MW Western brands still carry cachet in China's lower-tier cities. So that's where they're going now.

Tanner Brown

As megacities slow, multinationals from Starbucks to Skechers are chasing growth in China's inland cities, where brand loyalty is strong and competition is thinner

In the heart of Neijiang, a third-tier city in China's Sichuan province, a queue forms outside a newly opened Starbucks. It's not the first in town, but it's the first drive-through. In a city known more for pickled vegetables than caffè lattes, the scene would have been unthinkable a decade ago.

While multinational companies are pulling back in many parts of China, brands from Starbucks (SBUX) to Skechers $(SKX)$ are quietly expanding in the country's so-called lower-tier cities, betting that smaller urban centers - once seen as peripheral - are now central to their China strategies.

The new frontier

Multinationals have long focused on China's wealthier coastal cities-Shanghai, Beijing, Shenzhen and the like - but today's action is further inland. According to the National Bureau of Statistics, over 900 million people - more than 60% of China's population - live outside tier-one and tier-two cities. Household incomes may be lower, but so are retail-space rents and competition.

For Western brands facing sluggish sales in mature markets and geopolitical scrutiny at home, this "sinking market" offers scale and, increasingly, sophistication. Yum China (YUMC), operator of KFC and Pizza Hut, opened 1,800 new stores last year - many in cities most Americans have never heard of.

"Over half of our new stores have been in lower-tier cities in recent years," Joey Wat, CEO of Yum China, said in a shareholder letter, adding that "a good share of our future growth should come from the growing pool of consumers in such markets."

Indeed, KFC outlets in cities like Lu'an and Yulin often offer localized items - congee with youtiao, for example, or spicy crayfish wraps - at lower price points than in Beijing.

Consumption without bling

The shift is part of a broader transformation in Chinese consumption. While tier-one city consumers have grown more cautious amid real-estate deflation and youth unemployment, lower-tier-city residents are showing surprising resilience.

"People here still spend, but differently," said Wang Yu, a convenience-store owner in Dazhou, Sichuan. "They want value for money, and they like brands - especially foreign ones, which are seen as reliable."

That reliability matters at a time when domestic consumer confidence remains fragile. According to a recent McKinsey report, consumers in tier-three and tier-four cities were more optimistic about their financial future than those in China's largest metro areas, and more willing to spend on apparel, food services and personal care.

Western brands have taken notice. Skechers, the American footwear company, now has more than 3,000 stores across China, many of them in provincial cities. Executives say the brand's comfort-focused shoes appeal to a wide demographic, including middle-aged shoppers often ignored by trend-driven local startups.

Similarly, L'Oréal (FR:OR) $(LRLCY)$ and Procter & Gamble $(PG)$ have tailored product lines and pricing to capture the spending power of families and working-class consumers in inland regions.

E-commerce's reach

Digital infrastructure is also leveling the playing field. E-commerce and livestreaming have brought brand visibility and logistics access to places previously off the retail map.

Kane Hu, chief analyst at tech-focused Peak Investment, a boutique brokerage in the western city of Chengdu, which handles roughly 80 clients and around 100 million yuan, or $15 million, in assets, notes that live-commerce platforms such as Douyin and Pinduoduo have "revolutionized product discovery" in smaller cities, making shoppers more aware of trends and increasingly expecting brand-name goods to be available to them.

That dynamic has helped international brands expand without the overhead of flagship stores. But for companies seeking stickier brand loyalty, a physical presence still matters. Bricks-and-mortar locations are viewed as status symbols and trusted sources of quality in places where counterfeits and knockoffs circulate.

Risk and reality

The lower-tier rush is not without risk. Profit margins are often thinner, and logistics can be more complex. Some brands that overexpanded in the past - especially local chains - found themselves trapped in markets with limited upside.

There's also the question of long-term demand. As China's population declines and the housing crisis continues to drag on growth, will these smaller cities still deliver?

Big picture

For foreign investors and multinational executives watching China's slowdown with concern, the lesson may not be to exit the market - but to look beyond its glossiest cities.

The next chapter of China's consumer story won't be written in Beijing's malls but in second- and third-tier neighborhoods where the American dream is still aspirational.

As Starbucks brews another cup in Neijiang, the message is clear: Western brands may be losing their edge in China's megacities, but they're finding new life where few were looking.

-Tanner Brown

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July 14, 2025 12:15 ET (16:15 GMT)

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