China – Emerging Urbanites Reshape Rural Consumer Demand by Liliana Castillo Dearth, Denise Boynton

As emerging markets urbanize, newcomers to the city change their lifestyles and consumption habits. But what about those who stay behind? Urban influencers are bringing the city to the village, and creating opportunities for businesses and investors.

According to the United Nations’ 2014 World Urbanization Prospects report, 54% of the world’s population lived in urban areas that year, compared to just 30% in 1950. By 2050, the proportion is forecast to grow to 66%.

That will still leave a global rural population of 3.2 billion (down from 3.4 billion in 2014). As more people move to the city but maintain contact with their country cousins through rapidly improving communications and infrastructure, one trend can be expected to intensify: the influence of urban values on rural lifestyles.

[drizzle]Surprisingly, relatively little research has been carried out to date into how urbanized people affect the thinking and behavior of friends and relatives back in their rural villages. It’s a theme that occurs frequently in our grassroots research, however.

Growing Demand Is Not Being Met

For example, in China we found that rural consumer demands mirror urban demands when someone in a family becomes urbanized. In a village two hours from Changsha, Hunan Province, we visited families of which some members had moved to the city. The villagers liked to indulge in yogurt and canned drinks—products that are much more common in the cities than in the country, and which are routinely consumed by urban families we had visited in the city earlier that day.

In India, migrants have influenced behavioral changes in their former villages. Women in the village have started wearing “salwar kameez”—tunics with pants—instead of the more traditional saris, girls are allowed out on their bicycles, and some households have acquired washing machines and motor water pumps.

When villagers visit their families and friends in the city, they try Maggi instant noodles and pasta and other products that are not available back home. These products are now in demand in rural areas, but the demand remains unmet because of a lack of retail distribution networks.

Such influences are driving a shift in rural consumption from loose to branded items, as are improvements in infrastructure and connectivity. Essentially, this is the “urbanization” of consumption before consumers actually move to urban areas.

Conventional retailers can’t meet these changing needs. It’s simply too expensive to expand distribution to reach all these rural populations. In our view, the companies that will win these customers are those that can build distribution without a physical network.

China Sets the Pace

This would appear to be hugely beneficial for e-commerce businesses. In India, Internet penetration is just 28%, but this already translates to 375 million Internet users (source: Statista). Consumer research company Forrester Research estimates that there will be 68 million online shoppers in India by the end of 2016, with mobile commerce representing nearly 50% of online retail sales in the country.

Language presents a challenge. India has 22 official languages, and even the most popular—Hindi—is the first language of only 41% of the population. As a result, e-commerce sites need to be in several different languages to reach a majority of the population. Most major apps are currently in English.

In China, the level of e-commerce penetration is very high—a result of the inability of traditional physical stores (particularly outside Tier 1 cities) to keep pace with changing consumer demands. As of the end of 2015, there were 429 million online shoppers in China, representing a 61% penetration of Internet users. In 2013, China overtook the US in terms of online retail sales, with 1.85 trillion yuan (US$296.6 billion) in sales according to the Ministry of Commerce, compared to US sales of US$261.2 billion according to the US Department of Commerce.

As might be expected, China has experienced a wave of innovation around mobile purchasing and payments, with online payment providers like Tenpay creating the ability to exchange “hongbao” in small amounts between friends and family through the WeChat cross-platform messaging service. We think the ability to provide small payments through the convenience of an app would also be hugely beneficial for underbanked rural consumers in India.

These trends expand the EM consumer opportunity for many companies—but investors should remember that the companies most likely to succeed are mainly those that can build distribution without a physical network.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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