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Fresh food e-commerce in China a long way from being profitable, says analyst

E-commerce giant JD.com plans to expand its cold-storage and logistics sites and source a wider variety of food from around the world as it seeks a share of a market that could grow to almost US$36 billion next year.

China’s market for fresh food ordered online and delivered quickly is set to almost triple in size by next year to US$35.6 billion, but according to leading player JD.com, it will be a while before companies can make a profit from it.

Max Cao, the general manager of sourcing and procurement for JD.com’s fresh business, said in an interview that the company’s first priorities would be to strengthen its logistics system and expand the types of food on offer and improve customer service.

“Making a profit from delivering perishable products such as seafood, frozen meat, vegetables, fruit and ice-cream in the current environment remains a challenge for China’s e-commerce operators because of the heavy investment in the initial stages,” Cao said. He declined to say how long JD.com would be prepared to take losses.

Fresh food e-commerce is the latest in a wave of e-businesses that are transforming China, and has a huge growth potential. Currently just 2 per cent of fresh food is bought online, compared to around 40 per cent of clothes and electronics.

Indeed, the massive operating costs are likely to make JD and Alibaba ultimately the only winners in the fresh food segment, although that will only be after a long time spent experimenting, according to a report by Goldman Sachs.

Goldman figures showed that the number of e-commerce start-ups in China selling fruit, vegetables and flowers fell from 10,000 to about 5,000 by September 2016 because of the high delivery costs and the large subsidies they needed to offer to win new customers.

“The margins for fresh food e-commerce remain low because of high logistics costs, and I cannot see the possibility for JD to make a profit very soon from this sector,” said Zhao Ziming, a senior analyst at Pintu Tank in Beijing, a firm that conducts research on the internet industry.

He noted that the market is growing as incomes rise in China, but to reach smaller cities would require big investments in logistics. One option would be join up with physical stores, to help build customer trust, he said.

“I think it would be a promising business if e-commerce players could run online businesses with offline stores. People usually want to see how fresh the seafood is when they buy,” Zhao said. “So seeking cooperation with brick-and-mortar stores, I think, would be a good choice for e-commerce firms.”

Part of their strategy to broaden the appeal of online fresh food shopping is by diversifying the range of food on offer, Zhao Ziming, a senior analyst at Pintu Tank in Beijingsaid. Overseas products such as cherries from Chile are one of the most popular on the JD platform, he added. The challenge however, is to get consistent quality when dealing with a wide range of suppliers.

Source: scmp.com

Publication date: 9/22/2017


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