China Post, Horizon plan retail chain in rural areas

Plans by China Post and US-based China Horizon Investments Group to open 500 directly operated retail stores in rural China have raised doubts over the risks of high logistic costs and insufficient purchasing power in rural communities.

The two companies agreed to the venture last June.

It aims to create a chain of Post Mart retail stores. Under the deal, China Horizon will invest 1 billion yuan ($162 million) in a 25-year lease of 10,000 China Post retail stores.

China Post is State-owned and specializes in postal finance, delivery and logistics services.

More than 6,000 stores were franchised, and 98 directly-owned rural supermarkets were set up under a three-year pilot program.

They were run under the Post Mart brand in villages in Shandong, Jiangxi and Henan provinces.

Networks will now be established with Henan Post to expand operations in Shandong, Jiangxi, Shanxi and Hubei provinces, the National Business Daily quoted China Horizon CEO Alan Clingman as saying.

Rural retail channels remain underdeveloped, creating opportunities for retail brands such as Post Mart.

Post Mart, dubbed the rural answer to US retail giant Wal-Mart, has faced many challenges despite its decades-long brand and logistic networks, and with first- and second-tier Chinese cities saturated, smaller centers are set to be the next battlefields for those international retailers, such as Wal-Mart and Carrefour SA.

"Even local retailers haven't touched these areas," Jason Yu, general manager of Kantar Worldpanel, a global researcher of shopping habits, said.

But whether a retail model such as Post Mart's could work remains a question, Yu said.

He cited insufficient purchasing power as a major hurdle because mainly rural residents are elderly, women or children after many people migrated to the cities for work.

A scattered population, lower consumption and chaotic distribution channels filled with counterfeit products have slowed modernization of retail in rural China.

Zhao Ping, deputy director of the department of consumer economics at the Chinese Academy of International Trade and Economic Cooperation, said operators in the rural retail market must overcome high logistics costs to profit, due to the distances between villages. Local village markets, preferred by local villagers, may also be a strong competitor, she said.

Further, rural economic development, though growing faster than that in urban China, still lags behind.

"Annual income in rural China is much lower than that in cities to support the fast take-off of modern retail markets," Zhao said.