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As growth in Chinese cities slows, P&G sets its sights on 700 million rural consumers
You might not expect Gong Jianchen to be much of a brand aficionado. The 45-year-old father of two drives a truck, delivering pots, pans, and appliances from his hometown of Qiaoliufan, a sleepy little village in northern China where farmers ride their bikes in from the surrounding wheat fields to do their daily shopping. But just ask Gong about his favorite toothpaste or shampoo, and he turns rhapsodic. "Our family buys both Head & Shoulders and Rejoice, and Crest is good for brushing teeth," he says, reaching for the products as he shops. "Quality, at a reasonable price, is most important."
It's no accident that plenty of Procter & Gamble Co. (PG) brands have worked their way into Gong's heart. Few U.S. companies have seen the success in China that P&G has enjoyed. Since the Cincinnati-based consumer-products giant first brought Head & Shoulders to the mainland in 1988, it has introduced a steady stream of popular American brands such as Olay, Pampers, and Whisper, racking up $2.5 billion in annual sales there for fiscal 2006. It has 6,300 workers in China, and the extensive distribution network it needs to prosper in the world's fastest-growing retail market.
While the country's overall economy is booming, though, urban markets are increasingly competitive as the world's top brands vie for share. Meanwhile, growth in retail sales in the countryside is quickly catching up with that in major cities such as Beijing and Shanghai. Overall, just one-third of retail revenues now come from China's 24 largest cities. So in a bid to sustain its torrid expansion, P&G is pushing beyond China's wealthy coastal regions and spending more time and effort selling its soaps and other goods in places like Qiaoliufan. "There is an untapped opportunity to get our products to more consumers in the interior," says Christopher D. Hassall, a P&G vice-president in China.
Winning over rural Chinese, though, can be more complicated than selling to sophisticated city dwellers. Most of the 700 million potential consumers are first-time buyers, and incomes in the countryside average just $466 annually, less than one-third the level in mainland cities. What's more, rural China is hardly homogeneous. China's 30-some provinces and regions are home to scores of cultures with vast differences in buying habits. And unlike the country's cities, where shoppers are shifting to big retailers such as Wal-Mart (WMT) or Carrefour, most rural consumers still buy from tiny mom-and-pop stores.
To make inroads, P&G is sending its advance staff into as many out-of-the- way villages as it can to get a feel for what rural Chinese want to buy and how much they're willing to spend. Just as it has done for years in the cities, P&G's teams of so-called customer research managers descend on villages, often moving in with families for a few days. They've discovered that while low prices surely help sales, it's equally important to develop products that hew to cultural traditions. Urban Chinese are happy to pay more than $1 each for tubes of Crest toothpaste with exotic flavors such as Icy Mountain Spring and Morning Lotus Fragrance. But those living in the countryside are apt to prefer 50 cents Crest Salt White, since many rural Chinese believe that salt whitens teeth. P&G applies similar segmenting strategies to its Olay moisturizing cream, Tide detergent, Rejoice shampoo, and Pampers diapers. "P&G is very thorough and calculating [in China]," says Jeongwen Chiang, associate dean of the Cheung Kong Graduate School of Business in Beijing. "They don't blindly duplicate their successes in the West."
Just as important is getting goods to rural customers. The household and personal-products behemoth has built a distribution network covering half a million stores in almost all of China's cities and many of its towns. But villages have been largely unserved. Now that's changing. In Gaobeidian, a region an hour and a half southwest of Beijing that includes Qiaoliufan, P&G sells in some 300 shops in 150 villages--or more than half the district's total. It will add an additional 50 shops this year, says P&G sub-distributor Bai Fengwu, who delivers both products and sales aids such as posters and display boxes from his van, which is emblazoned with the logos for Tide, Safeguard soap, Pantene shampoo, and other brands. "We are looking at going deeper and improving our retail presence," says Irwin Chua Lee, vice-president of corporate marketing who oversees the company's sales of fabric and home care products in Greater China.
RIVALS GEAR UPAn agreement with China's Commerce Ministry signed in April should help P&G even more. Plans call for the company to help improve existing outlets, build new ones, and train locals in some 10,000 villages in the art of retailing. Beijing likes the plan for its promise to root out counterfeit goods and help spur rural consumption and economic growth. "We want to serve the peasants and bring real benefits to them," says Chang Xiaocun, the ministry official overseeing the project.
P&G's push into the countryside won't go unchallenged. Chinese rivals such as detergent and toothpaste makers NaFine and Nice Group have increased their market shares rapidly, in part by relying on armies of local staff who push their products across China. Meanwhile, Anglo-Dutch consumer giant Unilever has reorganized its once-chaotic China distribution network and is seeing strong growth in brands such as Omo detergent, Zhonghua toothpaste, and Clear shampoo. "We have made some errors and that has made us into a wiser company," says Frank Braeken, Unilever's chairman for greater China.
It all adds up to good news for shopkeepers and shoppers alike. "Before we offered just one product to the consumer and they accepted that," says Wang Yongjie, who has run a general store on Qiaoliufan's long, dusty main drag for 25 years. "Now they have a brand in mind when they walk through the door."