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New Retail in China’s Fresh Food Sector

  •   25 Dec 2018
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According to a report by Nielsen, Asian consumers spend 50% of their food expenditure on fresh food.

Data Source
More than half (52%) of respondents to a 2012 Nielsen Shopper Trends Survey said that rising food prices affect their purchasing of fresh foods, with meat and poultry categories impacted most (54%), but fresh foods continue to perform well in all parts of the world. In Asia-Pacific, fresh foods contribute as much as 60 percent of food, grocery, and personal care expenses across all retail channels on average. In Europe, fresh foods contribute 53 percent of expenses on average, in the U.S, 30 percent, and in Latin America, 25 percent.

APAC's market for fresh food is huge and growing—consumer expenditure is expected to grow from US$2tn today to US$2.6tn by 2019. Fresh food comprises a significant proportion of the consumer basket at nearly 50% of all consumer expenditure on food, groceries and personal care.

—Euromonitor International 2016

Cao Lei, director of the China E-Commerce Research Center outlined that fresh food is the most demanding category of foods to retail online in China. It needs numerous inputs including logistics, considerable financial investment, user operation, etc. Offsetting these inherent difficulties, fresh food, compared with other categories, boasts the highest repeat purchase rate and market potential. However, in the past years, the performance of traditional e-commerce merchants in China's fresh food sector has been less than optimistic because of slow delivery speed and efficiency.

Due to the strict demand for freshness, the fresh food sector is regarded as the last winnable battle for offline retailers in their war against e-commerce retailers. In December 2017, "Fruit Day" (a Shanghai-based retailer) shortened its delivery time in Shanghai to 29 minutes, occasioning a concomitant increase in orders of 305.7%.
Although 13 years have passed since the setup of the first fresh food e-commerce store, the fresh food retail sector is still dominated by "bricks and mortar" stores. According to a report by Ali and Boston Consulting Group, offline consumption of fresh food will be 75%-85% of the whole market share of fresh foods. Online trade value is expected to reach RMB 347 billion yuan (at a conservative prediction), and RMB 574 billion yuan (bold prediction) by 2020. According to another analysis company called Analysys, the online trading amount can reach RMB 469 billion yuan, which is almost the average value of the two numbers predicted by Ali and BCG.

Since 2015, lots of funds have been funneled into China's fresh food sector. In 2017, chain stores like Miss Fresh secured billions of US dollars in venture capital funding. At the same time, the market reshuffled. Some companies have merged with each other and some entered into cooperation with others.

  • Yummy 77: Amazon invested $20 million of funding in this Shanghai-based online food vendor in 2014. However, Yummy 77 suspended its business in April 2016.
  • Yihaodian: which was set up in 2013 as the first wholly owned comprehensive e-commerce platform, was purchased by Jing Dong in 2016.
  • Guoduomei: the largest fruit chain store in Beijing was merged with Pagoda in Nov. 2015.
  • 1mxian (1-meter fresh): set up in Nov. 2014, attracting 4 million users in one year and a half. In December 2016, it was merged with Pagoda.
  • In April 2018, Ali Group purchased Ele.me (takeaway platform, offering fresh food delivery service) with 9.5 billion dollars.

The market entered into a rapid growth phase at the start of 2018. The optimization of the supply chain and the innovation of business models are major contributing factors to this rapid growth. 4 trends are also fueling growth in the sector namely:

  • cold-chain in logistics
  • expanding market in catering
  • open stores
  • social network.
Financing Events of Fresh Food E-Commercial Companies in the First Half of 2018
PlatformDateRoundAmount (RMB)
No.1 Flavor2018.6.4A Round10 million
IYouhao2018.5.24Angel Round10 million
Sea Cat2018.5Pre-A Round10 million
Tianma Convenient2018.4Angel Round5 million
Rainbow Star2018.3.13A Round/
Song Xiaocai2018.1.22B1230 million
Xianshiji2018.3.5B/
Shidexian2018.1.15B/

Jack Ma's Alibaba is really the inventors of China's new retail concept which is characterized by combining online and offline retail into a unique experience. In terms of fresh food retail, there are mainly two types, fresh food community stores, and fresh food supermarkets exemplified by Hema Fresh.

Fresh Food Community Stores

Community stores are stores set up in communities to fit in with neighborhood surroundings and offer easy access to daily needs and desires of the community residents. Compared with farmer's market and supermarket, community stores tend to be geographically closer to their target market. Purchasing fresh food using community stores is convenient. Fast food giant McDonald's has also successfully employed a similar strategy in China.
According to a report jointly issued by the Boston Consulting Group and Ali Research Institute, the young generation, who dominates the consumer market, now prefers to order meals online, including fresh food. Due to the weak supervision of carryout food, healthier diets, and healthy options are also in high demand.  

Basically, these fresh food stores offer various categories of food to meet daily demands. With a developed supply chain, the price of products is not high. Some categories of product are even cheaper than identical products sold in supermarkets. Meanwhile, companies like Alibaba and JD are still developing the frameworksa although Hema Fresh is already a hit. The quantity of these stores and their development is still in its early stages, which gives community stores more space to develop. Considering the development in the first-tier city, it may still be a good choice to open new community stores in second and third-tier cities. Since the fresh food market in a second and third-tier market are still dominated by farmers' market, supermarket, and mom-and-pop stores, citizens there can still be sold on an upgraded retail experience.

Fresh Food "Supermarket" & New Retail Mode

Led by Hema Fresh from Alibaba and 7FRESH from JD, fresh food "supermarkets" are a new retail model which are a prominent part of China's new retail model.

What is the New Retail mode? It refers to a mode that integrates online shops with physical shops. Take Hema Fresh as an example, which is a hit now. It integrates supermarket, restaurant, e-commerce merchant with logistics. Customers can pick their cuts of meat, choice of fish or crustaceans etc and then chefs can cook products onsite. These supermarkets are fully integrated with cashless payment and offer a customized app which allows customers to pay without a need to wait in line. Besides, you can also enjoy the service at home. Goods can be delivered within 30 minutes to people who live within 3 kilometers of a Hema Fresh store. A storewide overhead mechanical transfer system is also built on the ceiling of each store which can package orders and transfer to delivery agents within 10 minutes and deliver to customers in 20 minutes.  Before goods are delivered to each store, they are sent to a Forward Distribution Center. The integration and mandatory use of the Hema app also allow Hema to turn offline customers towards its online retail channels.

Up to October 2018, Hema entered 16 cities and opened 87 stores according to their official data, including Beijing, Shanghai, Shenzhen, Guangdong, etc, covering 20 million customers. Among them, there are 20 stores in Shanghai and 16 in Beijing. According to its plan, Hema will open stores in all first and second-tier cities and developed prefecture-level cities before 2021. Alibaba's and Hema's chief competitor Jingdong (JD.COM) plans to open 1000 fresh food supermarkets within 3 to 5 years and signed contracts with 16 renowned real estate developers. Among these retailers, Hema Fresh grabs the market share aggressively by means of its operation mode. On September 17th, Hema Fresh first revealed its operation data on Alibaba's Investor Day. CEO of Hema Fresh said, "The Average Sales Per Unit Area for Hema Fresh (after operating for 1.5 years) has reached RMB 50,000 yuan."

According to a comprehensive analysis of trade of fresh food in China in 2017 (Analysys report), the value of all retail in China's fresh food sector reached RMB 1789.7 billion yuan, and demonstrated a year-on-year growth of 6.9%. Of this 1789.7 billion, e-commerce accounted for RMB 141.8 billion yuan. E-commerce penetration for this sector increased to 7.9%. In 2018, the trading volume of the e-commerce market is expected to surpass 210 billion.

From offline to online and everything in between

In 2016, Jack Ma underscored the importance of "new retail" in China. Given trends towards this hybridization of offline and online, traditional supermarkets have followed suit and started to cooperate with giant companies like Alibaba and Tencent. Despite all the hype surrounding new retail, H1 2018 data offers some cause for pause. Although most supermarkets utilizing new retail principles are still trading profitably, overall net profit is low.

Analysis of supermarkets turnover in the first half year of 2018

CompanyTurnover (bn)Year on yearNet Profit attributable to equity holders of the company (mn)Year on year
Yonghui34.4+21.47%933-11.54%
New Hua Du Supercenter3.4+0.3%7-83.23%
Jingkelong5.1-8.9%//
Hualian Hypermarket6.1-3.57%42-39.15
Jiajiayue6.2+11.84%193.7+35.63%
Sanjiang Shopping Club2.1+7.91%57-13.81%

                                                       
Another supermarket, Yonghui which has realized double-digit growth for the last several years has seen its fortunes flag after adopting a "new retail" business model. In the first half of 2018, Yonghui opened 19 Super Species, competing with Hema Fresh, and 85 community fresh food stores, etc which occasioned a reduction in net profit margins for the first time in 3 years. Some believe that the correlation between Yonghui foray into new retail and its declining fortunes is better viewed as a casual relationship highlighting the less than robust feasibility of the new retail business model.

The chairman of Yonghui, Zhang Xuansong said, "Yonghui will improve comprehensive gross interest by developing its own brands and building close cooperation with suppliers, such as direct purchasing." According to its expansion plan, Yonghui is set to open 100 Super Species and 1000 community stores before 2020. If the new retail model continues influencing its profit, Yonghui will likely reconsider this approach.  

Although the fresh food market is very huge and profitable, it's very difficult to stand out and differentiate your brand in this market. Many small startup companies operating in the fresh food e-commerce space shut down this year. According to the data issued by the China e-Business Research Center (CBRC), of more than 4000 fresh food online merchants:

  • 4% broke even
  • 88% of them operated at a loss
  • 7% undertook massive losses
  • 1% of them were profitable

Cao Lei, director of the China E-Commerce Research Center said, the high "death rate" indicated that fresh food e-commerce is not a game for small players. Here are the main challenges for them to overcome: unstable supply chain, uncontrollable product quality, difficulty in financing, high natural wastage rate, high logistics cost, and the competition from traditional farmer's market. With a solid foundation in fresh food purchasing, transfer and distribution, traditional farmer's market grasp a huge industry resource. Second, compared with other food, the high natural wastage rate is another major contributor to fresh food e-merchant's failure. Although utilization of cold chain technology can decrease the wastage rate, overall coverage of cold chain in China is still patchy. For giant companies, they can build their own cold chain logistics. Most start-up companies do not have the finances to implement adequate cold chain systems.

Advice on China's Fresh Food Sector

Companies must ensure brand differentiation and unique positioning to have a chance at succeeding in China's ultra-competitive fresh food sector. Take the example of "Chu Orange" branded oranges, which was the brainchild of Chu Shijian, former CEO of Hongta Group, a famous tobacco brand in China. Due to the outstanding quality of the orange, Chu Shijian became known as the "Orange Master", a nickname the company was able to use as a springboard to catapult the enterprise towards greater success.

Before starting this Chu Orange Project, Chu did an analysis of China's orange market. At that time, the price of imported oranges was 10 times that of domestic oranges but offered little in terms of an improved sensory experience to justify their inflated price tag when compared to domestic oranges. At the time most domestic oranges were classified by origin and species and no specific cultivar or brand was a market leader. Chu saw this as a major opportunity. After considerable time and finances invested in brand building, advertisement and promotion and sales in the offline market, all backed by strict quality control and an excellent product, in 2012 when Chu was 85, he entered China's fresh food e-commerce sector and became a big hit.

In the future, it may be a good way for companies to produce their own products, and establish their own production facilities, farms etc. In this way, companies can control quality, standardize their offering and showcase a self-contained and transparent supply chain and offer consumers assurances on product quality and safety. Alternatively, cooperation with local farmers can also be considered. Farmers shall follow the standard made by the enterprise and then sell qualified products to the enterprise.

Besides setting up planting bases, companies can also transfer their focus to third or fourth-tier cities, which could be a good chance for small fresh food companies or traditional supermarkets. Although giant companies are mainly laying out their stores in first-tier cities, it doesn't mean consumers in third-tier cities have reduced purchasing power. Many industries and people are transferring to third-tier cities, which will bring economic growth and more discretionary spending power.

We believe the fresh food sector will be a core business to supermarkets in the future but only a few companies will be able to profit from the sector. Who will emerge as China's fresh food e-commerce giant? Only time will tell.

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ABOUT THE AUTHOR

Lennie Tao

ChemLinked editor, having expertise in food regulations.