Firm finds fertile fields for growth in rural areas, reports Wang Zhuoqiong in Xinzheng, Henan.

Dark and dusty, the retail store on the main street of Lijiuchang village in Xinzheng, a small city in Central China's Henan province, has three rows of shelves and a backroom full of fresh food - but its display of merchandise is chaotic.

It is the only grocery shop in a village of 1,500 households.

The store owner, a woman in her 50s, uses a computer provided by retail supermarket chain PostMart to keep track of her trading - it also serves as her cash register.

Many of her items, such as oil-sugar candies, stopped being popular around 20 years ago, but here they are still being sold in her store.

James Luo, chief executive officer of PostMart, a project backed by China Horizon Management LLC, is in the shop and asks the reporter a very telling question: "Do you notice how many brands you are using yourself, that are available here?" The answer is not many.

"That is our opportunity," he said. "We want to make what urban residents are already using become popular here too."

PostMart is jointly run by China Post and the US-based China Horizon Investments Group, and is a hybrid retailer, with strong logistics networks and international retail experience, and has been working hard to establish a growing presence in the often complicated Chinese rural market.

Luo is asked by the store owner how she could manage to get more deliveries of medium-and high-quality diaper brands. With tap water not nearly as available in villages as in cities, and heating in the winter far from widespread either, keeping cotton diapers clear is not easy.

Standing next to the shop's beverage counter, the owner said villagers have high recognition of well-known brands, such as Coca-Cola. In fact, "if they haven't heard of the brand, they are not interested", she said.

It is not price that determines whether the local people can buy a can of Coke here, it is reliable supply and availability, said Luo. "If adding 15 cents to the price means that water, for instance, can always be in stock, then the buyers are happy."

However, on any given day in this small shop, 40 percent of its most popular items are out of stock, and the reason is simple.

"They have no reliable supply chain," explained Luo.

Rapid urbanization, continuous migration to the cities, and farmers' leasing out their land to the major farming operators have increased farmers' incomes in recent years.

"The villagers have the money to spend," said Luo. "The challenge is how we can get commodities to them."

Long distances between stores in rural areas can mean high distribution costs.

In Henan, there are around 45,000 village stations of China Post and thousands more independent stores.

But distribution to rural villages in China is also proving a major challenge for regional and national manufacturers, and brand owners.

PostMart has already held wide-ranging talks with major brands about how to distribute their products more efficiently, and cheaply to more remote provinces.

Major fast-moving consumer goods brands, especially, are eager to gain a firmer foothold in the countrysides and in lower-tier cities.

"What this is doing is actually disrupting the old-fashioned supply industry in China.

"Now the distribution system is like a bowl of noodles, and we hope the bigger brands will use our system to help them build a more effective supply chain," said Luo.

China Horizon first signed its 50-50 joint venture agreement with China Post in June 2013.

By the end of August, PostMart had 98 directly operated stores and 6,000 franchise stores in China. The State-owned China Post specializes mostly in postal finance, delivery and logistics services.

In a 25-year cooperation with China Post, China Horizon said it would invest 1 billion yuan ($162 million) to develop 10,000 retail stores. The partners also decided to build 111 terminal distribution centers (one in each county in Henan) and seven regional distribution centers to support large-scale distribution to the village stores.

At each center, there are now at least five sales employees, who visit stores to check on product availability. The service is supported by a truck fleet that delivers the next day, on-time and in full.

Such a system would have proved expensive for manufacturers to build, but Luo said PostMart's advantage is being able to call on a large-scale system that lowers costs, provides door-to-door delivery, and supports and manages services to individual store owners.

PostMart claims to have reduced delivery time from 21 days to one day.

Ben Cavender, principal of the Shanghai-based China Market Research, is enthusiastic that the China Post/Horizon logistics model may work well in helping to get small businesses their commodities easier.

But the question remains how they will handle competition from other wholesalers and e-commerce operators in the next few years.

Cavender said that the partners must build their brand awareness and the relationship with their customers quickly, to guarantee any hope for long-term growth.

The PostMart idea was actually the brainchild of Alan Clingman, CEO of China Horizon Management, who concluded that its previous business model of managing retail shops in rural China was not working.

Clingman took part in a three-year joint pilot program with China Post in rural regions, during which time the partners opened 100 stores under the PostMart brand and provided services to more than 6,000 China Post village postal stations and franchisees.

The idea of developing a full-blown retail business in rural China then came to Clingman.

The PostMart pilot program with operations in three provinces - Henan, Shandong and Jiangxi - was to run retail operations out of China Post real estate in various towns.

At the same time, they would run a wholesale distribution model to distribute products to stores at the village level.

"It was not a commercial operation. It was a giant experiment. The prime objective was to find a commercial model," said Clingman.

China Horizon concluded that running its own small stores at a town level was difficult to manage. They suspended operations in Shandong and Jiangxi.

One of the major decisions in the new project was to focus all the company's resources on Henan with the goal of becoming profitable and improving the model further in that province, said Clingman.

Speaking about the reason for selecting Henan province, Clingman emphasized its infrastructure.

"The roads are world class, the roads to the villages are in very good condition," he said.

He was also amazed by the use of cell phones and the availability of electricity in villages in the province.

Most importantly, however, choosing the right partner to work with in rural China is vital.

The distribution system centers owned by China Post have eased the investment pressure for international partners.

The use of traditional mail in the world is declining because of electronic and wireless services. "Physical mail is a dying business, with the exception of package delivery thanks to e-commerce," said Clingman.

However, the value of the postal network is enormous, he said, and cannot be replicated by private businesses. In addition, China Post is the most famous brand in China, especially in rural areas where it is most trusted.

"Some of the best people in rural China already work for China Post," said Clingman. "The key to success is to have an efficient distribution model at massive scale."

Contact the writer at wangzhuoqiong@chinadaily.com.cn