Big investments in supply chains, logistics infrastructure expected to produce gains as COVID create more demand for perishable groceries

China's fresh food retail market is poised to see steady growth in the coming years, with key players investing in supply chain and logistics infrastructure, as the country's mid- and high-income consumers display rising demand for premium brands and high-quality fresh merchandise, industry insiders said.

However, fresh produce retailers will take some time to achieve profitability. Their big-ticket investments in building warehouses, cold chain logistics, delivery networks and technological innovation are long-term in nature and hence returns on them will materialize later than sooner, they said.

The transaction volume of China's fresh food market is expected to increase from 5 trillion yuan ($785 billion) in 2020 to 6.8 trillion yuan in 2025, fueled by increases in per capita disposable income, according to iResearch.

Chinese e-commerce giant JD has accelerated steps to open more offline fresh food stores in the Beijing-Tianjin-Hebei region and the Guangdong-Hong Kong-Macao Greater Bay Area, said Zheng Feng, president of Seven Fresh, JD's fresh produce supermarket chain.

According to Zheng, the company's gross merchandise value or sales revenue reached nearly 3 billion yuan in 2021, and it aims to open more than 70 brick-and-mortar stores by the end of this year.

"We have been continuously strengthening the supply chain construction by building two commodity centers in Beijing and Shenzhen and cooperating with local premium suppliers to offer tailor-made fresh produce to consumers," Zheng said, adding the company will continue to enrich product categories and establish its self-owned brands.

So far, Seven Fresh has opened 66 stores in 13 cities across the nation, including Beijing, Tianjin, Guangzhou and Shenzhen in Guangdong province, Chengdu in Sichuan province and Wuhan in Hubei province. Consumers can also order products via the Seven Fresh app to get their orders delivered in as quickly as 30 minutes from nearby stores that are within a radius of 3 kilometers.

Zheng said the main users of the app are mid and high-income families who live in first and second-tier cities, and have a monthly income of more than 30,000 yuan. The company will cooperate with top-tier property developers to expedite its offline layout in more cities, he said.

In November, Seven Fresh and Muji, a Japanese retail company, jointly launched a fresh food complex spanning over 4,000 square meters in Shanghai. It also established a joint venture with Chinese retailer Better Life, with plans to open new stores in Changsha, Hunan province.

Freshippo, the online-to-offline retail chain of Alibaba Group, has sped up its pace of opening new membership stores nationwide since debuting the membership-only warehouse store in Shanghai in October 2020.

In January, the company opened three membership stores in Shanghai, as well as Suzhou and Nanjing in Jiangsu province, with each store spread over 16,000 to 20,000 sq m.

The different store formats can complement one another to serve a city's fast-moving and advanced consumption needs, said Hou Yi, president of Freshippo.

Analysts said the supply chain and quality control of fresh food are of great significance for e-commerce players that have tapped into the offline fresh food segment.

Wei Jianhui, an analyst with internet consultancy Analysys in Beijing, said fresh produce retailers should focus on improving the efficiency of supply chains and catering to the diversified needs of consumers, as well as ensuring the quality of their products. 

"Big data and artificial intelligence technologies could be utilized to accurately offer corresponding products and services based on different regions and customer groups, and constantly improve the shopping experience," Wei said.

The online fresh products market is also witnessing rapid growth. Data from iResearch showed trading volume of China's fresh food e-commerce sector reached 458.5 billion yuan in 2020, up 64 percent year-on-year. The figure is expected to soar to 1 trillion yuan in 2023, representing huge market potential.

Online fresh produce platforms have played a vital role in providing daily necessities during the COVID-19 pandemic, and stepped up efforts to establish direct sourcing bases and front-end warehouses, carried out in-depth cooperation with fast-moving consumer goods suppliers and upgraded the overall supply chain system.

Missfresh Ltd, an e-commerce platform focusing on delivering fresh produce and other daily necessities, expanded its vegetable direct sourcing base recently, spread over nearly 70 hectares, in Luliang county, Yunnan province.

Xiao Laicang, who is in charge of Missfresh's vegetable segment, said its farm in Luliang county adopts an order-based planting model, which leverages sales forecasts to determine production scale. The measure will allow the company to guarantee a stable supply of vegetables, and closely control the quantity, quality and cost of the produce, Xiao said.

By establishing a supply chain network covering farms, factories and processing facilities nationwide to directly source goods from their place of origin, Missfresh has enhanced operational efficiency and reduced procurement costs, the company said.

"We will continue to expand and deepen direct sourcing cooperation with production bases and premium brand suppliers, as well as give full play to technical advantages in big data and intelligent algorithms, so as to improve operational efficiency and build core competitiveness in on-demand retail segment," said Xu Zheng, founder and CEO of Missfresh.

The company sources products like fresh seafood, vegetables, fruit, meat, eggs and fast-moving consumer goods directly from almost 200 farms and about 350 factories and processing facilities across the nation.

As of Sept 30, 2021, its front-end warehouses had covered 17 first and second-tier cities in China, offering over 5,000 stock keeping units or SKUs, with orders delivered within 36 minutes on average.

Front-end warehouses, which are often located close to residential areas, integrate storage and distribution functions in order to solve last kilometer deliveries.

"The penetration rate of e-commerce groceries is rising as more and more consumers have switched to fresh food e-commerce platforms to buy fruit, meat, vegetables, seafood, grains, oils and other daily necessities during the pandemic," said Zhang Yi, CEO and principal analyst from consultancy iiMedia Research.

Advancements in cold chain technologies have prompted the development of the fresh food retail industry, Zhang said. However, the high attrition rate of perishable goods and huge logistics expenditures weigh heavily on the gross margins of fresh produce players.

Meanwhile, the safety of fresh produce has received widespread attention recently as the market supervision bureau of Beijing's Haidian district summoned and launched an investigation into Dingdong Maicai, a fresh produce e-commerce platform, on March 16.

The probe came after media reported one of Dingdong Maicai's front-end warehouses in Beijing cheated consumers by claiming dead fish as fresh ones and fabricating labeling. The regulator has also carried out inspections at other fresh food e-commerce businesses.

Dingdong Maicai apologized for selling expired food products, saying it has suspended operations at the front-end warehouse. It will identify problems and submit rectification plans to the authority to avoid a similar situation from happening again, establish an internal whistle-blowing mechanism and update monitoring equipment at warehouses, the company said.

Founded in 2017, the Shanghai-based startup reported its total revenue increased 72 percent year-on-year to 5.48 billion yuan in the fourth quarter of 2021, while its non-GAAP net loss was 1.03 billion yuan, compared with 1.24 billion yuan in the same period of 2020.

As of the fourth quarter last year, Dingdong Maicai owned 10 food research and development and processing plants, and about 1,400 front-end warehouses with an area of 500,000 square meters.

Mo Daiqing, a senior analyst at the Internet Economy Institute, a domestic consultancy, said ensuring the quality of products is the top priority for fresh food e-commerce platforms, and only by doing so can they win trust of consumers.

The country's fresh food e-commerce is entering the fast lane, but is accompanied by some problems related to operations, product quality, user experience, after-sales service and supply chains, Mo said.

More efforts should be made to ensure the safety of supply chains, expand product offerings and improve delivery services, she said.

Competition in the fresh food e-commerce sector is set to intensify this year as many companies in the fast-growing segment still face bottlenecks that affect their profitability, she said.

"How to optimize the supply chain management, improve operational efficiency and reduce operational costs－that is an urgent problem to be dealt with."