Curious Capitalist

China’s ‘Second Tier’ Cities: That’s Where the Money Is

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Airports can tell you much about the consumer development of a country. Having just landed in Shanghai on route to Chengdu, a second-tier city in the Southwest, where TIME’s sister publication is holding its Global Forum, I was struck by two things.

First, the amount of smaller Western niche brands that now occupy airport retail space. The big guns like Gucci, Dior, and Coach have been here for ages, and indeed get the majority of their corporate growth from China. But they are setting up most of their new shops in the country’s western regions, in “second tier” cities — that’s an official government designation, by the way, based on economic activity and population —┬álike Chongqing and Chengdu.┬áThe upper middle classes of Beijing and Shanghai no longer need to shop for Western luxury in China; they are rich enough to take trips to France, Italy and the US and get it direct. That’s why so many Parisian hotels are being re-kitted to accommodate Chinese tastes. And that’s why LVMH and others are counting on the newly wealthy, but less globally sophisticated, western Chinese to provide the next growth kick.

Meanwhile, smaller Western brands like Kiehl’s, the cult beauty pharmacy based in NYC, and San Francisco’s Benefit cosmetics seem to be doing a brisk business in the Shanghai airport retail malls. Coastal Chinese seem as familiar and comfortable with these high end specialty brands as their peers in New York or London are, which is a mark of how rich and consumer savvy they have become. Indeed, many of the products on sale in Kiehl’s had been customized for the Chinese — skin whitening products and an emphasize on exotic herbal formulas.

The second thing that struck me sitting in the Chinese domestic flight terminal is just how few Westerners there are here — most of those on my previous flight will remain here in Shanghai, while only handful sit among the hundreds of Chinese headed for Chendgu. Like the U.S., the world’s second largest economy is big enough to support it’s own huge domestic markets beyond the coastal export hubs. And there’s plenty of money in those second tier cities — most of China’s new growth will come from these cities (and Chinese growth represents 27% of all global growth this year). Twelve of the Fortune 500 already have headquarters in Chengdu, and the government is actively pushing its economic development. But the lack of Westerners here in the flight queue makes me think that there are too few foreigners ready to capitalize on this next Chinese development boom. Go West young Americans!