China’s prosperous mobile internet industry was built on a simpler version of demographic dividend, where massive population gained access to smartphones faster than any other country on the planet. However, that effect is fading.

User acquisition costs are higher than ever in major cities in China, as many internet companies compete for the mere chance of survival. But in the meantime, companies have found a new piece of a market that’s laced with opportunities in lower-tier cities.

As a country that is experiencing one of the fastest urbanization rates, Cities in China has developed into tiers by consuming rural areas. Tier one cities like Beijing, Shanghai, and Shenzhen are able to attract workforce from all around the country, while tier-3 and tier-4 cities, often being non-capital of provinces, are mostly decent-sized cities with population ranging from hundreds of thousands to a million.

But it is in fact in these lower-tier cities that people’s consumption power is growing due to general economic betterment. Morgan Stanley estimated in 2018 that lower-tier cities are expected to fuel two-thirds of national consumption increase towards 2030. With the significant rise in disposable income, the tourism consumption potential of residents in those cities have been awakened, and internet companies are trying to take advantage of this opportunity.

During the past Labor’s Day holidays, Online Travel Agencies see higher than ever demand for travel services in lower-tier cities. Filggy, a leading OTA platform operated by Alibaba, saw last year’s travelers from lower-tier cities increased by more than 30% compared to 2017, and that growth rate in outbound tourism in lower-tier cities was 15% higher than that of the nation overall.

According to local newspaper 21jingji citing Chinese data firm Analysys, the online penetration rate of the tourism industry in 2017 is merely 16.8%, which means that most of the Chinese tourists still rely on physical travel agencies to book services.

Wang Xu, 25, a teacher living in a small city, told PingWest that he reserved a tour to Dubai through a local travel agency recently. "Since I haven't been abroad before, a lot of complexities linger around, such as visa materials preparation and international flights booking," Wang said, "I feel assured through talking to the local travel agency face-to-face."

Customer demand like Wang’s prompted OTAs to set up physical storefronts in lower-tier cities, so that they can better serve them as well as boosting their own brand awareness.

One of the OTAs is Ctrip or 携程 in Chinese, a major contender in the global online travel services trailing Expedia and Booking in terms of market share.

Xiong Yi, manager of a recently opened Ctrip travel store in a tier-3 city, told PingWest that he is up to his neck in work during the past Labour Day holidays. "The store has been open for two weeks, and people just keep coming in,” he said, “Around 20 travel contracts can be signed each day. I can't even drink water when I want to because I have to communicate with a large number of customers everyday, which makes my voice hoarse.”

In a statement, Zhang Li, general manager of Ctrip's Tourism Channel Division said that the visit-to-sale conversion rate of a Ctrip physical store is conservatively estimated to reach 40%.

Beijing Business Today has previously reported that Ctrip is on track to hire more than 5,000 people and open over 1,300 physical stores, half of which will be located in county-level cities. This will bring Ctrip’s total number of stores up to 3,000.

Ctrip is expanding its offline footprint to specifically cater to customers’ needs in lower-tier cities. Since 83.2% of tourists book travel services offline, it means a vast market with sufficient possibilities. The higher conversion rate of offline stores is also notable. As long as the service is maintained at a satisfactory level, profitability of physical stores will continue to grow.

Unlike Tencent's WeChat and Alibaba's Taobao, which are closely related to people's daily life in China, OTA platforms are lesser known, sometimes never heard of in. lower-tier cities. Wang, the 25-year-old who is traveling to Dubai with parents, told PingWest that older people are not familiar with most OTA platforms. Therefore, their local travel agencies became the first option.

By setting up shops locally and providing a higher quality, more standardized service, OTAs will be able to improve their brand awareness.

Data provided by Ctrip showed that orders coming through its physical stores in lower-tier cities during the Labour Day holidays doubled when compared to the last year.

In a statement provided to China Travel News, James Liang, co-founder and executive chairman of Ctrip, said that there is still a significant market opportunity for offline stores to grab and that the company will grow its presence in tier-3 and tier-4 cities.

This trend is followed by other OTAs. Tuniu, which is partially owned by Ctrip, mentioned in its 2018 financial results that it will strengthen the deployment of chain stores and continue to penetrate tier-3 and tier-4 cities.