In a sleepy mountainside village in Songpan County, Northwest Sichuan — part of the historically and culturally Tibetan region of Amdo — Pema Ka, a 50-year-old Tibetan yak herder, tends to his horses using the remains of a basketball as a grazing muzzle. At almost 10,000 feet above sea level, the terrain is harsh and life is tough, especially during the bitterly cold winter months when temperatures routinely drop below freezing. Living an hour’s horse trek away from Songpan town, he, his wife and two sons lead a simple, traditional life in a house with no running water, a wood-burning stove for warmth and an outhouse.

Yet the family, who have little knowledge of the commercial world, are being heralded as the new frontier for increasing consumer spending in China.

Almost half of China’s 1.3 billion residents live in rural areas. Although East Coast dwelling urbanites command higher salaries, the incomes of underpenetrated rural consumers are increasing and cannot be easily dismissed in a slowing marketplace. A Kantar Worldpanel report recently noted that in China’s rural hinterland, spending at hypermarkets grew 10.4 percent and that at large supermarkets it increased 7 percent over the last year. These figures far outpace the spending growth of consumers in tier-one and -two cities for the same sectors as modern trade in these areas appears to be approaching saturation point.

In late 2014, Alibaba Group recognized that China’s rural regions presented enormous yet largely untapped opportunities for the development of e-commerce. The group initiated a $1.6 billion program to build 1,000 county-level Taobao rural operations centers and 100,000 village-level Taobao rural service centers over three to five years, which it claimed would cooperate with various regional governments, build rural e-commerce infrastructure and cultivate rural e-commerce talent and ecosystem players.

As of November, more than 8,000 village-level Taobao centers were open in more than 20 provinces. The centers give rural residents, who may not have access to the Internet, the opportunity to make online purchases with the help of trained operators. The service centers collectively generated gross merchandise value of more than 200 million yuan, or $30.7 million at current exchange, with several hours left during the Nov. 11 Singles’ Day online shopping festival.

Rural shoppers in general generated more than 10 million yuan, or $1.5 million, in the first eight minutes of the Singles’ Day festival and this rural appetite prompted Alibaba to create a new online shopping festival that would better service rural consumers while providing urban consumers with access to quality rural products. Coinciding with the Chinese New Year, the festival provided retailers with a channel to unleash the purchasing power of rural villagers, who are unable to travel to larger cities, through Alibaba’s multiple online marketplaces.

The Ali Chinese New Year Shopping Festival, as it was called, ran this year during the lead-up to the holiday period, from Jan. 17 to 21. Although Alibaba did not disclose the GMV generated by the event, the company revealed that 2.1 billion items from 93 countries and regions in China were sold on their retail marketplaces over the five-day period. According to the group, the festival attracted more than 5,000 international brands from 25 countries and regions.

Ranked by country, products from the U.S., Japan, Germany, Korea and Australia were the most popular, with women accounting for 59 percent of cross-border purchases of imported goods, driving strong sales of cosmetics, food and baby products. The average value of orders placed at some 12,000 Taobao rural service centers grew 117 percent to 262 yuan, or $40.20, compared with the average per-order value in December of 121 yuan, or $18.57. Seventy percent of the orders were completed via mobile devices. Apparel was the best-selling category among rural buyers.

Pema Ka is skeptical about the rising popularity of online shopping and the negative impact consumerism is having on his culture. “If we shop online, there is no reason to go into Songpan and socialize anymore,” he said.

Although Pema Ka does not own a smartphone, his sons — also yak herders in their late 20s — do, and have helped him to buy clothing online. Pema Ka does not have a high level of household debt, but is extremely price-sensitive and not interested in buying larger ticket items online or off-line. “I have no need to buy big electronic things. We have a small TV, but don’t need a refrigerator” in the middle of winter, he said, laughing. Pragmatic about his financial situation, after living through the turbulent times of the Cultural Revolution and Moaist policies, he has a mantra of reuse and repurpose. At his age, there is also a greater need to save in case of a medical emergency, as it is not possible to rely on the weak Chinese welfare state.

Pema Ka’s youngest son, Nyima Tashi, is more open to the world of e-commerce. A Chinese Millennial, he has only known political stability and has confidence in the Chinese economy. Still, he limits his online shopping to certain products. “I only buy cheap products online because it’s too hard to return things from our inconvenient location. There are also so many fake items, it’s hard to tell what is good quality,” he said. Nyima Tashi, 25, prefers to travel into Songpan for bigger purchases, which is where he recently bought his new iPhone 6s, at the local mobile store.

The affordability of Chinese-made smartphones is considered a contributor to the rise of online shopping in rural areas. According to an iResearch report released last year, mobile shopping in China more than tripled in 2014 and is predicted to reach $644 billion in GMV by 2018. Last year, Alibaba partnered with China Telecom to sell Tianyi Taobao Shopping Handsets, with prices ranging from 299 yuan to 699 yuan, or about $45 to $105. The mobile devices are installed with either the Mobile Taobao shopping app or the Yun OS mobile operating system, both of which were developed by Alibaba.

Alipay, the e-payment arm of Alibaba, noted in its annual spending report of Chinese consumers for 2015 that payments through mobile phones accounted for 65 percent of all transactions conducted over Alipay, up 15.8 percent on the previous year. This rapid growth in m-commerce was most apparent in China’s remote, and less developed, western regions, where there is a lack of broadband telecommunications infrastructure and prohibitively high desktop prices. Tibetan consumers were noted as conducting 83.3 percent of their Alipay transactions via mobile, the highest group in the country.

Alibaba’s biggest e-commerce rival, JD.com, is also targeting lower-tier cities. “As of Q2, we had already achieved more than half of all orders coming from tier-three and lower cities,” said Josh Gartner, senior director of international communications at JD.com.

In order to attract this developing consumer base, the company aims to enhance the shopper experience through local representatives combined with competitive delivery times and coverage. One year ago, JD.com launched its Village Promoters program, which uses local residents in rural areas to help increase the understanding of e-commerce and act as local representatives for the company. As of the end of September, the company had more than 100,000 promoters in the field. A key message that JD.com is eager to deliver to its potential rural, possibly remote, customers is that around 90 percent of direct sales orders are being delivered within the same day or next day. When questioned about the most isolated areas, Gartner clarified, “We don’t break this down by region, but nationally more than 85 percent of direct sales orders in Q3 were delivered either on the day that the order was placed or the next day. There is no e-commerce company in the world operating on our scale that can come close to that and it’s a huge differentiator in the market.”

Back in Songpan, local restaurant owner and manager Li Guiqiang has noticed an increase of retail chains opening in the area over the past few years. “We have a few big brands now like Spar China and Dicos [a Chinese fast-food restaurant], but the meals [in Dicos] are a lot more expensive than in Chengdu,” he said.

He is impressed that there are now five local logistic companies servicing the needs of the county’s 70,000 residents, pointing out that many of his friends have begun to open Taobao and WeChat online stores. Working in the online retail industry is now viewed as a legitimate job. “They can now stay in the town to do business, and not need to leave their families to find work,” he said. These entrepreneurs typically curate fast-moving consumer goods for local residents to buy with ease and peace of mind, as well as sell local products, such as dried yak meat and Chinese traditional medicine, to the rest of the country.

Although the figures seem exciting, Mark Tanner, founder and managing director of China Skinny, a full-service marketing, research and online agency, believes that international retailers must proceed with caution if looking to enter China’s rural market. “While the growth rates are impressive, it’s important to look beyond the high numbers. [Consumers in lower-tier cities] are much more price-sensitive and less sophisticated in their purchase behavior. They are currently more likely to opt for cheap local goods than international products that are typically positioned at a premium,” he said.

Tanner does point out, however, that it’s not all doom and gloom for international retailers and referenced Denmark’s fast-fashion retailer Bestseller, which has a portfolio of brands with large presences in lower-tier Chinese cities. “Their brands such as Jack Jones, Vero Moda and Only may not have the presence of Zara or H&M in tier-one cities, but actually sell significantly more clothes in China as they have great penetration in lower-tier cities, with appropriate positioning and price points,” he said. “[Jack Jones, Vero Moda and Only] account for three of the top six foreign clothes brands in China, and three of the top 12 overall.”

Although Zara is arguably most prevalent in top-tier Chinese cities, Inditex is making a concerted effort to penetrate a variety of Chinese cities through its portfolio of brands. As of the end of October, the group’s store footprint had reached 547 in Greater China with a presence in more than 60 cities, including 177 Zara stores. Inditex is also actively growing online sales in the country through its own brand Web sites and an alliance with Alibaba’s online sales platform Tmall to target a wider consumer group.

H&M has 303 stores in Mainland China, with 73 stores being opened during fiscal 2015. The company believes that the purchasing power of young people in second- and third-tier cities is continuously increasing, offering huge consumption potential. “We are continuing our expansion and adventure in second- and third-tier cities to open new stores and bring our brand culture and fashion spirit there,” the company said.

load comments
blog comments powered by Disqus