JD cultivating rural customers

An advertisement for e-commerce retailer JD.com Inc in Shanghai. Yan Daming / For China Daily

Online shopping giant shifting attention from top-tier cities to other regions

After raising $1.78 billion in a high-profile initial public offering on Wall Street in May, e-commerce giant JD.com Inc is eyeing China's vast rural areas for growth potential.

In a recent post on Sina Weibo - a Twitter-like microblogging site - the second-largest e-commerce player in China said it can be both international and rural, as reflected in two pictures it posted.

One is the huge screen in New York's iconic Times Square announcing JD's IPO. The other shows the company's promotional slogan painted on the wall of a house in a remote village. It reads: "How much you earn depends on how hard you work; how much you save depends on how often you shop on JD."

The ad is one of JD's latest strategies to promote itself to hard-to-reach rural residents. As the online shopping market in large cities matures, the large untapped market in lower-tier cities has emerged as a new gold mine for Internet retailers.

Consumers in small cities are active shoppers, and JD has had to act aggressively, said Shen Haoyu, chief executive officer of JD's e-commerce business unit.

Since the end of 2013, JD has painted its ads on more than 8,000 walls in 145 cities. In addition, to raise awareness of JD, the Beijing-based company has three customized buses it sends out to more than 100 cities to showcase its products and services to local residents.

According to Shen, even without the aggressive promotional moves, JD's sales growth in third- and fourth-tier cities has significantly outpaced sales growth in major cities.

Besides JD, other big names such as Baidu Inc and Taobao - the online market-place owned by China's e-commerce giant Alibaba Group Holding Ltd - have also created wall advertisements in lower-tier cities.

Rapid urbanization and increased spending by residents have made lower-tier cities the new engine that drives domestic consumption, said Yao Yang, head of the National School of Development at Peking University, at a forum at Alibaba's head-quarters in Hangzhou earlier this month.

According to the Alipay Annual 2013 China Spending Report released in January, consumption growth is gradually shifting from the wealthy coastal regions, such as Shanghai, Zhejiang and Jiangsu, to the poorer but rapidly growing inland provinces.

Seven out of the top 10 areas with the fastest growth in online spending in China are less-developed regions such as the Guangxi Zhuang autonomous region, Henan and Hubei provinces.

Further evidence of the trend is recent findings from Alibaba during its first county-level economic and e-commerce forum last week, which said growth in online retail transactions in counties and villages outpaced those in cities by 13.6 percentage points in 2013.

Neil Flynn, head equity analyst at Chinese Investors, a leading analysis firm for US-listed Chinese companies, said it is difficult to see the same trend in the US because consumers there tend to live within driving distance of huge supermarkets, which reduces the need to shop online.

"China doesn't have these kinds of developed brick-and-mortar retailers, and the boom in online retail in smaller cities is mainly because the consumers are being offered new goods that weren't previously available to them," said Flynn, who has been following e-commerce development in China for years.

He said that there is a huge market in third- and fourth-tier cities that have yet to be exploited fully by online retailers.

Cheng Dikun, vice-mayor of Kuytun, a city in the Xinjiang Uygur autonomous region, said that compared with going to brick-and-mortar stores, shopping online offers more choices.

"There are not many shopping options in Xinjiang, especially in a small city like Kuytun. Through online shopping, the gap between Kuytun and big cites in eastern regions has narrowed," he said.

"My daughter often buys fashionable clothes online. Without e-commerce, she would never know what is popular in fashion," he said.

Cheng suggested that online retailers should offer preferential policies to help reduce delivery costs.

"In eastern regions, online shoppers can even get free delivery. But for those of us who live in Xinjiang, we have to pay extra for orders online," he said.

Vanessa Zeng, a senior analyst of e Business & Channel Strategy at Forrester Research Inc, said that unimproved infrastructure and economic conditions in lower-tier cities make logistics, customer service and payment methods more challenging.

"The problem cannot be solved quickly," she said.

It is online retailers' top priority to make sure that consumers, either in lower-tier or large cities, get the same quality services, industry insiders said.

Many e-commerce players already have tried to improve the "weak link".

Alibaba signed an agreement with State-owned China Post Group Corp in June to boost its presence in rural areas. China Post has the most extensive delivery networks in lower-tier cities, especially in villages.

JD is catching up in this sector. At the beginning of the year, it launched a "pioneer station" program to encourage its deliverymen to go to their hometowns and expand delivery networks there.

"A sizable proportion of our 20,000 deliverymen are from lower-tier cities. Encouraging them to go back there to establish delivery stations is a win-win strategy for both them and JD," said Shen of JD, adding that as many as 135 new delivery stations have been built through this program.