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Why third and fourth tier cities are crucial for MNC growth: Mondelez China boss

By Gary Scattergood

- Last updated on GMT

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Why third and fourth tier cities are crucial for MNC growth: Mondelez China boss
Multinationals striving for growth in China need to better target third and fourth tier cities by improving distribution and building relationships with local retailers.

That’s according to Mondelez’s China president Stephen Maher who said slowing growth in top tier countries meant it was vital for food MNC’s to branch out across China.

Speaking at the Food and Beverage Innovation Summit in Shanghai, he said: “These places were not just invented or discovered five years ago, but why now are they becoming it important? It is due to the nature of growth and competition.

“This is where the net revenue incremental is, and that is why we need to go there.”

He said most MNC’s were now struggling to find sales growth, with tier one city consumption of FMCG’s falling as a percentage of the overall market.

This is turn leading to a squeeze on sales and marketing budgets, meaning a new approach to expansion is needed in third and fourth tier cities, he said.

A fundamental requirement, he argued, was to better utilise distributors.

“Most MNCs want to reduce costs, creating the challenge to maintain the bottom line while trying to deliver growth.

“The route to market in tier three and four cities means you will need to leverage distributors more effectively. Also, local retail chains need to be targetted as much, if not more, as national ones.”

He highlighted how Mondelez was cutting its number of China distributors from 1200 to 300 to help improve margins for those which remain.

“We also reinvented their warehousing, and taught and integrated health and safety standards,”​ he said.

“Unless distributors are treated as an extension of your company you are going to struggle to succeed in tier three or four cities.”

Low awareness

He said local competition was strong in these markets and that MNCs risked being “locked out”​ if they didn’t compete soon.

“It is often said that local flavours and tastes are more preferred, but I would argue most consumers have not been exposed to our brands. The awareness is low tier cities is not there.

“Also, local retailers tend to support, and in turn get more support, from the local manufacturers.”

Maher said MNCs should focus on their core “power brands​”, increase their presence in convenience outlets and adjust their marketing strategies.

“Marketing to consumers in these areas is more challenging because TV penetration is less impactful. But as companies drive productivity on media spend, they focus on national not local channels, which is less effective in tier three and four cities,”​ he added.

“Local retail chains dominate these market places, but most companies are focused around the national retailers.

‘Without doubt, the biggest opportunities in these places are convenience outlets,”​ he said.