Growing potential for fresh food e-groceries in China [Interview]

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The COVID-19 pandemic has sped up the transition towards online shopping, notably increasing consumer demand for fresh groceries. While various logistical and cultural challenges must still be navigated, the potential opportunities are huge. Michelle Huang, Author and Consumer Foods Analyst at Rabobank, discusses the growing popularity of fresh food e-commerce in China, and assesses what the future holds.

Fresh food distribution is at an inflection point in China. Digitalisation and investment in storage and logistics are creating a paradigm shift in the fresh food supply chain. According to the National Bureau of Statistics and China Internet Network Information Center, China had 940m internet users at the end of June 2020, a rise from 47% in 2014 to over 67% in 2020. Many internet users are active online shoppers, representing a very large potential consumer base.

“The COVID-19 pandemic has sharply increased consumer demand for fresh food e-commerce,” notes Huang. “Consumers - particularly older consumers - found this to be a convenient and safe option during the pandemic. Survey data suggests that many consumers have sustained this habit of buying daily necessities online, including fresh produce, in the post-pandemic environment.”

For health and safety reasons, consumers and regulators are also driving this shift from traditional wet markets to modern retail and e-commerce.

On the supply side, e-commerce giants have been heavily investing in acquiring new users to their platforms, especially in the lower-tier cities. For instance, in September 2020, food delivery platform Meituan announced its ‘One Thousand Cities Plan’ for its fresh e-grocery business, aiming to cover 1,000 cities/counties by the end of 2020. China’s cold chain is also developing rapidly, driven again by investments.

“We believe these companies will continue to invest in cold chain logistics to deliver fresh products to consumers,” says Huang.

Navigating the challenges

For e-commerce firms, managing the complexity of the fresh food supply chain remains a key challenge. While some tech giants have tried to disrupt the fresh grocery industry with unreasonably low prices, this business model has received criticism for its unhealthy pricing competition.

“China’s market regulator will likely tighten the regulation of community group purchases, and urge internet giants not to compete for market share with cut-rate prices,” says Huang.

Another challenge is establishing dedicated fresh food supply chains.

“The need to secure bulk supply and offer high-quality standards to consumers creates the need for a farm-to-fork model,” she explains. “Large buyers, such as Alibaba, are keen to expand their reach into origin markets to form a dedicated, secure supply chain. Direct procurement at origin shortens the value chain, ensures quality, and brings transparency.”

For such super-platforms, managing the complexity of a fresh food supply chain will require time. It will also require substantial capital investment in high-tech farming facilities, warehouses at origin to pre-pack and distribute fresh food products, and an on-demand delivery infrastructure.

“Freshippo’s move into digital agriculture practices offers clues as to how this could pan out,” says Huang.  “This Alibaba subsidiary cooperates with several villages dedicated to producing agricultural products, exclusively to serve its retail outlets across China.”

Freshippo’s pear village, with its digital production base located in Shanghai's suburbs, has brought in high-tech farming facilities like drone planting and data sensors, improving farm efficiency. The pear growers also receive accumulated data on consumer preferences for better product planning, to guide their planting activities.

Vertically integrated suppliers

Managing fresh food supply chain is complex, and e-commerce platforms may lack sufficient experience in fresh food supply chain. This is where large, vertically integrated suppliers could help. 

“These offer the know-how,” says Huang. “In exchange, super platforms can provide tech/data, logistics/delivery, and even financing for integrated suppliers to increase operational efficiency.”

This new model, however, needs to balance the benefits of key participants in the value chain so consumers can get lower prices, growers can get stable volumes and better margins, and integrated suppliers and platforms can earn reasonable margins by providing products/services.

“In our view, large e-commerce platforms will drive industry consolidation to create super platforms,” says Huang. “These super platforms will seek partnerships with global/local fresh food suppliers to build an optimised fresh food supply chain. This offers suppliers a strategic opportunity to gain a foothold in China's fresh food e-commerce sector and create an omni-beneficial long-term partnership model.”
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