English The stay-at-home economy and the growth of online ... · US 2019 total e-commerce retail sales and total grocery retail sales13 China’s total e-commerce sector is much larger

The “stay-at-home economy”

and the growth of online

grocery in China

PwC

Executive summary

Online grocery and the “stay-at-home economy”

Conditions for online grocery growth

• Dominant and concentrated e-commerce sector

• Fragmented retail grocery market

• High-frequency, small-order shopping habits

• Convenient, affordable delivery

Investment in upstream modernisation

• Private label brands

• Backward integration

• Cold chain logistics

• Agriculture

Keys to success

Table of contents

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Editor’s note: In this report, the China retail grocery market includes all retail sales from hypermarkets (including warehouse club stores), supermarkets (including discounters), convenience stores, traditional grocery retailers (including specialty food/beverage stores, independent grocery stores and other grocery retailers) and e-commerce grocery sales, and excludes agricultural product markets, gas stations, and restaurant/catering businesses. The US grocery market includes all retail sales from food and beverage stores (including supermarkets, grocery stores, convenience stores, specialty stores, etc., and beer, wine and liquor stores), grocery sales from supercentres and warehouse club stores, and e-commerce retail food, beverage, health and personal care sales.

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The "stay-at-home economy” and the growth of online grocery in China

PwC

Executive summary

The 2020 “stay-at-home economy” forced many consumers to try online channels for grocery shopping, accelerating the growth of China’s online grocery market and paving the way for further upstream modernisation.

The “stay-at-home economy” brought a sharp increase in online grocery sales. During the first three months of 2020, China’s online food sales grew by 32.7% year-on-year, even as China’s e-commerce sales across all categories increased by only 5.9% and total retail spending fell by 19%.1 Many consumers will continue buying groceries online after daily life returns to normal.

Online grocery sales take place through many channels, including on e-commerce marketplace platforms, restaurant and grocery ordering and delivery apps, proprietary O2O shopping apps and social media. Nearly all of these channels involve investment and technology from e-commerce and tech giants such as Alibaba, JD.com, Meituan, and Tencent.

China’s e-commerce and tech giants are investing in the retail grocery sector for several reasons. Grocery shoppers make frequent purchases and have a high conversion rate, and demand for groceries is relatively inelastic. E-commerce penetration for grocery products is lower than other merchandise categories, and the retail grocery sector is highly fragmented.

China’s online grocery sales will continue to grow because China already has the following conditions in place:

Dominant and concentrated e-commerce sector

Fragmented retail grocery market

High-frequency, small-order shopping habits

Convenient, affordable delivery

Food products require a much more sophisticated supply chain than other products such as apparel or electronics. Both fresh and packaged food products have temperature control, food safety, traceability and quality requirements. As online grocery sales increase, China’s e-commerce and tech giants will need to continue making upstream investments to ensure safe and sufficient supplies. These will bring further growth and modernisation to the food industry in the following areas:

Private label brands

Backward integration

Cold chain logistics

Agriculture

This report will analyse the current competitive landscape and the favourable conditions for rapid growth of China’s grocery e-commerce sales in 2020. It will look at upstream areas of China’s food supply chain where investment by the tech industry will continue to bring growth and modernisation. Finally, there are keys to success for the growth and deeper integration of e-commerce, big data and food production.

1National Bureau of Statistics, 2020年3月份社会消费品零售总额下降15.8%, 17 Apr 2020

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After the virus control measures have ended, work, travel and daily life will return to normal. But the growth in e-commerce grocery sales will persist. E-commerce accounted for an estimated 8-10% of China’s grocery sales in 2019;2 that share will be much larger by the end of 2020.

Economists have found that daily behaviour is often based on habit or insufficient exploration of options rather than a rationaloptimisation of costs and benefits. When habits are temporarily disrupted, people often find and permanently switch to more optimal behaviours. A paper by economists at Oxford and Cambridge calls this “the benefits of forced experimentation.”3

The “stay-at-home economy” of 2020 disrupted food purchasing and consumption habits, forcing many consumers to do more cooking and eating at home, and to experiment with purchasing groceries online. Many will prefer these new shopping options even when daily life returns to normal.

Online grocery sales come through a variety of channels, and there is overlap between physical stores and e-commerce giants. Some leading brick-and-mortar hypermarket/supermarket chains make up to 15% of their sales online via flagship stores on Tmall or JD.com, proprietary apps, delivery apps like Meituan and Ele.me, social media, or O2O services like JD Daojia or Taoxianda that handle online ordering and delivery for brick-and-mortar stores. Physical O2O stores like Hema or 7Fresh are specifically designed to make 50% or more of total sales via their own proprietary apps, and have designated e-commerce fulfilment areas. Pure-play e-commerce retailers also make online grocery sales from B2C platforms.

According to the National Bureau of Statistics, online grocery sales grew sharply in the first quarter of 2020. China’s online food product sales grew by 32.7% year-on-year, even as China’s total online sales grew by only 5.9% and overall retail spending fell by 19%.


China retail consumer spending year-on-year growth for January-March 20204

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2In this report, the China retail grocery market includes all retail sales from hypermarkets (including warehouse club stores), supermarkets (including discounters), convenience stores, traditional grocery retailers (including specialty food/beverage stores, independent grocery stores and other grocery retailers) and e-commerce grocery sales, and excludes agricultural product markets, gas stations, and restaurant/catering businesses; Sources: Euromonitor International; PwC analysis3Larcom, S., F. Rauch and T. Willems (2015), “The Benefits of Forced Experimentation: Striking Evidence From the London Underground Network”, 15 Sep 20154National Bureau of Statistics, 2020年3月份社会消费品零售总额下降15.8%, 17 Apr 20205S&P Global Market Intelligence, “E-commerce drives China’s Stay-at-home Economy in Corona-virus Aftermath”, 16 Mar 20206Bloomberg, “Coronavirus Outbreak Drives Demand for China’s Online Grocers”, 11 Feb 20207South China Morning Post, “Coronavirus a Boon for China’s Tech-savvy Supermarkets as Homebound Customers Switch to Online Grocery Orders”, 21 Feb 2020 8Suning Holdings, “Suning Releases 2019 Fiscal Year Financial Preview: Full Integration of All Scenarios GMV of RMB 379.7 Billion”, 16 Mar 2020

Even as total retail consumer spending fell by 19% in the first quarter of 2020, online sales of food grew by 32.7% versus one year earlier.

Leading B2C and O2O businesses reported even more dramatic online grocery sales growth over the previous year. Alibaba reported that processed meat and seafood sales grew by 400% and 300% respectively.5 MissFresh reported a 300% increase in online grocery orders during the Spring Festival. JD.com reported that its online fresh food sales during the ten days between 24 January and 2 February increased by more than 200%.6 Sun Art, one of China’s largest hypermarket operators, reported that online sales quadrupled during the Spring Festival holiday.7

Carrefour’s February 2020 China home delivery orders grew 412% over 2019.8

The online grocery growth rates for these companies are probably higher than the national growth rates for two main reasons. First, these companies significantly expanded their e-commerce operations during 2019. Second, their operations are focused on urban markets where consumers have been the fastest to adopt mobile e-commerce.

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Both e-commerce giants and leading hypermarket/supermarket chains are actively growing their online sales. But China’s tech giants are leading the investment, innovation and promotion for this channel. The majority of China’s online grocery sales, including those from brick-and-mortar stores, are purchased on platforms or systems built or funded by Alibaba, JD.com, Tencent or Meituan. These tech giants are also investing in upstream food product sourcing and cold chain logistics.

E-commerce and tech companies are investing in retail grocery channels for several reasons: high-frequency shopping habits, inelastic demand, high customer conversion rates, low penetration of e-commerce and a highly fragmented market.

Household purchases of discretionary products like apparel and electronics are relatively infrequent, and sales can be volatile in times of economic uncertainty. In contrast, households almost always purchase groceries multiple times per week, regardless of the economic environment. Visits to a grocery store or an online shop are often prompted by a need for a specific fresh food product, but customers almost always make impulse purchases of other products while shopping. This phenomenon offers retailers the opportunity to frequently engage shoppers with high conversion rates, and tempt them with higher-margin merchandise each time they shop.

In 2019, e-commerce grocery accounted for only 8-10% of China’s grocery market,9 compared to the e-commerce share of 21% across all retail product sales. The overall retail grocery market is highly fragmented; China’s top five hypermarket/supermarket chains together account for less than 10% of the market.10

9Euromonitor International; PwC analysis10Euromonitor International; China Chain Store & Franchise Association, 2018年中国快速消费品（超市/便利店）连锁百强, 9 May 2019; PwC analysis

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Even before people began staying home to prevent the spread of COVID-19, China’s e-commerce grocery market was poised for continued expansion. The unique and favourable conditions for growth include the following:


Fragmented retail grocery market



These favourable conditions are unique to China. Online grocery sales only accounted for 4% of 2019 US grocery retail,11 about half the rate of China’s online grocery sales.


The rapid rise of China’s digital giants has led to e-commerce dominance in retail. China’s total online retail


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US 2019 total e-commerce retail sales and total grocery retail sales13

China’s total e-commerce sector is much larger than its grocery sector, while the US grocery market is much larger than its e-commerce sector.

11Forrester, “Two Truths and Seven Lies Retailers Heard in the 2010s”, 31 Dec 201912China National Bureau of Statistics, Euromonitor International, PwC analysis13IIn this report, the US Grocery market includes all revenue from food and beverage stores, grocery revenue from supercentres and warehouse club stores, and e-commerce food, beverage, health and personal care sales; Sources: Census Bureau, Annual reports, PwC analysis14Alibaba, “Alibaba Group Announces March Quarter and Full Fiscal Year 2019 Results”, 15 May 2019; JD.com 2019 Annual Report; National Bureau of Statistics15Alibaba annual results press releases, US Census Bureau16US Census Bureau, National Bureau of Statistics

sales in 2019 were more than double those of the US, and accounted for 21% of retail merchandise sales compared to only 11% in the US. At the same time, total US retail grocery sales are about 30% more than China’s.

Not only is China’s retail e-commerce sector the world’s largest, it is also highly concentrated with the combined gross merchandise value (GMV) of the top two platforms exceeding 75% of China’s total online retail sales.14

In 2014, the domestic retail GMV of China’s largest e-commerce company, Alibaba, surpassed the value of all US retail e-commerce, and is now about 65% greater than total US retail e-commerce.

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Alibaba retail GMV and total US e-commerce retail sales (CNY)15 E-commerce as % of total retail in the US and China16

Alibaba’s GMV surpassed the entire US retail e-commerce market in 2014 and is now about 65% larger. E-commerce accounts for 21% of China’s retail sales, but only 11% of US retail.

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Alibaba, the largest e-commerce platform in China (and the world), had a GMV of 5.7 trillion CNY during the year ending in March 2019.17 During 2018, the combined retail sales of China’s top 100 retail chains was only 2.4 trillion CNY (including all retail chain store/product categories),18 and the total sales of China’s two largest hypermarket/supermarket/convenience store chain operators was only about 100 billion CNY each.19

17Alibaba, “Alibaba Group Announces March Quarter and Full Fiscal Year 2019 Results”, 15 May 201918China Chain Store and Franchise Association，2018年中国连锁百强发布，9 May 201919China Chain Store and Franchise Association，2018年中国快速消费品（超市/便利店）连锁百强，9 May 201920Including both Walmart and Sam’s Club US revenues, Sources: Walmart FY 2020 Annual Report, US Census Bureau, PwC analysis 21Walmart FY 2020 Annual Report; Digital Commerce 360, “US ecommerce sales grow 14.9% in 2019”, 19 Feb 202022South China Morning Post, “Coronavirus a Boon for China’s Tech-savvy Supermarkets as Homebound Customers Switch to Online Grocery Orders”, 21 Feb 202023Reuters, “Walmart Rips up China Online Strategy, Starts Again with Stake in Alibaba Rival”, 20 Jun, 2016; Bloomberg, “A Guide to Walmart’s Ragtag Alliance

Against Amazon”, 7 Aug 2018

Alibaba’s e-commerce platforms’ China GMV, retail sales of China’s top 100 chains and its largest hypermarket/supermarket chain

Alibaba’s e-commerce platforms’ China GMV is more than double the combined sales of China’s largest 100 retail chains and more than 50times larger than the total sales of the largest hypermarket/supermarket chain operator.

China’s e-commerce giants dominate the retail market, and dwarf the retail grocery industry. The domestic GMV on Alibaba’s e-commerce platforms is nearly double the retail sales of China’s 100 largest retail chains combined, and more than 50 times the sales of the largest hypermarket/supermarket chain.

Such dominance gives China’s e-commerce and technology giants the capability and resources to shape not only the grocery industry but the entire food supply chain.

This stands in contrast to the US, where brick-and-mortar stores still lead the retail sector. Walmart’s US retail sales exceed Amazon’s estimated total US e-commerce platform GMV by 70%. Walmart is the largest retailer in the US and the largest seller of groceries in the US (and the world). It accounts for more than 20% of the US grocery market.20

Walmart US retail sales and Amazon US e-commerce GMV21

Walmart’s US sales exceed Amazon’s estimated total US e-commerce GMV by 70%. Walmart’s grocery sales alone are roughly equal to Amazon’s US e-commerce GMV.

China’s e-commerce and tech giants are so far ahead in terms of digital engagement, gathering and analysing consumer data and ordering/delivery functionality that it is very difficult for a grocery retailer in China to independently build a competitive digital platform. Most retail grocery chains are cooperating with companies such as Alibaba, Tencent, JD.com or Meituan to grow their e-commerce capabilities, including online ordering, delivery, and omnichannel inventory and supply chain management.

China’s tech companies are developing and/or investing in multiple grocery ordering and delivery channels to increase overall online retail grocery sales.

In 2017, Alibaba acquired 36% of Sun Art (one of China’s largest hypermarket/supermarket chain operators) and has been helping to enhance their online sales, delivery and omnichannel inventory management systems. Online sales were reported to be 15% of Sun Art’s retail sales in 2019.22 Walmart (China’s third largest hypermarket/supermarket operator) became a major shareholder in JD.com after JD.com acquired Walmart’s China e-commerce platform, Yihaodian.23 Tencent acquired a

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5% stake in Yonghui, (China’s fourth largest hypermarket/supermarket chain operator) and has co-invested with Yonghui in the Super Species O2O supermarket chain.24 At the same time, leading brick-and-mortar retailers also sell groceries via their flagship stores on e-commerce marketplaces such as T-mall and JD.com.

Meituan and Ele.me provide online ordering and delivery from supermarkets and grocery stores on their restaurant food delivery apps, while JD Daojia and Alibaba’s Taoxianda equip hypermarkets/supermarkets with online ordering and delivery capabilities.

Recently-founded O2O supermarkets such as Hema (Alibaba), 7Fresh (JD.com), Super Species (Yonghui/Tencent) and Ella (Meituan) operate brick-and-mortar supermarkets that are designed to earn most of their revenue by fulfilling online orders for nearby home delivery. Walmart has begun building O2O supermarkets, and has co-invested with JD.com on the associated online ordering and delivery services.25 MissFresh, backed by Tencent, fulfils online grocery orders from front-end warehouses located near customers’ neighbourhoods.

Online grocery payments are mainly conducted via Tencent’s WeChat or Alibaba’s Alipay.

Grocery retailers that fail to develop online sales in China are finding that they can’t compete. Metro and Carrefour have sold their China operations to local retailers that are focused on building their online channels.

Metro agreed to sell an 80% share of its China operations, including about 97 stores, to Wumart in 2019 for about 1.9 billionEUR. Although Metro China had a respectable EBITDA margin of 5%, only 1% of its sales were online, compared to about 15% of Wumart’s sales.26 Wumart has been working closely with Dmall, an affiliated O2O platform, to digitise its in-store operations and build up online channels.27

After its Mainland China revenue fell by 10% in 2018,28 Carrefour sold an 80% share of its China business, with over 210 hypermarkets, to Suning for 4.8 billion CNY (673 million USD) in 2019.29 Built on the back of its home appliance and electronics retail business, Suning.com is China’s largest brick-and-mortar retail chain operator and has built one of China’s largest O2O platforms, with an omnichannel GMV of about 380 billion CNY.30 It has already begun upgrading Carrefour’s online ordering and delivery capabilities.31 Suning.com is 20% owned by Alibaba.

24永辉超市股份有限公司2019年半年度报告, Yicai Global, “Tencent Gets Go-Ahead for Stake in Fresh Food Chain in New Retail Push”, 5 Jul 2019 25CNBC, “As Walmart Takes on China’s Booming Delivery Market, It’s Going for a Smaller Store”, 21 Dec 2018; CNBC, “All Those Single’s Day Packages Show the

Real Battleground for China’s Online Shopping Giants”, 12 Nov 201926China Daily, “Wumart, Dmall, Metro Tie Up to Benefit All”, 26 Nov 201927经济观察网，多点Dmall进化论, 10 Apr 202028Carrefour Consolidated Financial Statements as of December 31 201829PRNewswire, “Suning Completes Acquisition of Carrefour China, Accelerating Full-Scenariou Retail Layout”, 27 Sep, 2019; Xinhuanet, Suning Completes Purchase

of 80 pct Stake in Carrefour China”, 27 Sep 201930Suning Holdings, “Suning Releases 2019 Fiscal Year Financial Preview: Full Integration of All Scenarios GMV of RMB 379.7 Billion”, 16 Mar 202031PRNewswire, “The Suning Era for Carrefour China, Achieved Significant Profit Increase in January”, 25 Feb 2020

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Fragmented retail grocery industry

China’s retail grocery industry is highly fragmented, and was estimated to have annual sales of around 5.6 trillion CNY in 2019.32 Modern channels, (i.e. hypermarkets, supermarkets, convenience stores) and e-commerce accounted for about two-thirds of the market. Traditional grocery retailers accounted for about one-third. E-commerce was estimated at about 8-10% of grocery sales.33

China’s largest hypermarket/supermarket chain operator accounts for only about 2% of the retail grocery market, and the top 100 chain operators combined only account for about 20% of China’s grocery sales.34 In contrast, the top five US hypermarket/supermarket chain operators account for nearly 50% of the 7.4 trillion CNY (1.1 trillion USD) US grocery market.35

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China’s retail grocery sector is highly fragmented. The largest chain store operator only has 2% market share, and the top 100 chain operators combined only have 20% market share. In contrast, the largest chain operator in the US has over 20% of the grocery market, and the top five combine for nearly 50% market share.

32In this report, the China retail grocery market includes all retail sales from hypermarkets (including warehouse club stores), supermarkets (including discounters),

convenience stores, traditional grocery retailers (including specialty food/beverage stores, independent grocery stores and other grocery retailers) and e-commerce

grocery sales, and excludes agricultural product markets, gas stations, and restaurant/catering businesses; Sources: Euromonitor International; PwC analysis 33Euromonitor International; PwC analysis 34China Chain Store and Franchise Association, 2018年中国快速消费品（超市/便利店）连锁百强，9 May 2019; Euromonitor International; PwC analysis35Annual reports; US Census Bureau; PwC analysis36Reuters, “Jet.com falls by wayside as Walmart focuses on its Website, Online Grocery”, 13 Jun 2019; Wall Street Journal, “Ahold Agrees to Buy Remaining Shares

of Online Grocer Peapod for 35 Million”, 17 Jul 200137Grocery Business, “Kroger Kicks Off Major Instacart Expansion”, 3 Aug 2018; Grocery Business , “Kroger, Ocado Strike Exclusive Deal for US Online Grocery”, 17

May 201838Supermarket News, “Amazon Finishes Strong Fiscal Year with Lackluster Physical Store Sales”, 31 Jan 2020; Supermarket News, “Digital Top 10 Rankings”, 10

Jun 2019

China’s retail grocery chains largely depend on e-commerce and technology giants to provide e-commerce platforms, mobile payments, data analysis, social media platforms, delivery services and omnichannel inventory and supply chain management.

The largest US hypermarket/supermarket chain operators, in contrast, already have their own modern and efficient national supply chains. They have the scale and resources to build or acquire their own e-commerce platforms. For example, Walmart acquired Jet.com in 2016, and is now one of the top three e-commerce retailers in the US. Ahold (now Ahold Delhaize) acquired Peapod, one of the largest US online grocery ordering and delivery services, in 2001.36

The size of US chains also gives them leverage when working with third-party online ordering and delivery services. Kroger, for example, partners with Instacart for online ordering and delivery that is fulfilled in its supermarkets. Kroger has also agreed to acquire a 5% stake in Ocado, a British online grocery retailer that is helping Kroger to build automated warehouses that can fulfil online orders more efficiently than its supermarkets.37

Online grocery payments in the US are much more likely to be done via credit cards, rather than online payment platforms such as Apple Pay or Paypal.

Amazon acquired Whole Foods, one of the top ten grocery chains in the US, and has been building its own chain of O2O stores. But in spite of Amazon’s platform holding close to 40% market share of all US retail e-commerce, Amazon’s online and physical stores together account for less than 3% of the grocery market, ranking seventh in US retail grocery market share.38

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Grocery shopping habits in China can generally be described as high-frequency, small-order, while US grocery shopping habits are low-frequency, large-order.

High-frequency, small-order size grocery habits have three advantages for retailers. First, there are frequent opportunities forhigh-conversion rate customers to make impulse purchases. Second, high-frequency shopping provides more opportunities for digital interaction with consumers and data collection to help improve the targeting of marketing, product selection and service. Third, small order sizes allow for affordable, convenient delivery because, as with restaurant meals, delivery can be done with electric motorcycles instead of cars or trucks.

Urban professionals in China’s first- and second-tier cities have rapidly adopted mobile e-commerce, including for purchasing their groceries and restaurant meals. They appreciate the variety and the convenience of online ordering and 30-minute delivery. They often don’t have time to shop in person. According to Kantar, China’s urban consumers already purchased 15% of their fast moving consumer goods (FMCG) online in 2019.39

At the same time, a large segment of the population, including many retirees, still prefers daily visits to a traditional agricultural product market to purchase fresh ingredients for their meals. They appreciate the low prices, interaction with vendors and being able to personally inspect their fruits, vegetables, meat and fish for freshness and quality. According to the China Cold-chain Logistics Development Report (2017), traditional agricultural product markets accounted for 73% of China’s 2016 retail fresh food market. In contrast, 90% of fresh groceries in the US were sold in supermarkets and hypermarkets.40

Transportation modes also affect shopping habits. Passenger car ownership in China has only recently grown, rising from 3 cars per 100 people in 2009 to 15 per 100 people in 2019,41 thus shopping habits are generally based on walking, public transit or two-wheeled transportation. With low car ownership, feeding a household requires relatively high-frequency shopping while purchasing quantities that are small enough to carry home without a car.

In contrast, US car ownership is nearly 70 per 100 people, with more than 90% of households owning cars. 76% of US workers drive alone to work (and another 9% drive with others),42 often past supermarkets with huge, free parking lots. Most shoppers drive their cars to supermarkets and hypermarkets once or twice per week. It is normal to purchase a week’s worth of fresh food in a single shopping trip. And large refrigerators have long been the norm for American households.

In July 2018, Hema’s average in-store order size was 113 CNY and its average online order size was 75 CNY.43 JingdongDaojia, an online ordering and delivery platform for supermarkets, reported an average order size of 149.5 CNY during the first three months of 2020, 58% higher than the first quarter of 2019.44 In 2019, Walmart’s average order size for US in-store shoppers was about 50 USD (350 CNY) with 13 items, and the average size of online “click-and-collect” orders was more than 120 USD (840 CNY) with 31 items.45 According to media reports in recent years, Peapod’s US customers typically shopped twice per month, with an average order size of more than 160 USD (1,120 CNY)46 and over 50 items.47

39Kantar Worldpanel, “E-commerce grew seven times faster that total FCMG”, 19 Dec 2019; note: this FMCG figure includes packaged food, and health and beauty

products, but excludes fresh groceries40China Cold Chain Logistics Development Report (2017); Alibaba 2018 Investor Day presentation, Hema – The Pathfinder of Alibaba’s New Retail, 17 Sep 201841Ministry of Public Security，全国私家车保有量首次突破2亿 66个城市汽车保有量超过百万辆，8 Jan 202042US Department of Transportation, Federal Highway Administration, Office of Highway Policy Information and National Household Travel Survey43Alibaba 2018 Investor Day presentation, Hema – The Pathfinder of Alibaba’s New Retail, 17-18 Sep 201844Dada Nexus Form F-1 Registration Statement, 12 May 202045Numerator, “Walmart’s Grocery Pickup is Picking Up”, 30 Apr 201946Crain’s Chicago Business, Peapod Wakes Up To Its Worst Nightmare”, 19 Jun 2017 47The Atlantic, “Why People Still Don’t Buy Groceries Online”, 5 Feb 2019

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48Washington Post, “The Delivery Drivers Risking It All to Keep China Fed”, 26 Nov 201949Grocery Dive, “Inside Peapod’s Delivery Planning, Where Every Second Counts”, 8 Oct 201850Fast Company, “Drive for Instacart and You Could Make $29.05 For an Hour’s Work – or $2.95”, 22 Feb 201951The Atlantic, “Why People Still Don’t Buy Groceries Online”, 5 Feb 201952Pitney Bowes, “Pitney Bowes Parcel Shipping Index Reports Continued Growth Bolstered by China and Emerging Markets”, 9 Oct 201953Demographia World Urban Areas 15th Edition, Apr 201954搜狐财经，卫计委：2030年常住人口城镇化率将达70%, 6 Jul 2016


Fast, affordable delivery is one of the most important factors in making e-commerce attractive to consumers and profitable for businesses. Making timely deliveries while controlling costs is difficult, but the conditions in China are more favourable than in other countries. The key factors are speed, cost and population density.

Consumers in China’s largest cities are already accustomed to 30-minute deliveries for restaurant and grocery deliveries. Packaged goods ordered on B2C e-commerce platforms usually arrive within one or two days.

Most urban grocery e-commerce in China entails 30-minute delivery for households within three kilometres of a store or a neighbourhood warehouse, and some hypermarkets/supermarkets extend same-day delivery to customers within five kilometres or even 20 kilometres.

Costs in China are favourable to home delivery of groceries. Delivery fees are generally 5-10 CNY for purchases from local restaurants or grocery stores using online ordering services such as Ele.me and Meituan. Because individual orders are generally small, deliveries can be made on electric motorcycles. Drivers can avoid traffic-related delays and easily find sidewalk parking near their delivery destinations. Such deliveries are faster and far less expensive than deliveries using cars or trucks. In China, a delivery driver in a large city can make 40 or more deliveries per day.48

In contrast, same-day or next-day grocery delivery in the US usually costs the customer 5-10 USD (35-70 CNY) in direct delivery fees. There are often additional costs such as tips for the drivers, and a minimum order size of 30 USD (210 CNY). For next-day delivery, a truck driver might deliver around 20 orders per day49 and the company provides the pre-loaded temperature-controlled truck. Two-hour grocery delivery in the US can require the shopper/driver to spend about one hour to fulfil and deliver one order.50 In addition to delivery fees and tips, customers often must pay a markup on grocery products (e.g. 10-15%) as part of the delivery cost.

Large orders usually contain perishable items, including frozen food; s deliveries cannot be left outside a customer’s door. Delivery staff usually bring the groceries into the kitchen and unpack them on the counter. Large orders can require several trips between the truck and the customer’s house, sometimes taking over 10 minutes to unload a single delivery.51

Parcel shipping is usually not used for intra-city grocery delivery, but it is often used for fresh or frozen specialty productsand for non-perishable grocery items. China’s parcel shipping costs are also quite favourable. In 2018, the average shipping cost per parcel in China was about 1.80 USD (13 CNY) compared to 9.15 USD (64 CNY) in the US.52

Alibaba, JD.com, Meituan and Suning have all made significant investments in home delivery. Depending on the company and the product, there are a variety of delivery execution models, including insourcing, outsourcing, and crowdsourcing. These companies are adept at using artificial intelligence and automation to minimise cost and delivery times.

China’s urbanisation and population density help make this delivery model feasible. Mainland China has more than 110 built-up urban areas with populations exceeding 1 million, with an average density of nearly 5,300 residents/km2. In contrast, the US has only about 40 built-up urban areas with a population over 1 million, with an average density of only 1,150 residents/km2.53 Based on these averages, an O2O supermarket or local warehouse in China would have about 150,000 consumers within a three-kilometre radius who could enjoy 30-minute delivery, compared to about 30,000 in the US.

The government expects China’s urban residents to grow from the current level of 60% to 70% of the population by 2030, so this facet of delivery conditions will continue to improve.54

Number of built-up urban areas with a population over 1 million

Number of people living in built-up urban areas with more than 1 million people

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20

40

60

80

100

China US -

100

200

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400

China US

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ions

China’s urban population density is favourable to delivery services. Mainland China has more than 110 built-up urban areas with populations exceeding 1 million, with an average density of about 5,300 residents/km2. In contrast, the US has only about 40 built-up urban areas with a population over 1 million, with an average population density of only 1,150 residents/km2.

-

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2,000

3,000

4,000

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China US

Average density of built-up urban areas with more than 1 million people (residents/km2)

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55 Forrester, “Two Truths and Seven Lies Retailers Heard in the 2010s”, 31 Dec 201956Supermarket news, “Instacart Aims to Add 250,000 More Personal Shoppers”, 24 Apr 2020; Supermarket News, “Instacart to Hire 300,000 More Personal Shoppers”, 23 Mar 202057The Atlantic, “Why People Still Don’t Buy Groceries Online”, 5 Feb 2019; Grocery Dive, Inside Peapod’s Delivery Planning, Where Every Second Counts”, 8 Oct 201858The Atlantic, “Why People Still Don’t Buy Groceries Online”, 5 Feb 2019

Will the “stay-at-home economy” be the tipping point that makes online grocery shopping mainstream in China?

In China, the conditions are favourable for online grocery retail. Because of consumers’ small order sizes, deliveries can be made using electric motorcycles. Population density is high, while delivery costs are relatively low. This enables fast, affordable delivery.

One of the biggest obstacles to growth for grocery e-commerce is convincing consumers to change their in-person shopping habits. The “stay-at-home economy” has forced millions of consumers to try online grocery shopping and to learn about the various online services and channels. Many of these have certainly found that their grocery shopping needs can be better met online and will continue using O2O or B2C e-commerce.

China’s online grocery sales will sustain a large increase in market share even after everyday life returns to normal.

Will COVID-19 increase online grocery sales in the US?

Online purchases accounted for only about 4% of 2019 retail grocery sales in the US,55 roughly half the level of China’s online grocery purchases. But as Americans have practiced social distancing in order to slow the spread of COVID-19, online grocery ordering has rapidly increased. Instacart, a company that delivers online grocery orders from over 25,000 stores in more than 5,500 US cities, reported that order volume has grown more than 500% year-on-year and that their average basket size has grown by 35%. The company is increasing its full-service and in-store shoppers to 500,000 from about 142,000 prior to the COVID-19 crisis.56 Like some other delivery services, they have begun offering more contactless delivery options.

In US mid- and large-size cities, consumers can usually get next-day grocery delivery for a 5-10 USD (35-70 CNY) fee or annual membership fees between of 98-150 USD (686-1050 CNY). There is often a minimum order size of 30 USD (210 CNY). For next-day service, a driver might deliver around 20 orders per day, using a specialised pre-loaded temperature-controlled truck.57

Two-hour delivery is available in large cities, usually outsourced to third-party companies with crowdsourced drivers. Cost to the consumer includes a delivery price of 5-10 USD (35-70 CNY), and often a markup on grocery prices (e.g. by 10-15%). Drivers often must go into the supermarket, pick out the ordered items, queue up and purchase them alongside regular in-store customers. For this type of service, a driver might use one hour per order. Tipping the delivery drivers is not required but, as in US restaurants, is often considered customary.

Because orders are much larger than in China, US grocery deliveries are done by car or truck rather than electric motorcycles. Car and truck drivers are unable to avoid traffic jams in the same way as electric motorcycle drivers.

In the US, drivers normally carry the groceries into the customer’s home. This often requires several trips from the car to the customer’s kitchen – again, because of large order sizes - and can take more than 10 minutes.58 With so many perishable goods, including frozen food, deliveries cannot merely be left on customers’ doorsteps.

Parking can also be a problem when making deliveries in densely populated urban cores. (Note: In densely populated cities like New York, restaurant meal delivery is often done using bicycles or motorcycles, but grocery orders almost always require a car.)

Cost and unpredictable delivery times can make online grocery shopping with home delivery less attractive to consumers. To minimise these factors, leading US hypermarket/supermarket chains also offer customers the option of purchasing groceries online and then picking them up, pre-packed, at the store. This method is also known as “click-and-collect.” Amazon and Walmart are also developing services where delivery staff enter the customers’ home and place perishable items in the refrigerator – even if the customer is not home.

American consumers often find that click-and-collect is faster and cheaper than home delivery. In locations with low population density, this is sometimes the only option available for purchasing of fresh food online.

The US “stay-at-home economy” is attracting many new online grocery customers. Click-and-collect could sustain its increased market share after life returns to normal because it offers more convenience with no added costs. For grocery home delivery to sustain its recent growth, companies will need to find solutions to overcome high costs and unpredictable delivery times.

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Private label merchandise share of revenue for modern grocery retail channels64

0%

15%

30%

45%

China US France Germany UK

59Fung Business Intelligence, Spotlight on China Retail 2018, Oct 201860Alibaba Investor Day 2019, Freshippo – The Future of Retail is Now, 23-34 Sep 201961Fung Business Intelligence, “Costco Tests China’s Retail Appetite”, Sep 201962永辉超市股份有限公司 2019年半年度报告63National Frozen & Refrigerated Foods Association, 2019 State of the Industry; Nielsen, The Rise and Rise Again of Private Label, 201864Fung Business Intelligence, Spotlight on China Retail 2018, Oct 2018; National Frozen & Refrigerated Foods Association, 2019 State of the Industry; Private Label

Manufacturers Association, 2019 International Private Label Yearbook


In this context, private label brands can be considered an upstream investment because they are an alternative to manufacturer brands, and they give retailers greater control over sourcing.

Private brands account for only 5-10% of grocery sales among China’s modern hypermarket/supermarket chains.59

Freshhippo is investing in private brands, which already account for 10% of its sales.60 About 10% of products offered at Costco’s Shanghai store are private label.61

Yonghui reported having 1,022 private label SKUs in June 2019.62

Private label brands account for about 17% of grocery sales in the US and over 30% in major European countries, where leading hypermarket/supermarket chains have even more dominant market shares.63 Private label brands account for 5-10% of grocery sales in China’s

modern hypermarket/supermarket chains. They account for about 17% of grocery sales in the US and over 30% in Europe.

Popular e-commerce categories such as electronics and apparel can be traded at arm’s length, without expiration dates, refrigeration, or sanitary and hygiene requirements. But fresh foods, including fruits, vegetables, meat, fish and refrigerated dairy products are perishable, with limited shelf life and demanding temperature control requirements. Even packaged ambient food products have strict food safety and traceability requirements.

As online grocery sales increase, China’s e-commerce and tech giants are making upstream investments to ensure that fresh food supplies are of sufficient quality and quantity, and delivered on time with unbroken temperature control. This is improving consumers’ quality of life, as well as food safety, quality and traceability. Upstream segments of the food industry are increasingly being brought into modern supply chains.

Across all categories of meat, fish and horticulture, China’s food industry is highly fragmented. The only exception is e-commerce retail, where Alibaba, Meituan, JD.com, Tencent and their associated platforms, O2O grocery stores and food delivery apps dominate the market. China’s tech giants are the only companies with resources to drive industry-wide modernisation. Online grocery sales accounted for only 8-10% of the market prior to the “stay-at-home economy”, but their market share will continue to grow.

China’s leading grocery retailers have made large investments to upgrade their e-commerce capability, fresh food quality, supplier management, cold chain, food safety, and traceability. But the largest five grocery chains together account for barely 10% of the grocery market, thus the vast majority of the food industry is still not part of their modern supply chains.

As online channels account for an increasing share of grocery sales, the following areas are receiving, or are likely to receive, significant investment from China’s tech giants:



Cold chain logistics

Agriculture

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Private label brands give retailers negotiation leverage over manufacturers and suppliers. This can be used to get the lowestprice on commodified products, or to have products manufactured to unique specifications. Dealing directly with manufacturers can also help to avoid the cost of distributors.

In the US, retailers often tender competitive bids when sourcing commodified products (e.g. milk) to sell under their privatelabel brands. Milk purchased in this manner, for example, is cheaper than milk that bears a manufacturer’s brand, and hypermarket/supermarket chains often pass the savings on to customers to attract foot traffic or online shoppers.

Private label products are often priced lower than manufacturer brands. But many have also built loyal followings based on quality, curation or unique attributes. The largest hypermarket/supermarket chains in the US also have premium-priced private label organic brands.

At Kroger, Albertsons and Costco, the second, third and fourth largest grocery sellers in the US, private label products account for over 25% of grocery sales.65

China’s O2O supermarkets, with limited floor space, might consider the approach of Aldi or Trader Joe’s in the US. These supermarket chains carry less than 4,000 SKUs per store, and private label products comprise 85-90% of their merchandise.66 In contrast, a typical US supermarket stocks about 50,000 SKUs and Walmart’s US supercentres carry 100,000 SKUs.67 Aldi and Trader Joe’s stores have a smaller floor space than other supermarkets, and by stocking private label brands they reduce the SKUs for each type of product.

Private label products can also be made by retailers’ own factories, as discussed in the next section.


Leading US grocery retailers have already invested in their own upstream food processing and manufacturing factories, often referred to as “backward integration”. Kroger owns 36 food processing and manufacturing plants in the US, including 16 milk plants.68 Albertsons owns 20 food processing plants, including seven milk plants, four soft drink bottling plants, three bakery plants, two ice cream plants, two grocery/prepared food plants, one ice plant and one soup plant.69 Kroger and Albertsons produce about 40% and 10%, respectively, of their own private label products.70

In the US, milk is the grocery product with the most backward integration. By 2017, Kroger processed all of the milk sold in its nearly 2,800 supermarkets, including organic varieties.71 Walmart recently built one of the country’s largest dairy processing plants to serve about 500 of its nearly 4,800 US stores.72

Well-funded retailers might even consider investing in full vertical integration for appropriate products. Costco recently invested more than 400 million USD to vertically integrate its US rotisserie chicken supply chain. It built a new processing plant and has signed 15-year contracts with nearby farmers to raise 100 million broilers per year, (roughly 1% of total US production), while Costco provides them with chicks and feed.73 Costco also produces 285 million hot dogs each year in its own factories to sell under its private label brand.74

Walmart is vertically integrating its Angus beef supply chain in the US. It has contracted with ranchers to raise hormone-free Angus cattle, and has directly contracted with a slaughterhouse and a packing company in order to control the entire farm-to-store supply chain for beef raised without added hormones. This gives Walmart better quality control and full supply chain transparency.75

China’s e-commerce companies could invest in partnerships with hog, poultry and fish farmers, as well as meat processing companies in order to create new products. There have already been cases of upstream investments by retailers in China, e.g. Yonghui Superstores (partially owned by Tencent) acquired minority stakes in companies that conduct pig farming, pork processing, fish farming and fish processing in 2018.76

65GroceryDive, “Not Just Knock-offs, but ‘Knockouts’: Inside Kroger’s Private Label Push”, 12 Mar 2018; RetailDive, “At Costco, Everything Resonates With the

Consumer”, 21 Oct 2019; Progressive Grocer, Albertsons to Expand Own Brands, Online Grocery”, 9 Mar 202066GroceryDive, “Not Just Knock-offs, but ‘Knockouts’: Inside Kroger’s Private Label Push”, 12 Mar 2018; Supermarket News, “Private Label: Trader Joe’s”, 16 Mar

2020; CNBC, “Grocer Aldi targets nearby rivals in its bid to boost its US Footprint”, 9 Aug 2018; Washington Post, “What’s Not to Love About Trader Joe’s”, 31 Mar

201867Wall Street Journal, “Walmart’s Secret Weapon to Fight Off Amazon: The Supercenter”, 21 Dec 201968Kroger Fact Book 2018 69Albertsons 2018 Annual Report70Grocery Dive, “Not Just Knock-offs but Knockouts: Inside Kroger’s Private Label Push”, 12 Mar 2018; Albertsons 2018 Annual Report 71Wall Street Journal, “Retailers are Bottling Their Own Milk, Raising Pressure on Dairy Companies” 13 Oct 201772Dean Foods 2018 Annual Report73CNBC, “Costco is Opening a $440 Million Chicken Farm to Escape America’s Chicken Oligopoly”, 5 Dec 2018 74Seattle Times, “Costco Changes up Food Court Menu, but the $1.50 Hot Dog Deal Remains”, 5 Jul 2018 75 Walmart, “Walmart to Create Angus Beef Supply Chain”, 24 Apr 2019 [Source]

76Yicai Global, “Tencent-backed Fresh Grocer Bolsters Supply Chain with Pork, Fish Investments”, 15 Jun 2018; 生鲜头条，永辉拼了！争夺生鲜制高点，3亿元入股2

家农业公司，15 Jun 2018

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77GlobalData, Meat Market In China: Market Snapshot to 2022, April 201978GlobalData, Fish & Seafood Market In China: Market Snapshot to 2022, April 2019792017 China Agricultural Yearbook80 MARA, 2019年10月份400个监测县生猪存栏信息

2017 retail meat sales in the US and China77 2017 retail fish and seafood in the US and China78

Fresh meat accounts for 79% of China’s retail meat sales compared to only 24% in the US. 52% of retail fish and seafood sales in China are fresh products, compared to only 13% in the US.

14%

52%79%

24%

0%

25%

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China US

Fresh

Chilled packaged

Frozen

Cooked

Ambient 4%

49%

9%

13%

29%

25%52%

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China US

Fresh

Chilled packaged

Frozen

Ambient

Dried

Selling fresh meat without a modern cold chain requires that live hogs and poultry be shipped from livestock farms to slaughterhouses that are located near consumers. The shipping and trading live animals increases the risk of spreading animal and zoonotic diseases, and creates challenges for traceability, food safety controls and animal welfare.

If there is a market disruption, due to e.g. epidemics, weather, natural disaster, transportation issues, economic recession,etc., it can be very difficult to delay or re-direct shipments. Fresh meat must be sold quickly or it will spoil. A downstream disruption could leave a slaughterhouse stuck with either an inventory of spoiling meat or a backlog of live hogs. Livestock that are not shipped or slaughtered on time require feed, housing, veterinary care and waste management, all of which require infrastructure and entail extra costs.

As more pork products are sold through e-commerce platforms, demand for pork from modern “designated” slaughterhouses will increase. At the slaughterhouse stage, fewer than half of China’s hogs are processed in modern facilities. In 2016, only45% of the hogs produced in China were processed at “designated” (i.e. nationally licensed) slaughterhouses.79 China already has ample modern slaughtering capacity, but many farmers, traders and consumers still favour informal, manual slaughterhouses.

In order to improve biosecurity and control African Swine Fever, government policies are promoting point-to-point shipment of hogs in order to reduce the number of live animals traded via middlemen or live markets. The government is also promoting the change from shipping hogs to shipping meat, meaning that hogs should be slaughtered near the livestock farm and processed into ambient meat products, or chilled and frozen meat products that can be shipped to retailers and consumers via the cold chain.

China’s livestock sector is highly fragmented, but consolidating. 2020 would be an opportune time to for B2C e-commerce or O2O retail grocery companies to form new upstream partnerships and invest in livestock farming or processed pork and poultry meat production. After 2019’s African Swine Fever outbreaks led to a 40% drop in hogs and breeding sows,80 China’s leading hog farming companies have been raising funds and investing to quickly expand their hog inventory and farm capacity. And as live poultry markets are discouraged for biosecurity reasons, there will be a need for investment in modern poultry production and supply chains.

Downstream, the “stay-at-home economy” will result in long-term changes to retail buying behaviours and preferences, bringing more demand for products from modern supply chains. As consumers switch to online purchasing, they may also be willing to try new processed products to gradually replace some consumption of freshly slaughtered pork and poultry.

Fresh meat accounts for nearly 80% of China’s retail meat sales, compared to only 24% in the US. Fresh fish and seafood account for more than half of China’s aquatic products retail sales, compared to only 13% in the US. This is related to threemain factors: consumer preference for fresh products, insufficient cold chain capacity and a lack of deep processing capacity for chilled packaged meat or other processed products.

The dominance of fresh products creates significant challenges for biosecurity, food safety and quality, logistics and inventory management.

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Cold chain and distribution

During the past ten years, there has been rapid growth in China’s cold chain capacity. Total refrigerated warehouse capacity increased from 55 million cubic meters in 2012 to 131 million cubic meters in 2018.81 Refrigerated truck shipping increased from 54 billion kilometre-tonnes in 2012 to 100 billion in 2016.82 In 2009, only 4%, 13% and 21% of China’s fruits and vegetables, meat, and aquatic products were distributed via the cold chain. By 2015, those rates had increased to 22%, 34% and 41%, respectively.83

Even after this growth, however, there is still significant room for improvement. China’s cold chain distribution rates and per capita refrigerated warehouse capacity are still far lower than those of the US, Europe and Japan.84

81China Cold-Chain Logistics Development Report (2019)82China Cold-Chain Logistics Development Report (2018)83China Cold-Chain Logistics Development Report (2011 & 2016)84NDRC, Agricultural Product Cold Chain Development Plan (2010-2015)85China Cold-Chain Logistics Development Report (2011 & 2016)86China Cold-Chain Logistics Development Report (2019); 2018 GCCA Global Cold Storage Capacity Report; USDA, Capacity of Refrigerated Warehouses 2017 Summary87中国产业经济信息网，农业农村部：加快冷链物流科技创新助推现代果蔬产业发展, 10 Sep 201888NDRC, 国家发展改革委经济贸易司负责人就《关于加快发展冷链物流保障食品安全促进消费升级的意见》答记者问, 28 Apr 201789Fitch Ratings, China Express-Delivery Blue Book, March 202090CNBC, “All Those Single’s Day Packages Show the Real Battleground for China’s Online Shopping Giants”, 12 Nov 2019; Fitch Ratings, China Express-Delivery Blue Book, March 2020

% of agricultural products distributed via cold chain85 Refrigerated warehouse capacity per capita (m3)86

In 2015, only 22% of fruits and vegetables, 34% of meat, and 41% of aquatic products were distributed via the cold chain in China, compared to more than 95% in Europe, the US and Japan. China’s per-capita refrigerated warehouse capacity is half that of Western Europe and one-third that of the US.

Enhancing cold chain capacity reduces spoilage loss, expands the range of distribution, increases the number of potential customers and improves supply chain resilience.

The shelf life of fruits and vegetables can be significantly extended by refrigeration, and by modernising packaging and handling. Fruits and vegetables require strict temperature control and careful handling due to their high moisture content and susceptibility to pests and bacteria. China’s post-harvest losses for fruits and vegetables in recent years are reported to be as high as 30%.87

Fresh meat accounts for nearly 80% of China’s retail meat sales. With increased cold chain capacity, the industry could transport more chilled and frozen meat to consumers over much longer distances, and thus slaughter hogs closer to their farms.

Enhancing China’s cold chain capacity will require balanced and integrated capabilities in every stage of distribution – from the farm to the consumer. Upon the release of the Opinions on Accelerating the Development of Cold Chain Logistics to Ensure Food Safety and Promote the Upgrading of Consumption in 2017, the NDRC cited some imbalances in China’s cold chain, e.g. ample cold storage near urban consumers but not enough in rural production areas; many refrigerated warehouses but few refrigerated distribution centres; ample frozen storage capacity, but not enough chilled storage capacity.88

E-commerce giants already control much of the regular (i.e., non-temperature controlled) express delivery sector. The top eight express delivery companies account for roughly 80% market share, and most of their express shipments in China are supported by Cainiao’s digital logistics platform that connects e-commerce sellers with companies in the logistics chain to facilitate end-to-end shipments. Alibaba owns 63% of Cainiao and has taken smaller stakes in four of the eight leading express shipment companies, (Best, YTO, STO, and ZTO).89 JD Logistics and Suning.com (20% owned by Alibaba) are also expanding their majority-owned express delivery companies.90

0%

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Fruits &vegetables

Meat Aquatic products

China US, EU, Japan

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0.1

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China Western Europe US

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A holistic approach to cold chain improvement is more difficult because China’s cold chain logistics industry is still highlyfragmented. According to the China Cold Chain Logistics Development Report, China’s top 100 cold chain logistics companies combined for only 10% market share in 2017.91

Refrigerated facilities and vehicles are much more capital intensive that those for non-temperature-controlled logistics. Only China’s tech giants have the funds, technology platforms and national reach to invest in new cold chain infrastructure on a scale that would bring China’s cold chain capacity up to the levels of Europe or the US.

JD and Alibaba are already among China’s leading cold chain logistics companies, according to Fitch, and Suning Logistics aims to build one of China’s largest cold chain networks during the coming years.92 These companies have already built cold chain infrastructure for high-value food products that are sold via their B2C e-commerce platforms and O2O fresh grocery channels.

In addition to funding, China’s tech giants bring big data and artificial intelligence capabilities to the management of coldchain logistics and storage operations. Data analytics and machine learning can optimise the scheduling of distribution, arrangement of cold storage inventory and the use of refrigeration equipment to save both energy and time. Big data also enables more automation, with the potential to reduce labour costs and minimise the temperature damage and energy losses caused by human error.

91China Cold Chain Logistics Development Report (2019)92Fitch Ratings, China Express-Delivery Blue Book, March 2020

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China’s tech giants can make a large and positive impact with technology-enabled channels for small farmers to bring their products into modern e-commerce and hypermarket/supermarket channels. Big data and mobile connectivity can be applied to transactions, logistics, traceability, food safety and quality management, as well as to integrated planning of planting, harvest and slaughter to ensure coordination of supply and demand.

Small farms often lack the scale, resources and expertise to acquire the latest technology and implement best practices. Technology companies are in a unique position to harness high-resolution mapping, satellite imagery, and weather data to provide small-scale farmers with precision farming advice on planting, irrigation, pesticides and fertiliser usage. Several multinational companies already provide this type of analysis for large-scale monoculture farms in the US, but China’s tech sector could deliver further innovation by tailoring this advice for small farmers. Big data and AI could incorporate this data to conduct online credit analysis and deliver rural micro-financing. China already has examples of using AI and automation on modern hog and dairy farms.

Modern hypermarket/supermarket chains and e-commerce giants have already built sourcing and supply chain management systems for small farms. As their volumes increase, they can bring tens of thousands more farmers into modern 21st century supply chains.

Agriculture

As e-commerce platforms and their modern brick-and-mortar partners expand their retail grocery market share, they will need to procure ever-increasing amounts of fresh food. Agriculture is perhaps the most fragmented and least modernised stage of China’s food supply chain.

Cold chain and supplier management that includes procurement from tens of thousands of farmers is one of the most difficult challenges faced by large-scale hypermarket/supermarket chains and e-commerce platforms.

To ensure safety and quality, retailers need to know the farmers that are growing their fruits, vegetables, meat and fish. China’s leading hypermarket/supermarket chains and top O2O chains already directly source their vegetables from farmers, using centralised procurement and distribution to bypass wholesale markets.93 But this will require much more investment if these leading companies double or triple their market share in coming years.

The following charts illustrate the extremely fragmented nature of China’s horticulture and livestock sectors compared to Europe and the US.

Number of farms with arable land94

China EU-28 US

230 million

1.6 million11 million 0.6

16

102

China EU-28 US

Average arable land per farm (hectares)95

Number of farms that raise hogs for slaughter96

China EU-28 US

2.2 million 66 thousand

42.6 million

China EU-28 US

2.2 million33 thousand

20.5 million

Number of farms that raise broilers97

China’s agricultural sector is extremely fragmented, with more than 200 million farms growing crops and raising livestock.

93Alibaba Investor Day 2019, Freshippo – The Future of Retail is Now, 23-34 Sep 2019; IGD, “Sun Art Launches Private Labels to Drive Growth”, 8 Aug 2016942017 China Agriculture Yearbook; Eurostat; 2012 USDA Census of Agriculture952017China Agriculture Yearbook; 2017 China Land, Mineral and Maritime Resources Statistics Bulletin; Eurostat, 2012 USDA Census of Agriculture962017 USDA Census of Agriculture; Eurostat; 2017 China Animal Husbandry and Veterinary Yearbook972012 USDA Census of Agriculture; Eurostat; 2017 China Animal Husbandry and Veterinary Yearbook

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Cater to local consumers’ preferences:With massive amounts of data available from individual purchases, inventories can be tailored to local preferences for individual neighbourhoods, while city and regional distribution can be optimised.

Bring benefits to farmers as well as shareholders: Supply chains should be optimised for more than profitability. Small farmers are not only the source of nearly all of China’s food, but they are the foundation and economic drivers of rural communities, which still account for 40% of China’s population. They need to share in the economic benefits of China’s modernising food industry for social harmony and to ensure China’s continued self-sufficiency.

Continue building out cold chain capacity: New cold chain infrastructure should take full advantage of big data and AI to optimise energy use, storage and transportation utilisation rates, interconnectivity between hubs, demand forecasting and production planning. Automation will reduce labour cost and minimise breaks in temperature control caused by human error.

Perform periodic make-or-buy analysis:The costs and benefits of backward integration will vary with scale, consumer preferences, commodity markets, manufacturing and packaging technology, cold chain capacity, upstream industry concentration, capital market conditions and the regulatory environment. Retailers should periodically review make-or-buy decisions for each of their major product categories.

Invest in agriculture: Small fruit and vegetable farms need resources and technology to adopt best practices and to gain access to modern retail supply chains. Investment in livestock farming would help the national hog inventory to recover from African Swine Fever. E-commerce grocery retailers can invest (or co-invest) to modernise, enhance visibility and gain control of the entire supply chain.

Work closely with government departments to support policy goals:Modernising the food supply chain will help with mutually beneficial goals such as the change “from shipping hogs to shipping meat”, integration of production, processing and trading of agricultural products, acceleration of cold chain logistics development, improvement of food safety traceability, reduction of food losses, etc.

Ensure healthy competition at each stage of the food chain：With such a concentration of funding, technology and data in the e-commerce and technology sector, investment and consolidation strategies must be careful to maintain healthy, sustainable competition at each stage of the food chain.

Keys to success

This report was written by Brian Marterer of PwC China.

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2020 PricewaterhouseCoopers. All rights reserved. In this document, PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. PMS-001381

Samie WanPwC Mainland China and Hong Kong Food Supply & Integrity Services Leader+852 2289 [email protected]

Wenjing CaoPwC China Food Supply & Integrity Services Partner+86 (10) 6533 [email protected]

Contact us

Brian MartererPwC China Food Supply & Integrity Services Senior Manager+86 (10) 6533 [email protected]

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English The stay-at-home economy and the growth of online ... · US 2019 total e-commerce retail sales and total grocery retail sales13 China’s total e-commerce sector is much larger