A Look at China’s Fresh Produce Retail Marketplace Amid COVID-19
Mainland China’s current fresh produce marketplace is a mix of the old and the new. The journey from traditional farm produce markets to fresh produce supermarkets to fresh produce e-commerce, the latter of which emerged in 2016-2017, hasn’t been a straight line. In fact, all three formats currently co-exist.
This article is translated from Mandarin and based on a GLG Teleconference that took place on February 18, 2020.
Four Business Models
Within e-commerce, four main business models have emerged.
First, the O2O (online-to-off-line) model practiced by large supermarkets: These include Alibaba’s Hema Xiansheng, JD 7Fresh, Yonghui’s Super Species, and Suning Fresh. Among these, Hema Xiansheng is the leading player, its business scope covering supermarkets, catering, and deliver-to-home services. Each store boasts thousands of square meters of floor area.
The second model is community service, where smaller stores abound. Most community-based fresh produce stores are in this camp. Leading players are Qdama, Shengxian Chuanqi, and Pagoda, which sells only fruit.
The third model is the community-based group buy, led by Nice Tuan and HN Kaola.
The fourth model combines front-end warehouses with delivery-to-home service. Leading players in this camp are Miss Fresh, which operates mainly in North China, and JD Maicai, in South China. They operate front-end warehouses, not stores, and promise one-hour delivery of fresh produce to buyers’ homes.
The entire fresh produce retail industry faces similar challenges, including high wastage, low gross profit margins, little standardization (and difficulty in raising it), and high delivery expense. Today, more than 70% of fresh produce still moves through traditional farm produce markets. Most of the remainder – over 20% – is accounted for by new retail, which has no standard definition but includes community-based fresh produce stores that serve a limited number of online orders, fresh produce supermarkets, and hypermarkets. Online accounts for only about 5% to 8% of total fresh produce retail sales, but it has big growth potential.
Reasons for Potential Growth
First, fresh produce is considered a “high-frequency consumption” product by its very nature; people eat fresh produce every day, and it has a relatively short shelf life. Overall, China sees 5 trillion sales per year of fresh produce. Second, the bulk of current consumers are in their 20s or 30s and are open to shopping for fresh produce via mobile apps; their parents or grandparents may still prefer to go to food markets. Demographical development bodes well for online growth.
A third supporting factor is the development of the required supply chain and cold chain logistics. Forming a cold chain logistics network covering China was once regarded as difficult, but companies such as ExFresh, an Alibaba portfolio company, now provide such capabilities, which will likely help drive the growth of fresh produce in new retail. We think it has great potential.
Top Two Players
The two top players in fresh produce new retail – Miss Fresh and JD 7 Fresh – provide an interesting comparison.
Miss Fresh is the leader in the business model based on front-end warehouses plus home delivery; no walk-in stores exist for consumers. Each of its 1,500 warehouses in 20-plus cities serves a catchment area of 3 kilometers in radius, and monthly active users number 11 million. Miss Fresh recently launched its warehouse 2.0 program, which calls for expanding the size of a front-end warehouse from 100 to 300-400 square meters – increasing the number of warehouses to 10,000 – and adding products such as freshly ground coffee and fresh seafood. Miss Fresh’s front-end warehouses generate 60,000 RMB sales per square meter annually.
Launched in response to the opening of Hema Xiansheng and using its membership stores as a benchmark, JD 7Fresh is largely a copycat. In 2019, JD restructured JD 7Fresh by combining it with JD’s fresh produce business unit and upgrading the resulting entity. In December, JD 7Fresh launched 7Fresh Life, a small-store format with 400 square meters of floor space. It competes with four other small-store formats launched by Hema Xiansheng in the first half of 2019.
Challenges for the entire fresh produce retail industry have long been the high fragmentation of upstream suppliers as well as the significant losses that occur during transportation. High delivery costs and high wastage also are major issues.
Theoretically, home delivery requires no cold chain logistics; a foam box keeps live crab, fish, and shrimp cool on a 20-minute delivery to a buyer’s premises. One way to trim logistics costs and wastage, therefore, is to have batch deliveries to front-end warehouses or stores and fast home delivery for the last mile.
In the supply chain, big data and other technologies can increase visibility, which enables better coordination among participants, in turn creating higher efficiency. At Hema Xiansheng and Miss Fresh, each step of the chain is digitized, which begets visibility – fundamental thinking for the fresh produce supply chain.
Impact of COVID-19
Lastly, during the coronavirus crisis, various new retail players experienced a boost in order flow. Miss Fresh’s orders grew by 300% year-over-year; other players, including Hema Xiansheng, saw orders increase by at least 100%. Before the crisis, consumers in larger cities embraced the new fresh produce retailers for the time savings and convenience, features that consumers in smaller cities didn’t find compelling. But with the coronavirus crisis confining people to their homes, many residents of smaller cities have turned to new fresh produce retailers. Similarly, many consumers who preferred the lower-priced fresh produce food markets before the crisis are now accepting the higher cost of shopping online because physical markets are off-limits.
But greater demand presents its own challenges. Order surges may overwhelm supply chains with limited workforce capacity, cash positions are strained, and costs are out of control. As a result, the coronavirus is likely to expedite the current reshuffling of the industry after a tough 2019. Companies commanding robust supply chain capability will survive, while those without it may fall by the wayside.
This article was translated and adapted from GLG’s February 18 Mandarin teleconference, “Redefining Grocery Retail: China’s Online Groceries Market.” If you would like access to this teleconference or would like to speak with any of our more than 700,000 experts, contact us.