After a decade when internet usage growth averaged 11 per cent a year in mainland China to exceed 900 million users, growth is slowing and online retailers are looking for new opportunities. Having already expanded into advertising and travel, the next battleground has been identified as fresh food and groceries.
Lockdowns caused by coronavirus sharply increased demand for online food shopping. Even though the internet accounts for more than 20 per cent of purchases of other goods in mainland China, the online share of food expenditure was just 3 per cent before the pandemic – well below other developed markets and less than half the UK level.
Mainland China’s online fresh-food sales were RMB280 billion (USD41 billion) in 2019 but by 2022 are expected to reach RMB690 billion.
Online fresh-food shopping peaked in February but remains higher than a year ago: not only are there more users, they are buying more frequently, often two or three times a week.
Penetration is expected to reach 5 per cent in 2022 as more offline supermarkets and hypermarkets shift business online, making food the country’s second-largest online retail category.
Different businesses are adopting different models to sell food online, and so far none has proved to be a clear winner. Some firms deliver from their own warehouses, some partner with physical retailers delivering from their stores; sometimes community groups place bulk orders and collect, People in top-tier cities prefer home delivery, usually paying a fee; lower-tier cities generally prefer the cheaper self-pick-up.
The country’s internet giants are very efficient at logistics and delivery but food retailing is a low-margin business. There is scope to control spoilage but it requires delivery efficiency, sophisticated warehouses and cold-chain technology.
Existing online retailers hope to realise synergies with other parts of their empires. However, the internet giants see food as the best way to acquire new users who can be cross-sold other items in their vast ecosystems – especially people aged over 30.
Some operators barely broke even before the pandemic but gross margins then soared to more than 30 per cent as prices were increased and better-educated shoppers, less sensitive to costs, became customers. However, margins are likely to return to thin levels when demand falls. The economics could improve if larger companies consolidate supply chains or entice clients to spend more online or shop more often.
But this is a now highly competitive sector where companies cut prices to attract customers. Some may merge or be forced out of the market.
We see rural shoppers as the next growth area for the online food retailers. Rural areas turned to the internet when the pandemic restricted fresh-food supplies but the Beijing government is also emphasising the development of the digital economy in these areas by increasing e-commerce penetration and logistics infrastructure construction.
First published 25 September 2020.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Binnie Wong
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ALIBABA GROUP BABA.N 269.73 24 Sep 2020 1, 4, 5, 6, 7, 11
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TENCENT HOLDINGS 0700.HK 505.00 24 Sep 2020 1, 2, 5, 6, 7, 11
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