Tapping into Incremental Growth in Lower-tier Markets in China

The rise of Pinduoduo is perhaps the most compelling testament to the immense potential and scale of China's lower-tier markets.

In 2023, Pinduoduo achieved annual revenue of 247.6 billion yuan, marking a year-on-year growth of 90%. The platform’s GMV surged from 1.01 trillion yuan in 2019 to 4.05 trillion yuan in 2023.

China’s cities below Tier 3 collectively house approximately 1 billion people, representing 70% of the total population. These emerging markets are not only significant in the digital realm but also constitute a vast and untapped opportunity offline.

Many food brands and foodservice chains have also begun reaping the rewards of growth in these regions.

The Growth of Tianlala

If you live in China’s Tier 1 or Tier 2 cities, you might not be familiar with Tianlala, but it has quietly spread its roots across counties, towns, and schools. Over the past decade, it has expanded to 7,000 stores, surpassing McDonald’s 6,657 stores in China as of February 2024.

Founded in 2014, Tianlala reached 1,000 stores by 2018 and has since expanded to 7,000 stores within just nine years. As a result, it’s often referred to as the “next Mixue Ice Cream & Tea.” Interestingly, Tianlala is even more deeply entrenched in lower-tier markets, with over 80.34% of its stores located in Tier 3 cities and below, compared to 56.25% for Mixue Ice Cream & Tea.

The Dairy Market's Shift to Emerging Markets

The dairy sector is also shifting its focus to lower-tier cities. Consumers in Tier 3, Tier 4, and lower markets now account for 53.6% of total dairy consumption. Notably, 84% of product categories have seen higher growth in consumer numbers in Tier 3 to Tier 6 cities compared to Tier 1 and Tier 2.

The vast population in these regions, coupled with the growing purchasing power of entry-level consumers and young adults in small towns, is driving this trend.

The Case of Yili

Yili’s 2023 annual report highlights this transformation:

"As household income levels steadily rise and infrastructure continues to improve, the lifestyle of county and township residents increasingly mirrors that of Tier 1 and Tier 2 cities. These areas have become the hotspots for FMCG market growth in 2023. Among them, counties and county-level cities, home to 250 million people or nearly 30% of the national urban permanent population, are making significant contributions to the growth of the dairy market."

According to Kantar consumer research, the number of households in counties and county-level cities purchasing ambient liquid dairy products increased by 2.6% year-on-year during the reporting period.

In 2023, Yili achieved a record-breaking 126.179 billion yuan in revenue and a net profit of 10.429 billion yuan attributable to its parent company.

Dongpeng Beverage’s Remarkable Surge

Another standout performer in recent years has been Dongpeng Beverage. Benefiting from national channel expansion and digital transformation, the company achieved 11.263 billion yuan in revenue in 2023, a 32.42% year-on-year increase, and a net profit of 2.04 billion yuan, up 41.60%.

For perspective, Dongpeng’s revenue stood at 4.209 billion yuan in 2019 and only 2.844 billion yuan in 2017. This represents a fourfold increase over seven years and a 2.68-fold increase in just five years.

This remarkable growth across sectors highlights the untapped potential and resilience of China’s emerging markets, presenting significant opportunities for businesses willing to adapt and innovate.