Iris Mir Authors

The e-Grocery Gold Rush

August 19, 2013

China’s e-commerce companies are suddenly stocking up on groceries.

Buying groceries in Chinese cities like Beijing and Shanghai is a nightmare for many office-goers. After a long day at work, shoppers head to overcrowded supermarkets just to find noise, confusion and impossibly long queues at the payment counter. And it doesn’t end there: they also have to carry the grocery bags, however heavy they may be, all the way home.

E-commerce players in China, always quick to smell a business opportunity, are trying to take the sting out of grocery shopping for these busy urbanites. They are devising solutions that will give shoppers the convenience of ordering groceries online from the comfort of home and have them delivered to their doorstep on the same day or in a day or two.

Entering the Fray

In October last year, Yihaodian, China’s first online supermarket, launched 1,000 augmented reality stores across the country. While standing in such a ‘store’ which is in reality nothing but an open public space, shoppers can simply whip out their smartphones and view a virtual supermarket complete with 1,200 meters of floor space and 1,000 items in stock. They can fill their virtual shopping baskets simply by scanning the item codes and checkout. The company will deliver the merchandise at their doorstep in a day or two.

Yihaodian’s virtual supermarkets have created ripples, not just in China but globally as well. The concept is revolutionary, one of a kind. So much so that the company won a Silver Lion and Best Use of Mobile Devices for Media at the Cannes Lions 2013.

Chairman Gang Yu emphasizes that the virtual supermarkets are less about actual sales themselves and more a marketing tool to help Yihaodian build its brand. Gang has a point. When he and his partner Junling Yiu founded Yihaodian in 2008, the company was China’s first online supermarket. But today the field is getting increasingly crowded with everyone from e-commerce companies to players in the logistics industry jumping into the fray. In an increasingly crowded market, it is becoming important to build a strong brand to rise above the noise, and that’s where Gang’s virtual supermarkets come in.

Gang is betting big on the future of e-grocery retail. He estimates that online purchases of food and drink stand at just about 1-2% vis-a-vis shopping in physical supermarkets. In future, he believes the figure will grow to 20-30%.

Others are taking note too. Jingdong Mall (until recently called 360Buy), which proudly called itself a specialist in 3C (computers, communications and consumer electronics) products, recently added fast-moving consumer goods to its array of products. In the end of April, the company launched a new e-supermarket service. Not to be left behind, the Alibaba group’s Taobao, China’s leading customer-to-customer (C2C) site, launched 24Taobao as an experimental C2C e-supermarket platform. When Tao Ran, Vice-President, Alibaba, launched 24Taobao in January 2013, he said it was because they had identified a need among local grocery suppliers to have a platform to sell their products nationwide and help them reach more customers. Also, Taobao’s strong reputation in e-commerce provides suppliers with a channel that can help them improve their reliability. Still in early stages, the company has limited its operations to Beijing and Hangzhou (where the headquarters of Alibaba are based). But the company has plans to expand to more than 10 cities in the coming months. Even the Shenzhen-headquartered SF Express, China’s leading private logistics provider, also decided to dip its toes into the waters with the launch of an online grocery commerce subsidiary SF Best last year.

Oceanne Zhang, Leader of Market Insights at Kantar Retail, thinks that there is a rather simple explanation for this phenomenon: e-grocery commerce is increasingly becoming a key differentiator for China’s e-tailers, who are struggling to attract new shoppers and increase market share in an increasingly overcrowded sector. Groceries provide the much-needed ‘stickiness’ factor. “(E-tailers) want to sell everything online, but they are still not attractive to people because they have lots of competitors. Since people do grocery shopping on a more frequent basis, this can help the e-commerce companies drive more traffic and build customer loyalty,” she says.

Yihaodian’s Gang agrees. “(E-grocery) is a hard category but it has its merits as well because it has a high conversion rate, high frequency and it is very ‘sticky’.”

Competing in a New Arena

“Selling fast-moving products, like supermarkets do, is the biggest thing for Jingdong,” says Shi Tao, Jingdong’s Vice-President (Retail). Since its launch in 1998, the company has been continuously expanding the categories on offer, and grocery was the only one left, says Shi. This category-expansion strategy has worked for Jingdong so far. It claims it’s been growing faster than the industry’s average making it the second-largest B2C company, with a 16% share of the market in 2012, according to China Internet Watch.

Will Tao, Analysis Director at iResearch, an internet industry research firm, says that with its latest foray, Jingdong is trying to differentiate itself from competitors. At the same time, “they can attract new buyers through new categories because people can (now) buy everything from the same place”, he adds. Zhang of Kantar is less optimistic and believes that Jingdong seems to be losing focus by “opening to all categories”.

Owning the logistics system gives Jingdong an edge over e-grocery platforms that rely on third-party logistics providers. Jingdong had to invest in improving its facilities to store and distribute perishable products that can’t stand high temperatures or dust. Shi is confident about this new venture. He believes the brand can rely on its strong distribution network and its wide reach in big cities. “The customer size is huge there, and it allows us to test the market and see which aspects we should improve,” he says.

Yihaodian and Jingdong have very similar business models for grocery retail. They buy the products from manufacturers and sell them through their online platform. SF Best, the grocery venture of logistics company SF Express, follows the same model but thanks to its sophisticated logistics infrastructure, it is able to provide fresh and frozen food, something most competitors can’t do just yet (Yihaodian has recently started offering fresh fruit).

In the case of other players like 24Taobao or Choashi Tmall which use the C2C model, third-party suppliers themselves are responsible for the inventory, pricing, warehousing and delivery.

A Practical Move?

All said and done, will expanding onto e-groceries really help Chinese e-tailers achieve market supremacy?

iResearch’s Tao doubts there is a large consumer base in China for e-grocery shopping but he still believes that it might be a sustainable strategy “as long as these companies limit their operations to major cities” where they have well-established supply chains in place.

Besides, buying groceries is a very personal activity in which people like to browse and sift through products before picking what they want. Given this peculiar consumer trait, companies need to give shoppers a compelling reason to go shop for grocery online. A recent report released by Kantar Retail compares the pricing strategies of China’s online and offline supermarkets. Interestingly, the study concludes there’s no real price advantage in online stores, being only a 4% less expensive than their brick-and-mortar counterparts. Yihaodian is the only e-supermarket that stands out because of its remarkably low prices in imported food, a category that Zhang sees as attractive for customers.

Beyond Convenience

As Zhang from Kantar Retail explains, Yihaodian has the highest loyalty among all because it started as a grocery e-tailer (the company has since expanded into new categories such as apparel and cosmetics). “Shoppers who decide to buy groceries online usually have higher loyalty”, she says. With only a 0.90% share of China’s B2C market, according to China Internet Watch, Yihaodian has enjoyed a more sustained development. It developed its own logistics system and infrastructure to optimise product distribution and to make sure its 20 million registered users have a good shopping experience.

Other e-tailers that are now starting fresh with e-groceries face a greater challenge. Jingdong for instance, enjoys a good reputation among its customers. But it will be harder for the company to expand the trust they’ve earned as a reputable 3C e-tailer onto something so personal as buying groceries.

A.T. Kearney’s recent study titled ‘A Fresh Look at Online Grocery’ says that “most players assume that the unique selling proposition is the time saved through home delivery”. This is a very narrow view–it undermines the potential of the sector and prevents players to overcome what the consultancy firm sees as the “major challenge”: customer retention. Instead A.T. Kearney recommends the adoption of “smart customer-friendly strategies” that offer “additional value”. Operations and supply chain are “a determinant factor when determining the best approach to developing and implementing a customer-friendly strategy”.

Yihaodian’s Yu Gang says the company has invested a lot in their supply chain. “Our business model might be easy to copy but the supply chain management is very difficult to copy,” he adds. “It’s been specially designed to ensure low operation costs that really pass the benefits to customers and ensures success of e-commerce companies”. So Yihaodian has been building a very flexible model where many different systems coexist: from inventory management systems to warehouse management, category management, price intelligence management and promotion management.

On top of that, in order to develop a strong customer experience, it has created an in-house platform for innovation, which has given birth to pioneering projects like the virtual supermarkets.

The Last Frontier

According to Xu Yong, Senior Consultant at China Express Consulting, a consulting firm focused on the express delivery industry, the real competition between China’s e-groceries will start in the next few years with the delivery of frozen food. Currently, China’s logistics infrastructure cannot ensure a seamless cold chain. Players who manage to advance in this field will enjoy a unique advantageous position. “Online supermarkets like Yihaodian will need to build refrigerator warehouses, equip delivery branches with freezers and own a fleet of refrigerator trucks,” says Xu.

This is an opportunity SF Best doesn’t want to miss. Launched in Mid-2012 in Beijing, the company quickly expanded to other major cities such as Shanghai and Shenzhen. Its mission is to offer healthy and good quality imported produce with the best shopping experience. It also guarantees an ‘unbroken’ cold-chain. iResearch’s Will Tao suggests that they feel confident that people will trust their service because they have the good shipment system in the parent company of SF-Express. “They have the advantage and they have the shipment infrastructure. So why not use the extra room and make money from that? They can get extra stock on a plane, so everything (they get) will be a profit,” he adds.

McKinsey believes that e-grocery shopping will eventually disrupt traditional offline supermarkets. Companies are still experimenting with new ways of attracting customers, reducing costs and earning a profit, according to its report titled ‘Retail 4.0: The Future of Retail Grocery Online’. In a way, the study reveals how the challenges posed by e-grocery shopping could force the e-commerce industry to think about new models. Profitability requires innovation especially for Chinese e-tailers, which are already struggling from intense competition and squeezed profits margins. The opportunity is there. As Jingdong’s Shi Tao sees it “With e-supermarkets (in the picture), the real battle with offline stores has begun”.

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