In an earlier post, we spoke about the challenges facing new entrants to Tier 1 cities and raised the question of whether it was possible to just avoid Tier 1 cities all together and go to Tier 2 & 3 cities to build a business. Our answer then and now is the same – depends on the concept and the development model.
Here are some critical issues to consider.
Franchise model vs. direct owned model – all the evidence points to the direct owned store model as having the highest potential for success.
Western vs. Asian cuisines – there is much higher probability of success in secondary cities with Japanese, Korea, Taiwanese or Southeast Asian cuisine. There is just not much knowledge about Western food and not much interest frankly except for the large Western QSR chains that build awareness with deep pockets in Tier 1 cities first. There are many success stories of regional Chinese chains with 100+ stores operating mainly from secondary cities and they have very profitable models.
Simple vs. complex operating systems – The more simple & easy to train operating systems, the easier to expand throughout secondary cities. Believe it or not there is a labor shortage in the restaurant sector and staff will not work at a chain with difficult work conditions.
Low vs. high price – disposable income in secondary cities is lower than Tier 1 so prices must be affordable. Spending per person should be 15-25 RMB for QSR and no higher than 50RMB for full service.
Which Tier 2 & Tier 3 city? – There are huge variations between these cities and disposable income is not necessarily the best guide to determine development potential. Some cities have more westernized influences given historical contacts such as Dalian, Qingdao and Tianjin. Some cities are very receptive to Korean food such as Jilin, Changchun, and Jinan. It all depends on the experiences of the local population. Overall, the secondary cities in the Greater Yangtze River Delta are the most attractive markets – Wuxi, Suzhou, Nanjing, and Ningbo.
There are many similarities across other emerging markets that have relevance to China and we will discuss this in the next post.