I recently came across a discussion forum on LinkedIn where two long-term China residents (Western European expats) were debating whether it is possible to build a consumer brand in China without starting out in a Tier 1 city. The branding expert said “no” but the Private Equity guy said “yes” and used examples like Alibaba which began in Hangzhou.
I heard this debate many times before in pretty much every country where I have worked – the USA, Korea, Japan, the UK. “If a brand does not start on the East or West Coast of the USA it does not have much of a chance.” Same argument for Seoul, Tokyo or London. But does this argument have merit today in the fast paced world of the internet and social media?
At the end of the day it really depends on the concept. The more “international” and “exotic” the concept, the more it needs early adopters who primarily reside in Tier 1 cities. I am sure that Gucci would not have entered China by placing the first store in Jinan, Shandong Province and neither would a parma ham producer.
In the restaurant sector it all comes down to whether the cuisine already has some acceptance in the market. Most Chinese QSR chains began in Tier 2 cities primarily because they could not afford to start in Tier 1. Many have achieved large-scale development with as many as 300-500 stores and are entering Tier 1 cities now with little resistance.
McDonald’s started their China development in Shenzhen when it was hardly a sophisticated city. KFC opened the first stores in Japan in Nagoya. Most large restaurant chains in the USA are based in Tier 2 cities and avoid Tier 1 because the economics are so unfavorable, but when the do open in NYC, LA or San Francisco, they are busy.
Do Japanese, Singaporean, Taiwanese, Hong Kong style or Korean concepts need to start in Tier 1? I personally doubt it. How about a fine dining French concept – almost definitely. A luxury steakhouse with cigar lounge? I think it can be successful in many Chinese Tier 2 cities today.
Each concept needs to be judged on its own merits. There is no one-size-fits-all answer!