Rural China key for brands

08 December 2010

BEIJING: Brand owners failing to "go rural" in China may be making a costly mistake, a report from McKinsey has argued.

The consultancy estimated the 750m consumers living in the Chinese countryside offered an opportunity worth 2.9tr yuan ($436bn; €327bn; £277bn) last year, doubling figures from 2000.

Most major multinational corporations attempting to crack China typically establish a presence in Beijing and Shanghai before then targeting smaller cities.

"Few have taken the bolder step of moving into China's rural hinterland," Max Magni and Yuval Atsmon, of McKinsey, wrote in the Harvard Business Review. "It's not difficult to guess what's holding marketers back."

One obstacle is the absence of organised retail outlets like supermarkets and convenience stores, which generate 20% of sales in the countryside, measured against 65% in China's primary cities.

Some 60% of rural roads are unpaved, while delivery expenses can be 30% above those in metropolitan areas.

"Getting around these retailing hurdles will require flexibility and creativity," Magni and Atsmon said.

Supermarket chain Suguo has built a franchise scheme, supported by government funding reaching 3,000 yuan per store, and operates hundreds of sites in towns and small cities.

Alongside providing assistance in redesigning these units, Suguo supplies many products, often yielding between 50% and 70% of sales.

The electronics sector has also gained from an official subsidy launched in 2008, reimbursing 13% of the cost on items like PCs and microwaves, and recently extended to cover more goods and higher prices.

Lenovo boasts a network containing 12,000 shops stocking at least some of its range, having focused on attracting and training local entrepreneurs.

"In early 2009, 45% of the desktop computers we sold to consumers in China were sold in what we call 'emerging markets'. Now it's 70%," Tang Jie, general manager of its consumer and channel business, said in August.

"In notebooks, emerging markets accounted for 30% a year ago, and now it's half."

Electrical appliance manufacturer Suning, Finnish telecoms firm Nokia and American IT specialist HP are following a similar path.

"We found the rural market very different from the urban since the rural ones are not evenly developed," said Isaiah Cheung, general manager of HP's Personal System Group.

"Tapping the rural market is our priority since the first-tier market is getting saturated ... Our goal is to cover 10,000 villages by the end of this year."

Elsewhere, Samsung has rolled out smaller TVs for these buyers and LG championed its cheaper LCD sets rather than expensive LED alternatives.

Procter & Gamble, the FMCG giant, allocates roughly 30% of its domestic R&D budget to delivering items for the same audience.

The company also sells Tide for as little as 1.9 yuan in the countryside, compared with 9.9 yuan in urban centres.

"We're working with the Chinese government in something called Ten Thousand Villages where we expand the distribution of our products in the rural areas of China," Bob McDonald, P&G's ceo, said earlier this year.

"That obviously creates more people to use our products and helps us get to the 5bn consumers that we've targeted over the next five years."

White goods maker Haier also runs 6,000 franchise stores under the Goodaymart banner, and is affiliated with thousands of local shops and repairmen.

As a result, it reaches half of consumers in less-developed regions, and has introduced washing machines which clean vegetables, are relatively quiet and keep rats out, specifically for this clientele.

Magni and Atsmon revealed 40% of Haier's revenue should come from the Chinese countryside by 2011.

"How many other companies can say that?" they asked.

Data sourced from Harvard Business Review; additional content by Warc staff