China’s explosive e-commerce growth has fundamentally transformed the retail industry and changed the way retailers sell and distribute their products.
However, there is an area into which digital commerce still finds it hard to penetrate – the grocery delivery market.
Delivering groceries represents a major challenge for standard, online-only e-commercial businesses, and for a number of reasons.
First is the high logistics costs associated with carrying fruits, vegetables, dairy products, eggs, fresh meat and processed foods from the chiller cabinet. This is because these products require refrigerated packaging and storage throughout the entire transportation process.
Retailers typically find it hard to pass on such incremental costs to consumers because these products are already sold at a low price, so any price hike could significantly dampen overall demand.
At the same time, the short shelf life of fresh food products means their delivery has to be quick. Generally speaking, grocery products have to be delivered within a couple of hours to ensure freshness and quality.
All of which helps to explain why fresh food delivery in China was for a long time limited to more expensive items such as seafood and organically farmed produce.
INTEGRATED MODEL
But having successfully created an immense e-commerce ecosystem across China, Alibaba started making inroads into the grocery delivery market in 2016. It established Hema, a retail store chain that combines the functions of a restaurant, supermarket and distribution centre for food deliveries.
The Chinese e-commerce giant described Hema as a "pathfinder" for Alibaba’s new retail strategy and an integral part of the group’s digital ecosystem, which utilises data and technology to make retailing more efficient.
Hema’s biggest difference from Alibaba’s online-only e-commerce model is that it owns digitally-empowered physical stores. As of the end of last year, the brand had over 100 stores selling both household products typically found in supermarkets and fresh produce offered in wet markets.
At the same time, Hema stores serve as a distribution centre for deliveries to nearby households. It serves households within three kilometres of its stores and promises delivery within 30 minutes.
Such a hybrid business model effectively solves two major problems. First, grocery delivery is made possible due to the proximity of the target households. Customers are much more likely to put in orders for fresh food products if there is no need to worry about the quality deteriorating during delivery.
Under the traditional retail model, retailers typically have fewer storage and distribution centres. And each cater for larger areas.
Placing small distribution centres across every neighbourhood is not commercially viable because demand from online orders alone is insufficient to support them.
By combining in-house dining, onsite purchase and online delivery, the new retail model also helps to ensure demand is less diffused by keeping it all under one roof.
As a result, overall demand per store tends to be higher. According to Hema's marketing material seen by FinanceAsia, the average monthly spending per customer through both online and onsite purchase was Rmb575 ($86) as of July last year, more than double the Rmb279 average spending for pure online customers and Rmb228 for those who purchase in-store.
Alibaba’s Hema is not alone in adopting this new retail 'online + offline' business model. Its closest rival in this field is 7Fresh, a supermarket chain backed by JD.com.
Even traditional retailers are starting to adopt it.
Suning Commerce Group, better known as an electronics product retailer, started the Su Fresh chain in 2017. Yonghui Superstores, China’s fifth-largest supermarket operator by revenue, also operates the Super Species chain with 60 stores in 15 cities as of the end of last year.
DIGITALISATION
The stores are operated with technology that allows retailers to integrate and manage online orders and in-store sales. And most employ dynamic pricing systems through which product prices are automatically updated in real-time based on demand, relative freshness and existing inventories.
That is made possible by the use of digital price tags on every product. It also ensures prices are the same across online platforms and physical stores.
Customers can scan barcodes on product tags to learn when they were produced and delivered to store, access their qualification certificates and read instant reviews from other buyers.
In addition, most of these stores accept only digital payments with designated apps.
Data collected from these payments subsequently enable retailers to analyse individual shopping habits in order to design customised advertisements and discounts.
Thanks to its success, the 'online + offline' concept looks set to expand. 7Fresh president Wang Xiaosong said the supermarket chain aims to open another 1,000 stores over the next five years, while Su Fresh has signalled that it aims to add over 240 stores by the end of next year.
That stands in sharp contrast to the traditional retail sector, where growing closures have become the norm in recent years.
For investors interested in the Chinese retail sector, there are limited channels to invest in this burgeoning business subsector at the moment since most of them are privately held. But it is one that should be on the watchlist for future investment ideas.
