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Posted on Harvard Business Review: December 6, 2010 3:15 PM
Brimming with confidence after their recent success in China's biggest cities such as Beijing and Shanghai, both foreign and local marketers have expanded into many smaller cities across the country. However, few have taken the bolder step of moving into China's rural hinterland, consisting of 750 million consumers. This market was estimated at around RMB 2.9 trillion ($426 billion) in 2009—twice as much as it was in 2000.
Companies that don't go rural, we believe, are making a major mistake.
It's not difficult to guess what's holding marketers back. One, modern stores are rare in rural China. Supermarkets, hypermarkets, convenience stores, and malls together account for around 20% of rural consumption compared to 65% in urban areas. Two, it's tough to get to rural outlets in China. More than 60% of rural roads are still unpaved, and delivery costs can be 30% higher than they are in urban areas. Getting around these retailing hurdles will require flexibility and creativity.
One, companies should use franchising to scale up quickly. For instance, Suguo, a Chinese supermarket chain with hundreds of outlets in small cities and rural towns, has set up a rural franchising program. Helped by a central government subsidy of 3,000 RMB per store, Suguo helps remodel retail outlets and keeps them stocked. Its products often account for as much as 50-70% of a store's sales.
Two, take advantage of subsidies for rural consumers. In 2008, the Chinese government launched a four-year program to increase the penetration of consumer electronics in rural areas. Among other things, it offers a 13% subsidy on a range of products from computers and microwave ovens to air conditioners, water heaters, and motorcycles. The government has recently expanded the program to cover more products, and increased the price limit to RMB 7,000 per item. Chinese consumer electronics giants such as Lenovo and Haier as well as electronics retailers like Suning are using this initiative to penetrate into rural markets. Some international brands such as Nokia and HP have followed suit. For instance, HP is trying to grab a bigger slice of the rural market by expanding its rural retail network and by sending product demonstration buses to rural schools.
Three, tailor products and prices to rural budgets. Samsung's rural TV offerings are smaller (22-inch, 26-inch, and 32-inch sets) while LG pushes less-expensive LCD TVs rather than LED models. In recent years, P&G has invested as much as 30% of R&D to develop products that fit the tastes and budgets of China's rural consumers. For instance, it offers Tide detergent for 1.9 RMB (about 28 cents for 320 grams) and Rejoice shampoo at 9.9 RMB (around $1.48 for 200 milliliters)—a sizable markdown from the 15 RMB ($2.24 for the same 200 millileters) that Rejoice typically costs in urban areas.
Four, companies can piggyback off established sales and after-sales service networks such as Haier's. Through its network of 6,000 Goodaymart-branded franchise stores and relationships with tens of thousands of village store-owners and local repairmen, Haier services customers in around half of China's rural areas. A successful pioneer, the company has invested heavily in understanding consumers' needs and developing products for them. Everyone knows how Haier created washing machines to wash vegetables such as potatoes when it found that's what people in villages were using them for anyway. It also tweaked the machines to produce less noise and keep rats out—two factors rural consumers said were important to them.
By 2011, Haier expects 40% of its revenues to come from China's rural market. How many other companies can say that?
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