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Fresh food online: the mainland's greatest e-commerce challenge

Described as the "last blue ocean" by mainland e-commerce operators, fulfilling online orders for fresh food offers a hugely lucrative opportunity for those who can get it right, though many have already floundered.

Photo: Online shopping, courtesy of traditional vegetable markets. (Xinhua News Agency)
Online shopping, courtesy of traditional vegetable markets.

E-commerce is increasingly popular in China, with online transactions now accounting for sales of 17% of all clothing and 15% of 3C (computer, communications and consumer electronics) expenditure. By comparison, food products sold online account for less than 1% of total retail sales. Even so, in 2012, sales of agricultural produce via Taobao.com exceeded Rmb20 billion, with the figure expected to reach Rmb50 billion in 2013, rising toRmb100 billion in 2014. Trailing closely behind Taobao.com in terms of food sales are a number of less high-profile websites, notably Sfbest.com (SF Express), 1mall.yhd.com (Yihaodian) and Ego.12582.cn (China Mobile).

E-commerce players regard the fresh food market as the "last blue ocean", a recognition of the size of the potential market. It is, however, a difficult one to crack. This is due to a lack of standardisation, high logistics costs, the perishable nature of the products and the high levels of spoilage during transportation. Over the past four to five years, a number of domestic operators looking to pioneer fresh food e-commerce have proved notable failures, including the supermarket groups China Resources Vanguard and CP Lotus.

Having learned some tough lessons from their predecessors, a new group of substantial e-commerce operators have launched food-related ventures. In May 2012, Sfbest.com started its e-commerce operation, offering nine major categories of products, with its fresh food business now accounting for one-third of its sales. In June 2012, Amazon.cn formed a joint venture fresh food business with Xmato.com; while Jd.com started its own fresh food business in partnership with a dozen or so famous food brands back in July 2012.

This trend continued in 2013, when Tmall.com's 2 July announcement that it would expand into providing cold chain logistics for fresh food. In the initial phase, fresh fruit and raw food materials would be provided, via a distribution network ranging from Shanghai to 26 other large online shopping cities, including Beijing, Guangzhou, Shenzhen, Hangzhou and Chongqing. In the same month, the e-commerce website Yihaodian, part of the Walmart Group, announced the opening of a Shanghai-focussed online vegetable operation, after initially operating a fresh food operation in early April 2013. Its online vegetable business covers all of Shanghai except Chongming Island.

Photo: Online ordering sorted and packed. (Xinhua News Agency)
Online ordering sorted and packed.

The big surprise in the fresh food e-commerce sector, however, was the launch this year of the COFCO Corporation's Womai.com. It made its debut on the powerful Sina Weibo platform, then started promoting itself independently. Womai.com claims to source quality food from all over the world by capitalising on its decades-long experience of dealing in cereals, grains and other foodstuffs. Additionally, COFCO has formed strong links with other players in the food industry and benefits from direct supplies from food production sources. Womai.com has also constructed its own warehouses in Beijing, Shanghai and Guangdong. All the warehouses feature constant-temperature storage of more than 50,000 square metres, fresh food storage of about 6,000 square metres and a red wine cellar of close to 1,500 square metres. Its cold logistics chain is now regarded as the best in China, with its emphasis on quality control highlighted by its policy of not stocking commodities that have one-third of their quality guarantee period expired, while items with two-thirds of their quality guarantee period expired will not be processed for sale. COFCO's Womai.com potential has lured a number of potential investors, with the private equity firm SAIF Partners injecting substantial capital into the venture.

The emergence of fresh food e-commerce is a direct result of capital investment in cold chain storage and the younger demographics' penchant for online shopping. Unlike the older generations, young people prefer not to shop and compare prices at traditional markets, but would rather do so online.

If fresh food is indeed the least standardised product category with the oldest supply chain, but the highest standards, it is clear that there are still challenges ahead, with cold chain logistics an obvious bottleneck. As fresh food products have a relatively long industry chain, from the fields to the dining table, it is indeed difficult to ensure their freshness. This is further complicated by the sensitivity of fresh food to temperature and environmental changes, which require demanding storage and transportation standards. The cost of cold chain logistics is also higher than that of ordinary logistics, while the unit prices of fresh food products are generally low and have a slender gross profit margin. Overall, the sector represents a distinct challenge for e-commerce players, but one with enormous rewards for any that can surmount these logistical difficulties.

Guan Shan Shan, Beijing Office

Content provided by Picture: HKTDC Research
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