Who Can Seize The Second And Third Tier Cities?

The emerging and broad market of China's second and third tier cities is undoubtedly the "next" strategic highland for more and more international giants.

However, considering that most international brands in China currently make pricing strategies based on the consumption level of first tier cities, the overall low consumption level of second tier and third tier cities will hinder them from entering and conquering this special market. It is also because of this that it first became the front position for the active expansion of domestic brands.

However, an analysis report recently released by UBS Securities took China's sportswear industry as an example and made an interesting assumption: if those international first tier brands, such as Nike, Adidas, etc., choose to launch footwear products with lower prices in second and third tier cities, what impact will it have on domestic brands?

If Nike "sinks", cost control should start from dealers

At the beginning of May this year, Adidas announced its first quarter results, which showed that the sales in the Greater China region fell by 15% year on year. At the same time, Nike predicted that its annual revenue in emerging markets, including the Greater China region, would grow at a rate of about 10% in the next five years.

This means that, on the one hand, the first tier market that was once familiar to these international brands has gradually become saturated; On the other hand, they must adjust their sales channels and product mix as soon as possible to enter the second and third tier cities with low consumption levels, rather than waiting for the natural improvement of consumer spending power there.

However, according to the analysis of the UBS report, the "perfect pricing" of footwear in second and third tier cities is currently between 170 and 250 yuan, while the price of footwear sold by Nike (the international first tier sports brand with the largest market share) in China is between 400 and 1000 yuan. The price difference of 150 yuan between the two is an important reason that prevents its business from entering the second and third tier markets. In contrast, several major domestic brands that are actively focusing on expanding their markets in second and third tier cities, whose prices basically fluctuate 50-70 yuan around the range of 170-250 yuan (see Figure 1).

However, if Nike makes the lowest price of footwear products 300 yuan, although it is still slightly higher than the "perfect price", the idea of "spending 50 yuan more to buy a pair of Nike shoes" is likely to drive those consumers who now buy high-end sports shoes brands such as Li Ning, Anta, and Tebu to take the lead in shifting.

Therefore, a prerequisite question that needs to be solved first is whether Nike can achieve 300 yuan for a pair of sports shoes?

According to the further analysis of UBS, assuming that under the current pricing strategy, Nike's cheapest sports shoes are priced at 395 yuan (excluding discounts), then the distribution expenses account for the largest proportion of the cost (134 yuan/pair), about 1/3 of the sales price. The second is the total production cost (95 yuan/pair, including raw materials, labor and administrative expenses). Next comes Nike's profit - 78 yuan/pair (see Figure 2).

If Nike adjusts the price of the cheapest sports shoes to 298 yuan (excluding discounts), the sales and management expenses of dealers will be the first to be compressed by 36%. The second is the total production cost, which is reduced by about 26%. Although the unit profit of Nike and its suppliers may also decline, the rapidly growing sales volume after entering the second and third tier cities can offset the decline in unit profit (see Figure 3).

For dealers, because a large part of the original sales management fee of 134 yuan/pair comes from the expensive store rent in the first tier cities, if transferred to the second tier and third tier cities where the store rent cost is only 1/3 of the first tier cities, but the sales may be 50% of the first tier cities, Then the goal of reducing the dealer's sales and management expenses by 36% is likely to be achieved (see Figure 4).

More accurate value positioning, the way out for domestic brands?

No doubt Nike Adidas The sinking of sales channels of international first tier brands and the adjustment of product mix will first have a big impact on domestic high-end sports brands, and the natural improvement of consumer consumption level in second and third tier cities will soon put pressure on the performance of small domestic brands with an overall average price of 150-250 yuan/pair.

However, the report of UBS also pointed out that, on the whole, the size of China's sports shoes market (including well-known brands and general brands) will probably reach RMB 69 billion in 2010, and the size of well-known brand sports shoes market will reach RMB 297 billion by 2020. In other words, in the next 10 years, the compound annual growth rate of China's sports apparel industry will still reach 15.7% (see Figure 5).

So, for domestic brands, how should they grasp the development opportunities in the second and third tier cities?

From the perspective of brand marketing budget alone, except for Li Ning and Anta, the marketing budget of these two domestic high-end sports brands can reach more than 1 billion yuan, the budget of other domestic brands is only between 350 million yuan and 500 million yuan (see Figure 6). This means that the latter will be at a disadvantage in brand exposure and popularity for a long time.

Therefore, for these brands, how to use their understanding of the local market accumulated from earlier entry into the second and third tier markets to really spend the limited brand marketing budget on the cutting edge has become the key to their foothold in the second and third tier cities.

It is worth noting that compared with consumers in the first tier cities, consumers in the second and third tier markets are more likely to brand The recognition of is based on a completely different logic.

　　 Sportswear The main consumption force of the industry is about 16-35 years old young people. In the first tier cities, people of this age group not only have more rich and mature brand cognitive ability, but also are more eager to highlight their distinctive personality in the vast crowd. Therefore, in terms of the positioning of brand appeal, it is more necessary for businesses to give a unique, even some extreme slogan to attract their attention and pursuit.

However, in second and third tier cities, young people of this age group are relatively more influenced by people around them, and their pursuit of personality will still leave the mark of traditional consumption concepts. At the same time, due to the relatively limited consumption capacity, how to let them pursue their own personality and a better life at a lower cost will be the main direction for brands eager to win the recognition of these consumers.

Because of this, Anta, which advocates "never stop", PEAK, which advocates "I can be unlimited", and 361 degrees of "be brave to be yourself", are likely to become increasingly developed in online shopping, and the physical sales channels of international brands are also sinking. Today, they are still popular in second and third tier cities, occupying a market share that cannot be underestimated.

In the long run, this kind of value proposition must be further refined to more accurately target consumers with stronger commonalities in some parts of the second and third tier cities. In this way, domestic brands can really establish their own niche market and share their own "cake" in the "hand to hand combat" with international brands.