Research Insights The colossal potential of lower-tier cities in China

The colossal potential of lower-tier cities in China

August 2023
Phocuswright Research

As China transitions into a new travel era, OTA bookings at home and abroad are picking up speed. Phocuswright’s latest travel research report How Chinese OTAs Turned Around Three Years of COVID Isolation examines how Chinese OTAs reframed their businesses during 36 months of COVID disruption. Among other notable moves, they grew their customer bases in lower-tier cities, embraced user-generated content, augmented their livestreaming capabilities, and prepared for social commerce challengers.

Lower-tier cities: variably defined, but highly important

Chinese cities are grouped in tiers depending on their size, population and economic output. Beijing, Shanghai, Guangzhou and Shenzhen are the four established first-tier cities. In 2018, 15 new first-tier cities were designated, including Chengdu, Hangzhou, Xi'an and Qingdao. Then there are over 30 fast-developing second-tier cities. The next level of lower tier cities is where brands, retailers, real estate firms, banks, insurers and OTAs are now focusing their attention.

Almost 300 third, fourth and fifth-tier cities are located across China. They comprise nearly 70% of China's urban population. In recent years, consumer spending increased and diversified in these cities, but low international air connectivity made them less appealing to OTAs. No longer. Over the past three years, Chinese OTAs accelerated their marketing and customer acquisition strategies in lower-tier cities to engage young populations with developing tastes for travel experiences.

This strategy stepped up in 2021, when it became clear that China would not quickly reopen for outbound travel. "We deepened our coverage in lower-tier cities and under-penetrated markets in China. This will help stimulate consumption demand in these areas," said Meituan Chairman Wang Xing during the company's 2021 annual report conference call. There was, he added, a need to "keep track of constantly evolving consumption trends, especially for 21-to-30-year-old consumers."

Membership drives targeted lower-tier consumers enriched core benefits and customized travel solutions for desirable customer segments, such as students, graduates and Gen Zs. OTAs enhanced this approach in 2022. "We continued to optimize products and services and persistently penetrated lower-tier cities that remained resilient amid the pandemic and outpaced the overall market recovery," said Wu Zhixiang, co-chairman of Tongcheng. "Lower-tier cities are under-penetrated yet contain colossal potential."

Optimizing bookings in lower tier cities is now integral to OTA thinking. Joyce Li, head of capital markets at Tongcheng, said: "60.8% of new paying users via our Weixin (WeChat) Mini Program in 2022 were from Tier-3 cities or below, and 86.5% of registered users are from now from non-Tier-1 cities."

Having expanded their user bases to drive resilient traffic through diversified sources, the next steps are to convert newly engaged lower-tier consumers into "high frequency users." This approach is mirrored by Chinese hotel groups. H World (formerly known as Huazhu), which is a partner of Accor in China, says its hotel network expansion in 2023 will focus on "lower-tier cities and less penetrated areas".

The full article reviews the many developments and initiatives undertaken by Chinese OTAs in the past several years, including: growing their customer bases in lower-tier cities; embracing user-generated content; augmenting their livestreaming capabilities; and preparing for social commerce challengers that also drew large domestic crowds. These players have all closely monitored the changes in travel regulations, consumer expectations and trends, readying themselves for the coming outbound travel surge.

For further intelligence for you and your entire company, subscribe to Phocuswright Open Access. This subscription puts the entire Phocuswright research library and powerful data visualization tools at your fingertips. There’s a reason executives around the world trust and reference Phocuswright research and data on a daily basis. Explore for yourself why.