"I spend most of my income on clothes, entertainment and food, and this year, my baby," she told Beijing Review. "I don't think too much if I really want to buy something. With a double income and relatively low living expenses, I can even save some money."

New adults on the block

New generation adults like Liang living in third and fourth-tier cities are presenting a stronger consumption demand and capacity today. During the Spring Festival, these cities posted 55-percent growth in New Year goods consumption year on year. In first-tier cities, the growth was 4 percentage points lower, according to a report by online shopping mall Tmall.com on February 11. The report also showed the sale of imported cherries, an expensive fruit in China, in third and fourth-tier cities far exceeded that in first-tier cities.

Small cities have become the new gold mine for Chinese e-commerce platforms with their huge untapped potential. The 18-35-year age group, who live and work in relatively developed third and fourth-tier cities in China, are well-educated on average, with a bachelor's degree or above and have a decent job in their hometowns. They can easily afford to buy an apartment.

The phrase has gone viral on Chinese social media with the group being compared frequently with their peers in big cities. The 28-year-old Gao Zihui left her hometown to work in a finance firm in Shanghai, the business capital. Now she says she misses her hometown. Gao's nostalgia increased when she saw a cherry-related post on the Internet, saying the people who can eat as many cherries as they want are those with real financial freedom, since 1 kg of cherries costs 200 yuan ($30). Imported from Chile, the fruit is not something for average households. People like Gao have to pinch pennies when they live in big cities, since their rent alone can easily go as high as half of their monthly salary.

Pan Helin, a postdoctoral fellow in applied economics at the Chinese Academy of Fiscal Sciences, said small cities' consumption capacity can be attributed to Internet Plus industries. Online businesses transcend geographical limits on the market, boost communication and bridge gaps among cities and regions.

With the Internet economy and wider channels for acquiring new products, small city residents are more willing to spend. They are unleashing their consumption potential with mounting consumption capacity, he added.

Xing Ziqiang, chief economist of Morgan Stanley China, predicts that by 2030, the consumption of third and fourth-tier-city residents will increase to 45 trillion yuan ($6.71 trillion) from 15 trillion yuan ($2.24 trillion) in 2017, making them the main force of consumption in the next decade. Small satellite cities in developed clusters such as the Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area, Chengdu-Chongqing Area and Beijing-Tianjin-Hebei Region are expected to take the lead in the consumption market.

A blue ocean

Eyeing the blue ocean of small cities, Chinese e-commerce giants are adjusting their strategies to tap these markets.

In the first quarter of 2018, the e-commerce penetration rate of fourth-tier cities rose 19 percent year on year while in first and second-tier cities it increased by only 1 percent, according to a report on Chinese households' consumption by the Nielsen Holdings Inc. in December 2018.

Daniel Zhang, CEO of Alibaba, said the market in small cities and towns has been a major driver for their growth for two consecutive quarters. The efforts they have put into strengthening business infrastructure in villages and towns and expanding delivery channels have borne fruit.

According to Alibaba's latest financial report on January 30, 70 percent of its newly increased active users are from small cities and towns. Currently, it has 636 million active users.

This year, Alibaba's online shopping branch Taobao.com has stepped up efforts to explore the new market. Its subsidiary Juhuasuan.com was established in 2010 as a group purchase website. Jiang Fan, President of Taobao.com, said at a public meeting on March 21 that the subsidiary will now tap small cities and towns to meet new needs and improve its supply-side efficiency while maintaining its low-price advantage.

Mogujie.com, a social media and online shopping platform specializing in fashion content and targeting women, has also speeded up exploring the market with steps such as regional livestreaming. Sellers can promote their products on the local channel by talking in their home dialects, an effective way to connect them with potential local buyers.

According to Mogujie.com data, consumers from third- and fourth-tier cities constitute 60 percent of its client base.

Chen Qi, CEO of Mogujie.com, said the platform is cashing in on the trend, with young women in small cities and towns becoming more interested in fashion and popular brands. The fast development of e-commerce has raised small cities' awareness of fashion trends, resulting in an upgrade in the consumption of their residents.

Time to brainstorm

Michael Zakkour, Vice President of China/Asia Pacific strategy and global digital practices at consulting firm Tompkins International, told Beijing Review that Chinese companies have shown good performance.

He said Alibaba is bringing new retail (the integration of online and offline shopping) to these cities and towns. The company has not only brought online shopping to more buyers but also used its technology, cloud and payment services to enable local companies to go digital.

China has more than 700 million online consumers and in the future, consumers from small cities and towns will represent the next 700 million new retail consumers, he said.

In addition, he also sees "great opportunities for U.S. brands, retails and producers." "Companies like Alibaba… and others provide the tools and marketplaces for U.S. brands and retailers to sell on," he said.

But there are also challenges. Take the cherry as an example. Tmall guarantees delivery of its cherry to second-tier cities in 72 hours and has unleashed great demand. But it takes longer to deliver the delicate fruit to lower-tier cities, which would compromise its taste. Cold-chain logistics and storage have to be improved.

Meanwhile, the 700 million online consumers are not all alike. There are unique demographic groups and different segments. Savvy and experienced digital shoppers have a completely different set of needs and expectations than those who have just joined the e-commerce revolution. The former tend to buy more foreign, luxury and premium goods and are willing to pay for them, while the online consumers in smaller cities and rural areas are more price-sensitive, and tend to spend more on mass market goods and utilitarian products.

But a sub-segment also buys premium goods, which is in line with the fast developing cities and regions driving higher percentages of GDP growth, he said.

"The challenge is doing the research required to find the right consumer segments, how to address them, what products, services and prices will appeal to them and then having the patience to grow with the opportunity," Zakkour said.

Copyedited by Sudeshna Sarkar

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