“And unless Chinese food consumption habits change rapidly, future growth will increasingly depend on a very different model to facilitate the delivery of fresh food. It will also require a very significant investment in infrastructure to make it work,” he adds.
This could be good news for reducing the high level of food lost during storage, transport and processing; at around 35 million tonnes a year, it’s equal to roughly six per cent of all the food produced in China.4
Group buying pointing the way
Though digital retail heavyweights such as Alibaba, JCB and Pinduoduo – who together control around 80 per cent of China’s online retail spend – are in a strong position to disrupt the grocery market and gain online share, their existing approach is generally viewed as being most effective in Tier 1 cities – the country’s biggest.
Outside of those areas, ‘community group buying’ (CGB) has emerged as one of China’s most important digital trends.
CGB integrates small orders from households in the community into a large order. This model requires a central ‘community leader’ to negotiate with the supplier and coordinate the delivery and pickup from a central warehouse.
The aim is to largely disintermediate the expensive last mile of the delivery process by having consumers come out of homes to pick up the goods. This has made it particularly popular amongst price-conscientious consumers in Tier 2 and Tier 3 cities and spawned a $US11.5 billion industry.
Their success is, however, attracting the attention of the internet giants, which have begun investing in CGBs and implementing aggressive subsidy programs to recruit community coordinators and local suppliers.
The scale of the opportunity
Much of their focus has been on disintermediating the ‘last mile’ – the final step between distributor and consumer. However, so far, it has very much been a case of trial and error, even for these businesses. For instance, Alibaba’s ‘new retail’ initiative, launched in 2018, sought to bring 30-minute delivery to anyone living within a 3km radius of a Hema supermarket. The model proved to be unscalable, particularly in those smaller centres where CGB has taken off.
Kim says in 2021, most players are banking on a 6 to 18-hour delivery timeframe being acceptable to consumers. They are use a more multi-layered approach, where produce can be delivered to distribution centres or direct to the home, depending on the locality.
JD.com, another leading e-commerce player, has been investing in private player Xingsheng in a show of commitment towards the micro fulfilment grocery business model. Xingsheng’s group purchase platform operates in lower-tier cities in 14 Chinese provinces to help close the ‘last mile’ gap in the delivery network and serve neighbourhoods with fresh foods and daily necessities where online shopping is still in its infancy.
But Kim says that this is still early days even for the final mile and even more significant investment will ultimately be required further up the supply chain, especially in refrigeration.
In China, fresh food accounted for 90 per cent of the total tonnage of cold-chain logistics, with pharmaceuticals making up most of the rest.5 Pinduoduo, a leading online e-commerce asset-light business, has committed capital to build up cold chain logistics facilities.
“This will help reduce spoilage and bring down the cost, making online ordering both safer and more competitive. Improving the supply chain is the key to both fresher and more affordable goods,” Kim explains.
For those prepared to spend time building and perfecting their model, their rewards should ultimately be there.
“Increasing market share and capturing some of that spend is a once-in-a-decade opportunity,” he concludes.