E-commerce platforms in China are expected to reinvent their business model and personalized even more customer experience as the rural communities are becoming an important market.

China: why is rural e-commerce market the next gold mine?

China's e-commerce market has been a hot topic for a long time now. Its huge achievement in urban area has attracted worldwide attention, and is appearing as a global class success. Indeed, in 2015, the online shopping growth rate in the country amounted to about 43%.

But China's e-commerce market is not a highly-unified market. Chinese rural area is a completely different target market - in which it is very difficult to apply the same business model as the one of China’s urban areas. But it could be seen as a gold mine that has not yet been enough paid attention to.

The market is indeed huge: right now, more than 620 million people live in the countryside and there are 270 million migrants workers in the city. All of them are potential e-consumers. The latest data indicates that the scale of China's rural online shopping is more than 350 billion yuan (50 billion dollars) in 2016 and 84.41% rural residents shop online. And top Chinese e-commerce players can only begin to understand the potential behind these numbers.

 

Great changes to help overcome the challenges

"The 36th China Internet Development Statistics Report" made by CNNIC stated that, historically, two main challenges to e-commerce in rural area were observed: a rather small target market and difficulties in terms of delivery service. Indeed, a high proportion of young people in countryside are choosing to migrate to the city and the ones left in rural area are mostly elders and children who rarely purchase online. Now, because of a relatively monotonous life and conservative consumption concepts, the online consumption needs of the former are limited. And although the children of rural area adopt more easily new shopping behaviours, their consumption needs remain controlled by their parents.

Another problem is that logistic costs in countryside are 5 times higher than the ones in urban area, which is a big issue for the development of rural e-business. Many online shopping orders from farmers are cancelled because their locations are out of delivery area and the delivery fee are pretty high for the rest of the customers. Demand is also too unstable and volatile and transportations in non-plain areas are difficult. Since logistics and distribution system in rural area cost several times higher than in the city, e-business giants in China would rather invest resources in developed areas.

But against all odds, rural e-commerce has been booming for the past 4 years. It might be directly correlated to internet access and smartphone penetration in the countryside. More precisely, 780 million Chinese people use mobile phone to access internet (57% of total population in China) and 95% of them access internet by using smartphone. This penetration led to 77 million rural people who shopped online in 2014.

According to an increasing trend of the past 4 years, rural online shopping will continue to maintain rapid growth in the next three years. The gap between urban and rural areas might even be reduced. Many factors are already causing this growing trend including broadband coverage, e-commerce platform promoting, increasing service outlets, better rural logistics, partnership with villagers and the policy encouraging e-commerce business.

In the future, the Chinese e-commerce platforms will not only sale a large number of industrial products and urban consumer goods to rural consumers, but huge amount of agricultural products and raw materials are expected to be shipped into the city through those e-commerce platforms.

Alibaba: a pioneer in the rural e-commerce market

One of the largest online retailers in China already took notice of the potential of the rural market: Alibaba Group. Its strategy is to enter the rural market by building partnership with local sellers who want to sell their products all over the countryside and gain an online visibility. This is what the company has done with Taobao villages. A Taobao village refers to a cluster of rural e-tailers who sells their products through Alibaba’s Taobao marketplace. Usually, the annual turnover of e-commerce businesses in these villages is over 10 million yuan (1.5 million dollars) and more than 10% of families in the village have their own online shop.

At the end of August 2016, 1311 Taobao villages were located in 18 provinces of China. Among these provinces, Zhejiang Province, Guangdong Province and Jiangsu Province rank top three areas in China where there are the highest number of Taobao villages. In 2016, more than 700 million packages were sent by Taobao villages shops.

Taobao shop in rural China
 
In the meanwhile, two leaders in terms of offline retailing has found their way to rural e-commerce. Suning.com and JingDong, an important competitor of Alibaba Group, develop their own offline shops in countryside and build partnership with local retailers. The model of JingDong is based on the development of service centers, plus franchise stores. SuNing combines the direct online platform, financial services and Online-2-Offline model. Online platforms emerging from offline shops will be the new retail trend in next five years.
 

E-commerce in rural area still needs time to grow

Although the current development of rural e-business increase roughly, e-commerce has not become the main force of the domestic economy and is still on the initial stage. What could help its development is showing the virtuous circle that could come out of it. Indeed, young generation from rural areas are supposed to be the main consumers of online shopping business, but many of them still choose to get employed in urban area since there are more working opportunities in the cities. Compare to the long-term investment on a rural retail shop, it is more practical and realistic for them to get a job or join a short-term networked pyramid plan to earn quick money.

But the success of Taobao villages may change that. Data analysis results of Ali Research shows that one additional active Taobao village shop can create around 2.8 working opportunities. Till the end of August 2016, Taobao village shops has directly create more than 840 thousand working opportunities. Compared to the traditional industry that has led the rural area’s economy for a long time, the working opportunities of e-commerce platform created are not much, for now. The Chinese will have to promote e-commerce platform via encouraging policies.

 

By Mu Cui
Senior Strategy Analyst