The following article is reprinted with permission from Redtech Advisors.
Many of China’s mainstream ecommerce players are experimenting with delivery of fresh groceries, but it might take several years to get the proper infrastructure in place to make it work outside of Tier 1 cities like Shanghai and Beijing (where Alibaba and JD are already running trials). Smaller rivals are also pushing into the sector, including SF Express, Yihaodian and Amazon.cn.
We’ve seen reports that suggest China’s refrigerated logistics is woefully underutilized – 19% vs 90% in the US. While that’s hard to verify, it’s certainly more widely accepted that China’s refrigerated logistics needs a massive boost in capacity and quality to pull even with developed countries – the annual shrinkage in fruits and vegetables is estimated at the equivalent of the daily nutritional value for 200 million people. And one estimate puts China’s cold-storage capacity per capita at equivalent to the US in 1949 or Japan in 1965. In addition to needing additional refrigerated warehouse and delivery trucks, the logistics systems required for separation of fresh food from other products is also underdeveloped in China.
But all these challenges are potential opportunities for ecommerce players with deep pockets and large-scale logistics operations, such as JD, Alibaba and even SF Express. JD’s taken the most interesting approach by spending RMB4.3 billion for a 10% stake in domestic supermarket Yonghui Superstores. The deal is part of the online retailer’s campaign to leverage existing networks of bricks-and-mortar stores to boost its supply chain and diversify its offline offerings. Founded in 1998, Yonghui Superstores operates 364 supermarkets in China, with plans for 179 more this year. JD will work with Yonghui to first engage in simple O2O deliveries from local stores, but could later start to integrate the distribution of fresh foods from its warehouses.
In 1H16, we’ll be looking into the progress being made on delivering food in China. Generally, sale of perishable goods is a low-margin business but drives traffic for more profitable packaged goods. Bolting on this type of business is in line with the slew of high frequency, low margin O2O subsectors that China’s Internet companies are aggressively pushing into because they cross-sell the traffic to other, more profitable products and services within their ecosystem.