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Alibaba, JD.com Target Rural China for E-Commerce Growth

By noreply@blogger.com (InfoseekChina)

(WSJ) China’s e-commerce titans, facing a slowdown in the growth of their core urban customers, are battling to crack a new frontier: the sprawling countryside.

Each morning at 7:30 a.m., Pang Weidong starts his delivery route at an Alibaba Group Holding Ltd. -affiliated distribution center here in China’s northeastern plains. His small truck navigates pothole-ridden roads to deliver goods such as toilet paper and weightlifting sets. The 35-year-old Mr. Pang, whose daily route spans a length equivalent of Interstate 95 from New York to Boston, said delivering some 200 packages a day takes about nine hours since he has to stay under 40 miles an hour to avoid accidents or damage to the goods—and the cows, goats and geese that occasionally wander onto the roads.

Mr. Pang is part of an army of drivers hired by Alibaba’s logistics partners and its chief competitor, JD.com Inc., to make deliveries in rural towns across China. The two companies, which built a combined 80% share of the $440 billion retail e-commerce market in China largely on the strength of sales to urbanites, each aim to reach 100,000 country villages by the end of the decade.

Alibaba and JD.com are pushing into rural areas at a time when they are coming under increased pressure from shareholders to find new growth. The major cities in the world’s second-biggest economy are maturing as markets for online shopping, with fewer new customers to sign up.

Daniel Zhang, Alibaba’s chief executive, earlier this month said he was confident that Alibaba would continue growing over the long term on the strength of frequent purchases and the variety of products offered.

Investors are concerned that the slowing economy and turbulent stock market may damp consumer spending. Alibaba’s revenue grew at the slowest rate in more than three years in the three months ending in June, and JD.com executives said earlier this month they expect sales growth to moderate later this year.

But China’s villages hold promise. Roughly 600 million rural citizens are seeing their incomes rise faster than city residents, though they tend to be poorer overall. In 2013, rural per capita annual income was 8,896 yuan (about $1,392) compared with 29,547 yuan in urban households.

Many in villages are just discovering online shopping after purchasing their first Internet-connected smartphones in the past year, often through government programs. The number of e-commerce customers in rural China is barely one-third that in the cities, but their ranks are rising rapidly. Last year, 77 million people shopped online in the countryside, a 41% increase compared with 17% growth in urban areas, according to China Internet Network Information Center, a government-research group.

“The scale of online shopping in rural areas is still lower than in the cities, so there’s a huge space to unearth, a big market that can be fought for,” said Wang Xiaoxing, e-commerce analyst at research firm Analysys International.

Until recently, e-commerce had largely bypassed remote areas like villages in Mingshui, which were seen as too difficult and expensive to reach. China has no carriers capable of deliveries to all rural addresses, and the national postal service isn’t fast or efficient enough to serve the needs of online retail companies. E-commerce companies preferred to devote resources to chasing wealthier urban consumers, who were conveniently concentrated in a few areas mostly along the coast.

Alibaba, the largest e-commerce company in China, is investing 10 billion yuan to build 1,000 county-level distribution centers and 100,000 village-level drop-off points over the next three to five years. As of June the company had 63 county-level centers and 1,803 village-level centers.

Alibaba does most of its sales through Taobao and Tmall, websites similar to eBay.com where retailers and individuals can list their wares. After a consumer makes a purchase on either site, third-party companies coordinate delivery through Cainiao, an online logistics platform set up by Alibaba in 2013. Alibaba has minority stakes in some of the logistics companies using Cainiao, but distribution centers and delivery trucks are generally operated by third parties.

Tang Dazhuang, 20, from a family of corn farmers, was at a delivery station in Liming, one of the villages on Mr. Pang’s route on a recent Monday picking up a 10 yuan box of five pairs of socks that he had bought from Taobao three days earlier. “This is more convenient for shopping,” he said.

“After buying something I just have to wait at home. Before I used Taobao, I would have to go to the county town (Mingshui county) to buy things.” He said it took 40 minutes to drive there. “There are more options on Taobao, so it’s better to shop there.”

Alibaba has said its goal for each village would be one extra day of delivery beyond the regular delivery time to get to the closest county. JD.com said its village deliveries can take one to three days.

Beijing-based JD.com, which sells most of its goods directly like Amazon.com Inc., has a different strategy for rural deliveries. The company runs its own network of 166 regional warehouses and thousands of smaller local delivery stations. In remote areas, JD.com is working with third-party logistics carriers and paying contracted “brand promoters” who receive packages and hand them off to customers. The company declined to disclose the cost of the initiative.

To be sure, it may also take a while for both companies to see demand catch up with their infrastructure investments. Rural shipments make up less than 10% of parcels generated from Alibaba’s China retail marketplaces, and analysts say it is unclear how quickly the online buying power of rural residents can be unlocked.

The biggest challenge for both companies is completing the “last mile,” the logistics industry term for the final step to reach a customer. Past logistics investments in China largely went toward offshore shipping, such as ports and airports to promote trade, while domestic delivery services remain a highly segmented market comprising thousands of small and regional transportation and warehouse operators. Without domestic logistics infrastructure to work with, the companies had to build logistics infrastructure themselves.

Parcels still can’t be taken to many recipients’ doorsteps because homes in a typical village are laid out along a network of tight pathways between fields or rice paddies. Delivery trucks can’t fit in these alleys and it would take too long to transport packages on foot—if a deliveryman can find the customer at all.

“In the cities, every address is very fixed and more clearly labeled, like house numbers, street names, districts. But addresses in villages are not so clearly labeled,” said Jiang Hongyu, director of JD.com’s rural efforts.

Alibaba has appointed drop-off stations decorated in bright orange and green with a “Taobao Village” sign for customer pickup.

Even if Alibaba and JD.com reach their goal, it will only cover a fraction of some 600,000 villages scattered across China. But much like the companies had to build the infrastructure for urban e-commerce to grow, they hope their rural expansion plans pave the way for a new market.

“The roads are bad and no one wanted to spend heavily in investing in doing logistics for the rural areas just for the sake of a few packages,” said Xu Weidong, a Cainiao operations manager for northern China. “Now, Alibaba is here.”

Source: Wall Street Journal by Gillian Wong and Loretta Chao

Source:: Alibaba, JD.com Target Rural China for E-Commerce Growth

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