Shopping for trouble

Retailer retools following setbacks to rural strategy

After four years fighting for a share of China's rural retail market, Post Mart, a retail chain run by China Post Group and American investment company US Horizon (China) has decided to temporarily close a portion of its stores, among other measures.

"We need to transform the business and embrace a new strategy," James Lo, CEO of Post Mart, told the Global Times in a phone interview Sunday.

Post Mart began operations in 2010 with 100 trial stores in Henan, Jiangxi, and Shandong provinces, all of which are home to large rural populations. The strategic cooperation agreement between China Post and US Horizon stated that the two planned to expand operations to 10,000 stores nationwide by 2015.

However, the chain has reportedly run into operational issues, generating huge losses in 2013, according to local media reports.

Lo, who took up his current position in November of 2013, confirmed to the Global Times that Post Mart has "temporarily suspended its operations in Shandong and Jiangxi until 2016, and signed contracts with some independent owners, giving them the right to operate Post Mart stores in Henan Province."

Confused rural market

Lo has found the Chinese rural retail market to be much more complicated than he expected.

"A lack of logistics and supply chains is one of the major obstacles for retail operators in rural areas," Lo said.

Rural consumers' habits are also distinct from their urban counterparts. Many go to open air markets on regular schedules, with a number of vendors selling a variety of small products. They are also not particularly brand conscious, only identifying very famous brands such as Coca Cola and Master Kong (an instant noodle brand), according to Lo.

Consumers at these markets tend to prefer cheap imitation products and individually owned retail stores. And "those individually owned stores have tricks to reduce their operating costs by avoiding taxes," a source who preferred not to be named told the Global Times Sunday.

Since shopping habits, preferences and purchasing power vary across rural areas, analysts say that chain stores have to vary their strategy across different villages. Li Weihua, an academic specializing in franchise research at China University of Political Science and Law, told the Global Times that the diversity of China's towns and villages creates a huge challenge for chain store operators.

Unappealing offerings

These challenges appear to have played a role in Post Mart's current difficulties.

One insider, cited in a report in the Beijing-based China Co-operation Times newspaper last year, noted that Post Mart sold products that were not popular with village residents, including cookies costing 110 yuan ($17.75) per box, and imported wine for 1,188 yuan a bottle, well beyond the reach of a typical rural consumer's spending power.

"Although US Horizon is deeply experienced in retail operation in foreign markets, it doesn't have the same understanding of the Chinese rural market," said a China Post staff member in the same report.

Another anonymous Post Mart staff member was quoted by China Business Journal as saying that all the products sold in Post Mart stores are from brands more popular in urban areas, as opposed to the brands preferred by rural consumers.

In the same report, a Post Mart manager pointed out that its products are usually in short supplies due to distribution problems.

Lo declined to comment on Post Mart's previous management, saying only that the company has been confronted with some "issues during early stage development, just as in many start-up companies."

Transforming the business

To turn around Post Mart's fortunes, Lo has already started transforming the business. He plans to shift Post Mart's focus to wholesale, logistics and retail, rather than purely operating chain stores.

As part of this plan, the company has built 40 distribution centers in Henan Province to facilitate sales and deliveries to surrounding towns and villages, with plans to build another 71 by early 2015. Lo calls this a sign of their commitment to this promising business.

Post Mart has also begun signing contracts with independent operators to run directly owned stores, a strategy which Lo says will enable Post Mart "to rapidly increase sales, reduce costs and return to profitability in a very short period of time." He added that "independent operators will try their best to increase business revenue and streamline operations, as they're the ones who own the stores."

Enormous rural demand

Despite the challenges of operating in rural areas, companies and investors are still keen on a market where Lo says "residents' purchasing power is very strong, as is their demand [for products]."

The net per capita income for China's rural residents hit 8,896 yuan in 2013, a 12.4 percent year-on-year rise, according to the National Bureau of Statistics. Urban residents saw a 9.7 percent increase in incomes during the same period.

Rising rural incomes have been reflected in rural retail. Retail sales in rural areas nationwide grew by 14.6 percent in 2013, 1.7 percentage points more than in urban areas, according to a study by the Chinese Academy of Social Sciences.

Only those chain store operators "who can grab the rural market can succeed in the context of the rapid expansion of China's villages and towns," said Li, the expert on franchise research.

"Rural areas are challenging, but very attractive," Lo said.