A SWOT Analysis of China’s Cherry Market and a Look at Chilean Imports

On Jan 6, the fruit exporters association of Chile, and Pinduoduo (拼多多) formally reached a strategic partnership. The two sides will cooperate in the aspects of merchant connection, market expansion, and supply chain, and jointly promote the sales of Chilean cherries using an ultra-short supply chain model involving direct agricultural imports.

However, shortly after the cooperation was reached, the outbreak of SARS-COV-2 occurred in China. On Feb 14, Ronald Bown, the president of the Chilean fruit exporters association, said publicly that due to the epidemic, the Chilean fruit sector was facing  losses of more than $100million. Decreased importation of cherries in China was expected to be the significant factor. Based on that scenario, this year's revenue from Chilean cherry exports would fall by $70 million to $80 million (equal to 492million to 563million RMB).

Strength

1. Cherries are China's luxury fruit

Statistics show that in the past two years, China's imports of cherries ranked first in the world. More than 10, 000 containers of Chilean cherries were shipped to China last year, accounting for almost 90% of Chile's total production, said Tang, a staff of procurement at Hema company(盒马鲜生). Cherries are one of the most expensive fruits in China, but recently they have become more affordable for average Chinese.

2. Seasonal advantages

Chile, which locates in the southern hemisphere, has opposite seasons to China, so it is able to meet China's demand for cherries during winter.

3. Preferential tariff policy

In 2017, the China-Chile free trade area was extended, more than 97% of products (including cherries) traded between the two sides are now subject to zero tariffs.

Weakness

1. Rely heavily on the integrity of the supply chain

As a fresh product, the integrity of the supply chain is vital. Cherries can also be easily damaged or spoil during transportation. The supply chain of imported fruit is relatively long, and the transportation distance is long. Before delivery, there are many uncertainties, such as weather, shipping time, etc.

2. The stubbornly high price makes regular consumption difficult for average consumers.

This year, Jingdong's fresh e-commerce platform has also seen a drop in sales of imported fruit. During the epidemic, the unit prices of imported fruits such as grape, guava, avocado, and mangosteen all declined from Dec. 2019, but the price of Chilean cherries remained unchanged.

The picture below shows the price of only one cherry is 5.2RMB, which is approx. 0.8dollars.

3.  Profits margins are low

The low gross profit margin of imported cherries is mainly due to fierce market competition between the various e-commerce platforms and a transparent value chain in which prices are relatively stable.

Opportunities

1. E-commerce

Data shows that in 2018^[1], China's imported fruit market value reached $8.42 billion, with a year-on-year increase of 34.5%. Therefore, e-commerce platforms such as Alibaba, JD, and Suning have invested in the development of supply chains to cover the fresh market. They adopt the mode of direct procurement from Chile, Thailand, and other countries to remove multiple intermediate links, and to reduce costs.

2. Online channels pander to consumers by price-slashing

In Jan. 2020, Suning, JD, Pinduoduo, and other platforms have unveiled a consumption subsidy valued at 10billion RMB. The price of cherries has dropped noticeably, which has attracted a large number of consumers. For instance, Juhuasuan (聚划算) offered the lowest price ever for Chilean cherries, selling 10-kilograms of class 3j cherries for just 258 yuan. Previously the same quality cherries sold on the market for about 650 yuan.

Threatens

1. Timing is crucial for the fruit business

Demand for cherries is subject to seasonal spikes, and this demand is particularly high during the Chinese Spring Festival. This year, lunar New Year’s Day came earlier, while South American cherry ripened late. These two occurrences coincided with the outbreak of SARS-COV-2 in China. Chinese customs were not able to clear the imported cherries quickly at that time. Furthermore, due to citywide lockdowns in most provinces, cherries were unable to reach consumers in time. As a result, this year, many e-commerce platforms have frequently received negative comments, with most consumers reporting that cherries are not fresh.

2. Competition with domestic producers intensifies.

Besides, it is worth noting that China also has a large domestic cherry sector. In the ten days after Chinese New Year's eve, fruit sales on the JD Daojia (京东到家) platform grew 380%^[1], with local fruit sales volume outpacing imported fruit by 5.7 times. The sales value of domestic fruit was 2.7 times that of imported fruit. During the epidemic, a large amount of domestic fruit piled up in warehouses, and this has driven prices down. Compared with imported fruits, domestic fruits possess local advantages, especially lower price and convenient transportation.

3. Poor offline business

Although the online platforms mentioned above are performing well, the offline market was hit badly by COVID-19. In Dec 2019, it was reported that most offline fruit retailers were already facing losses. The COVID-19 issue significantly impacted supply chains, consumer demand, and we can expect significant losses and closures of many retailers.

The Post Covid Era in China's Fresh Fruit Sector

China has been effectively able to implement a COVID-19 suppression strategy. As life returns to normal, fruit trade and overall consumption is expected to rebound by the end of March^[2]. We expect many stakeholders throughout the fresh fruit supply chain to have been forced to close permanently. However, it is difficult to predict how this will impact the market. The downturn in sales of imported cherries is likely to continue. Consumer confidence has understandably taken a hit, and consumers are now cognizant of the very real potential of global economic recession and are likely to tighten purse strings in response. Given cherries' positioning as a luxury fruit, we can safely predict continued sluggish demand unless the market becomes more competitive and prices reduce.