Sometimes an economic downturn is the time to go out on a limb. It may be the moves that a company makes now that will help keep its business booming when the economy turns around. Rural markets are been seen as the savior of the Chinese economy as the large rural population means that even a small increase in consumption could mean a big boost to China’s overall consumption. Beijing even launched a subsidy program to encourage farmers to buy home appliances such as televisions, washing machines, computers and other home appliances and home electronics. The program seems to be working. Retail sales in May were urban areas were 15% in May but 15.6% for rural areas.
However, we found while researching our April cover story Spending is Patriotic, farmers aren’t conspicuous consumers. They were simply taking advantage of the subsidy program to replace or upgrade home appliances that were already on their shopping lists. Suggesting that any extra revenue that companies were seeing was just a release of pent up demand. Part of that is due to farmers always watching their wallets, but there is a lack of proper retail outlets in rural areas, most people end up buying from Mom and Pop type stores that carrying whatever they can purchase from local distributors — leaving a big gap for foreign retailers to fill
As panelists at China Economic Review’s fast moving consumer goods (FMCG) conference said yesterday a downturn does not mean domestic and foreign consumer goods companies shouldn’t make the move into rural areas now if their pockets are deep enough (and they have the right strategy). Property prices will be slightly lower and there are people who have gone home after losing their jobs in China’s first tier cities who are ready to work.
Most importantly, panelist Dr Niklas Schaffmeister of BBDO Consulting cited a survey from Market Leader that said companies who increased their marketing spending during previous downturns or recessions saw a return on capital employed of 4.3%. And those who maintained their current marketing spending received an increase of 0.8%. For those that cut their budgets, there was a drop of 0.8%.
Therefore maybe FMCG companies should stop thinking about cutting head counts and start thinking about building and growing their networks especially out into the countryside.