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A combination of higher living costs and the downturn’s impact has led middle-class and affluent consumers (MACs) in big cities to have less enthusiasm for spending than MACs in smaller cities--presenting a huge growth opportunity for international companies, finds BCG’s "Big Prizes in Small Places: China’s Rapidly Multiplying Pockets of Growth" report.

“Companies that fail to venture into China’s small cities will miss out on a significant portion of the middle-class growth explosion and leave an opening for their competitors to fill,” warns BCG senior partner Hubert Hsu, a coauthor of the report and based in Hong Kong. Today, in order to reach 80 percent of MACs, a company must be in 340 urban locations; to achieve the same coverage in ten years, a company will need to be in nearly 550 urban locations. By then, there will be nearly 800 urban locations with real disposable income per capita greater than Shanghai’s today.

Hong Kong–based BCG partner Carol Liao, also coauthor of the report, explains small cities offer the potential for higher margins from a fragmented trade structure and the opportunity to shape the behavior of new middle-class consumers.

However, companies should not assume that their big-city business models will work equally well in small cities. BCG’s research has found that many consumers new to the middle-income segment are less sophisticated about brands and sometimes require education on product benefits. These consumers also do less research before purchasing than big-city consumers and show more trust in local brands and television promotions.

Even small-city markets are not all alike: regional differences in spending habits, product preferences, distribution channels, and trade structures are significant. For example, MACs in cities clustered around Nanjing and Chengdu are the most interested in spending more and trading up, while MACs in the cities around Wuhan and Shenyang are the least interested. Because regional differences are so significant in China, companies must define the source of their opportunity carefully and prioritise growth plans before allocating resources, says BCG.

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