This Reuters report shows that rural buying support in spurring the GDP of the Chinese nation.
When Dell Inc reported its fourth-quarter results last month, the announcement included a surprising figure — an 81 percent jump in the PC maker’s China sales during the quarter.
Fueling this result, said the company, were government incentives to spur domestic consumption, particularly in small cities and rural areas.
Dell, which sells its computers in China through retail chains as well as through its direct sales model, is not alone.
Competitors ranging from China’s Suning and GOME to foreign rivals like Wal-Mart Stores Inc and Best Buy are profiting from Beijing’s determination to drive economic growth by boosting spending in the country’s US$1.8 trillion (RM6 trillion)retail market.
The Chinese government announced recently that it will extend its incentives for rural and small-city consumers, setting off what is likely to be a close competition among retailers that have until now focused mainly on China’s big cities.
The opportunity is big. More than two-thirds of China’s 1.3 billion people live in rural areas — roughly three times the entire population of the United States. Retail sales in these areas grew 16 per cent to 4 trillion yuan (RM1.97 trillion) last year.
Investor optimism about China’s stimulus spending has already sent China retail shares soaring. GOME, for one, jumped 180 per cent in 2009, outstripping a 52 per cent rise in the broader Hong Kong market.
China’s domestic electronics retailers are pursuing their new customers aggressively.
Suning, the country’s largest electronics chain by market value, said it would use the 3 billion yuan it raised from a share sale to expand sales network and to develop logistics centres. It plans to add 520 new stores in 2010 on the existing network of 941 stores across China.
Rival GOME, with over 700 stores across China, has adopted a “go rural” policy, and plans to team with small local retailers to increase the range of products on offer in a bid to tap rural spending growth.
Foreign retailers are also starting to look outside the tier-one cities. Wal-Mart, the world’s biggest retailer, electronics retailer Best Buy and France’s Carrefour are all eyeing growth in second and third-tier cities, if not yet rural areas.
Profits from these ventures won’t be immediate, however.
Suning and GOME probably won’t see their new rural stores break even in fewer than five years, said Natalie Zhu, a senior China retail analyst from JLM Pacific Epoch, a Shanghai- and Beijing-based research firm.
And as they move into China’s hinterlands, domestic and foreign retailers alike will have to confront entrenched local competitors.
“Individual operators now occupy the majority of the (rural) market,” said Zhu. “Even (national) local players have very little market share for the time being, not to mention the foreign operators.”
Independent local players, which account for more than 50 per cent of the rural market, have advantages including being able to use their familiarity with local spending behaviour to adjust their offerings and provide customised product advice to their customers.
“Even domestic players will find it quite difficult to penetrate the true rural areas, because the market, the demand and the customers have very different profiles compared with bigger cities,” said Bei Fu, a director of corporate and infrastructure ratings at Standard & Poor’s.
Consider televisions. Rural consumers tend to prefer big screen TVs, which confer greater status in their villages while urban shoppers are more focused on quality and brand, according to Zhu.
While national operators like Suning and GOME will struggle to compete with local chains, their wide selection of fast-selling electronics products may give them an edge over foreign players such as Wal-Mart and Carrefour.
When asked recently about flat-screen televisions, a salesman in the small electronics department of a newly opened Carrefour in the second-tier factory town of Dongguan suggested the reporter look elsewhere.
“You can probably get a wider choice of products in the Suning just down the street,” he said.
There is another risk in the retailers’ rural expansion plans: if China scales back its incentives, rural spending growth could stall, saddling retailers with a costly and unprofitable network of stores.
For now, though, that seems like a distant worry.
“What does China have the most of? Farmers. The rise of this spending group will drive growth of the retail sector,” said Linus Yip, strategist of First Shanghai Securities.
“Growth is definitely there.”
