. This upward trend is pivotal in establishing the foundation for a systemic change in how manufacturing is negotiated in China.

The Apple Seed

Workers assembling hardware components at a Foxconn factory in China.

Workers assembling hardware components at a Foxconn factory in China.

While many instances of labor mistreatment have made their way into the public spotlight, the case that has enthralled the public perception in these past weeks is the relationship between Apple and its Chinese OEM Foxconn. Foxconn employs roughly one million Chinese workers in its factories; its largest factory, located in Guanlan, employs 73,000 workers whose primary function is to assemble iPads, iPhones, and other Apple products for primarily overseas sale. In spite of the public uproar in the United States over the paltry wages and 56-hour workweeks of typical factory workers at Foxconn, one fact remains abundantly clear to the Chinese who work in these factories: Foxconn is somewhere they want to be

Despite working conditions that seem unappealing to American eyes, as well as several legitimate issues uncovered during a Fair Labor Association audit of the company, Chinese workers flock to work at Foxconn. When compared to national salary averages, the reason for their attraction to Foxconn’s production lines becomes clear: minimum wage in the area is 1,500RMB (about $220) per month, whereas workers at Foxconn enjoy starting wages of 1,800RMB (about $265) with a post-probationary increase to 2,200RMB (about $325) per month. In fact, workers at the Guanlan factory make an average of 2,872RMB per month (about $424), nearly twice the legal minimum wage, which most factories employing low-skilled, abundant workers rarely go above.

Aside from financial incentives, Foxconn also seems to be addressing intangible worker needs better than its competitors. Although it reported an apparently distressing 18 suicides among its factory workers in 2010, this number is actually a great triumph for the company. When compared with China’s national average of 22 suicides per 100,000 workers, Foxconn’s workplace environment seems to be over twelve times better than expected from a similarly-sized manufacturing firm.

Despite its industry-leading salaries and benefits for its manufacturing workers, Foxconn is still able to maintain high profitability for its primary business partner, Apple. Apple has been able to report record earnings and incredibly large margins last quarter, totaling $46 billion of revenue, in the face of higher manufacturing salaries and countless legal and PR expenses related to the treatment of workers at Foxconn

Socially Responsible Labor as a Competitive Advantage

With the trend of increasing worker compensation as well as increased pressure from international consumers to address workplace abuses, a unique opportunity is presented to entrepreneurs wishing to break away from age-old conventions. With the valuable data that Foxconn has generated regarding the positive effects of some of its workplace policies, it becomes apparent that more can be done to address other workplace issues and generate more revenue for the company at the same time. There exists the opportunity for a manufacturing company to capitalize on social responsibility as a primary selling point of its business.

In addition to ensuring manufacturing quality and capacity, as any traditional OEM should, an OEM can create a competitive advantage from socially responsible labor practices by ensuring that its business partners would be free from legal fees and public relations expenses related to workplace issues at its factories. These cost savings would allow companies to accept higher manufacturing costs, improving the quality of life for workers in factories as well as preserving earnings for the international firm.