Thematic Spotlight on lower-tier cities: spending habits, trade-up trends and brand choices

China's post-COVID recovery has been characterized by uneven purchasing patterns as consumers turn more discerning against a still-muted macro backdrop. Leveraging UBS Evidence Lab's Low Tier Cities survey, we explore how spending patterns and brand preferences of mid-to-high income consumers in smaller cities are trending across beauty, beverages, travel, sportswear, wellness and electric vehicles (EV). We zone in on so-called tier 3 cities, home to 24% of China's population, or 330m consumers. 

Spending on restaurants, coffee shops and beverages saw a boost in tier 3 cities in H1. Beauty recovered, but make-up to a lesser degree than skincare; sportswear was stable, but staples slowed. In bigger cities, both the rebound and near-term expectations are stronger amid slightly improved income expectations. Although the spending outlook among tier 3 city respondents has improved on the start of this year in many categories, it still falls short of last year; and in some segments, the share planning to spend more is flattish or decelerating. The survey also shows that in smaller cities, compared with the start of the year, fewer respondents now expect their income to rise in the next 6M; property sentiment is also weaker. While modest easing is underway in property it may benefit bigger cities more than lower-tier cities. 

Trading-up momentum in tier 3 cities slowed in H1. In higher-tier cities, the overall momentum was more robust, but still slower than last year. Compared with their big-city peers, consumers in tier 3 cities were more likely to downgrade in some categories. But China’s premiumization story has not been derailed. Although softer than last year, upgrading remains the dominant trend: among the categories surveyed, trading up intent was strongest in beauty, sportswear, and wellness-related areas. There are opportunities for both foreign and local brands. For example, when it comes to sportswear purchases, quality matters most and while branding is important only 11% of respondents say that the brand they buy must be international. In beauty consumers in smaller cities still lean towards domestic beauty brands, but foreign marques continue to grow in appeal. 

Tier 3 city consumers travelled more for leisure in H123 (up 20+ppts vs. H222). Intentions are also up and interest in heading overseas also ticked higher. Obstacles to outbound persisted in H1: besides still-limited flight availability passport issuance was only 68% of 2019's level. Approved countries for group tours also did not include US, UK, Australia, South Korea or Japan. But as of 10 August 2023, the ban on these destinations (and more) has been lifted. However, it's worth noting that, based on the survey, in smaller cities the share planning to lift travel budgets still lags the share planning to travel more. The extent of any boost to consumption from recent stimulus measures also remains to be seen - but, if incomes do go up, travel is one of the top areas consumers (in big and small cities) would allocate more to.