People living outside of China often think of the country in terms of its megacities. And it is true that storied places like Beijing, Shanghai and Shenzhen loom large in terms of economic and cultural influence.
But, did you know that the country’s rural villages (and smaller suburban enclaves) are also centers of economic growth and innovation?
Consumers in China’s third- and fourth-tier cities and vast rural areas are enjoying a rise in disposable income and new options for spending their dollars. Since 2012, consumption growth in these areas has been higher than in larger Tier 1 and Tier 2 cities, and analysts predict that rural China will account for two-thirds of the country’s consumption growth by 2030. China’s online retail market is expected to double in that time period, and that growth will also come disproportionately from rural areas.
Business leaders inside and outside of China should take note of rural China’s retail boom for three reasons.
#1: It creates an unprecedented growth opportunity for companies of all types and sizes.
#2: Rural China is a new frontier for retail innovation.
#3: China’s rural economy provides an opportunity to see the inventive fusion of commerce and social good.
Since my arrival in Shanghai as PepsiCo Greater China Region’s (GCR) CEO, it has been a great learning experience for me to venture outside of China’s urbanized provincial centers into rural areas. I have been incredibly impressed by the fast-growing infrastructure and the ubiquitous signs of economic growth.
3 themes emerged in my visits to these small county cities:
Theme #1: An unprecedented growth opportunity for companies of all types and sizes.
We know the Internet is a transformative technology worldwide, and in China today it is empowering a new cohort of rural shoppers. According to the China Internet Report, in 2017, Internet penetration in rural China was 35%, with over 209 million users. This data point captures two opportunities. First, there are a huge number of Internet “newbies” in China. Second, there are millions more who have yet to come online. Infrastructure upgrades and the widespread adoption of mobile pay mean that rural China’s Internet users quickly turn into online shoppers. At least half of the population in even China’s most remote villages will be equipped with eCommerce capabilities by 2020.
This means that the race is on. As online retail growth in China’s megacities reaches a saturation point, eCommerce companies are eyeing small-cities and rural villages as the next frontiers for growth. They are aided by the fact that the Chinese government has poured millions into road and high-speed rail construction in the past decade, making the delivery of goods increasingly possible. Today, the average rural dweller can buy clothes from indie designers selling on Taobao, books from retailers like Amazon or DangDang, and home appliances, all from their mobile phone. I’ve seen this firsthand in my own visits, where one cannot miss the impact of growing access to technology and mushrooming retail options. For example, most farmers today have access to mobile phones and many have vehicles, two things that would have been unheard of even a decade ago.
Rural shoppers are exploring new categories, like baby goods and appliances, and determining what product features are important. They are trying new brands and forming their (often immutable) first impressions. They are experimenting with the ways things they buy can help them express their identities. At PepsiCo, we see our own products included in this cycle of discovery and trial. Beverages like Pepsi and Marinda were relatively unknown in many villages just 10 years ago. Today, consumers are trying them with zeal, and they often appear on their “must have” lists for holiday celebrations and family get-togethers.
In this dynamic setting, business leaders within China and around the world have an opportunity to ask themselves how their products and services can fit into this changing retail landscape.
Theme #2: A New Frontier for Retail Innovation.
Necessity is often the mother of invention, and this is certainly on display in rural China, where innovative retail solutions are everywhere. I’ll give you two great examples.
First, the booming rural market has inspired new retail job types. In the absence of physical stores, eCommerce giant JD has needed to think about new ways to connote luxury. One unique solution is their “White Glove Delivery Service,” which sends drivers smartly dressed in suits, ties, and the requisite white gloves to deliver expensive products like smartphones right to consumers’ doors. A visit from one of these “product chauffeurs” is a status symbol in rural China, and the drivers themselves can become village celebrities and influencers.
New business models are also emerging, as evidenced by the wild growth of Pinduoduo. I’ve written previously about this social shopping network, which works on the premise that the more people come together to purchase, the less they pay. The app has experienced massive growth, gaining over 300 million users in 2017 and reporting RMB $262.1 billion in revenue. Almost two-thirds of Pinduoduo’s revenue comes from Tier 3 cities and rural areas, where the company has found a sweet spot with female shoppers.
There is great potential for social shopping to help facilitate the discovery and adoption of new brands in places where inexperienced consumers may distrust formal marketing efforts.
The unique needs of rural China are sparking novel innovations, which are noteworthy in their own right. Equally interesting, I believe, is the possibility that some of these ideas could flow back into larger markets to inspire new retail approaches there as well.
Theme #3: Novel Fusion of Commerce and Social Good
The 2018 China Internet Report identified four overarching themes influencing China today, and one of these is that the Internet is empowering the rural population.
Growth in Internet access and eCommerce has had broad social impacts, like more access to media, education options and choices for mobility. It is estimated that at least 55 million students in rural schools are now reachable via live-streaming classes. And, over 78 million rural users get their news from one of the three primary news apps at least once a month.
One dimension of this rural empowerment is the unique fusion of commerce and social good. A great example is the rise of the Taobao Village. This term refers to any rural village where at least 10% of households sell goods online, with annual sales of at least $US 1.6 million.
In 2017, there are an estimated 2,100 such villages, creating an estimated 1.3 million new jobs throughout rural China. These portals into the global economy have transformed life in villages, providing new options for jobs and economic activity.
(Image Credit: China Internet Report, 2018)
On another front, Alibaba recently announced ambitious plans to alleviate rural poverty by investing over $US 700 million in the eCommerce platform Huitongda. The initiative uses technology to help poor farmers improve their business, for example through things like analyzing consumption data to upgrade planting schedules, using video recognition technology to improve animal survival rates and providing loans to help under-resourced villagers obtain operating capital for small business. Already, there are almost 10 million online shops run by rural farmers, with many more slated to follow.
Knitting the Threads Together
Signs of the retail explosion are everywhere, remaking life in rural China. Within PepsiCo GCR, our commitment to being 'In China, For China, with China' includes not only Tier 1 and Tier 2 cities but extends to these fast-changing rural areas as well where we are actively innovating to meet the needs of rural China. We are developing products to meet rural consumers’ growing interest in health and wellness products through our Quaker portfolio. And, are working to extend distribution reach to additional Tier-4 markets where Pepsi and Lay’s don’t yet serve consumers.
It is my great privilege to lead during this time of vast and fast-paced retail transformation. Thanks for traveling a part of this journey with me, and I hope you’ll keep this part of the world on your radar as an incubator for emerging retail trends.