Chinese consumers usually buy fresh food from physical farmers’ markets, grocery stores, or supermarkets. With the development of cold supply-chain logistics and changes in customer behavior, fresh food e-commerce companies started to replace physical in-store shopping as the prefered mode of some Chinese consumers. 198 fresh food e-commerce companies were established in 2014 and drew the attention of investors to the sector. After a short peak, the sector cooled down and left only a few top players in 2016.
A spike in fresh food e-commerce activity occurred during the coronavirus outbreak in China. To effectively contain the spread of the coronavirus and minimize the opportunities for cross-transmission, Chinese authorities halted operations of some businesses and services and suggested people stay inside. The brick and mortar farmers’ markets, grocery stores and supermarkets are thus unsuitable for containing the virus, as they are packed with people coming in close contact with one another. As a result, ordering fresh food online and then making home-cooked meals has grown in popularity during the coronavirus outbreak. Xiachufang, a recipe-sharing app, increased its daily active users by 27.3% from January 24 to February 2 according to Analysys Qianfan.
Baidu index also shows an increase in search queries of Xiachufang since January 27
How fresh food e-commerce companies adapted to the coronavirus outbreak depends on which industry model the company subscribes to. Here are how three of the top models responded to the outbreak.
1. Warehouse model
The warehouse model is represented by Dingdong Maicai and MissFresh, companies similar to FreshDirect, a US-based food e-commerce company. The companies own warehouses to store the fresh food, and operate logistical operations to distribute it. The food quality is managed by the operators and usually proves consistent.
Dingdong Maicai, backed by Sequoia Capital, mostly serves Southern Chinese cities. According to Dingdong, order amounts tripled on Chinese New Year’s eve this year, in the midst of the outbreak, compared to the year prior. One Dingdong customer reportedly buys fresh food 3 to 4 times a week today compared to her previous once-a-week frequency. The increase in orders forced Dingdong to temporarily waive its timely delivery commitment, and the lockdown of some labor-export cities made staff shortages a problem for most businesses. Dingdong announced plans to temporarily halt services in Ningbo, a smaller city near Hangzhou and Shanghai, to fully concentrate its resources and capacities on Shanghai, Hangzhou and Shenzhen. MissFresh’s sales also increased by 4 times during the first 5 days of the Chinese New Year versus last year. Normally, the company takes at least 3 days to run out of all its stock, but during the first week of this Chinese New Year holiday the entire vegetable stock would be gone by around 4pm everyday.
The warehouse model in China works slightly differently from the US-based FreshDirect. FreshDirect owns a massive food hive in New York City’s South Bronx, whereas its Chinese counterparts have a network of smaller warehouses located in closer proximity to the communities they serve. This enables faster delivery times compared to that offered by FreshDirect, which is typically next-day. Operators like DingDong and FreshDirect source the food from vendors at a large volume, making their fresh food often the most affordable among all three models presented in this article.
2. Platform-based vendor utilization model
The second is the platform-based vendor utilization model represented by JD Dao Jia and Meituan Maicai. Vendors list products on JD Dao Jia’s platform, including fresh food and daily groceries. Due to the increase in demand for fresh food during the Coronavirus outbreak, Walmart’s sales on JD Dao Jia are 6 to 7 times higher this year compared to those prior. The platform essentially offers a one-stop online shopping solution, sourced from customers’ preferred local stores such as Walmat or Carrefour. It is similar to Instacart, where busy customers can shop from the comfort of their home from local Whole Foods, Costco, or Kroger stores. The platform owners utilize their existing logistic networks and capacities rather than operating independent warehouses, thus allowing the service to be more flexible. The food quality depends on which vendor customers order from, with the platform only able to control the delivery logistics.
As the platform owners tend to operate a very mature delivery network, the advantage of this model is that customers can get almost everything they need, including fresh food, groceries, or even drugs, from one site. The waiting time from JD Dao Jia is guaranteed to be within 2 hours under normal circumstances. However, the platforms are not liable for any of the products sold through them.
Similarly, Instacart customers can also get themselves fresh food, daily groceries, alcoholic beverages, and prescription drugs through Instacard Rx. However, a scheduled delivery, something that Chinese customers now take for granted, requires a paid Instacart Express membership.
3. Store + Community model
The third model is a combination that I would call a “store + community” model, represented by Hema. The operators have physical stores but also serve a large customer base online. Online sales are 60% of Hema’s total sales, with the food available online sourced from the same stock as that available in physical Hema stores. Food is delivered from nearby physical stores to the community by delivery persons assigned to each of the stores. On normal days, Hema is able to deliver food to customers in a 3km radius within 30 minutes. Over the past month, Hema has operated nonstop in China, including in Wuhan, the center of the epidemic. The dramatic increase in online orders caused staff shortages for sorting and delivery. To address the shortage, Hema hired temporary staff from local restaurants whose dine-in service is suspended during the outbreak.
This is an ambitious business model to capture both online and offline traffic, requiring a reliable logistic network and supply chain. The need to operate physical stores in addition to delivery and logistical services makes this the heaviest and least adaptable of all three models. It assures a better customer experience but at a higher cost, with the prices of Hema products tending to be among the highest.
After Amazon acquired Whole Foods in 2017, the company adopted a model that has been the closest to Hema’s. It relies on operating its own delivery network to ensure fresh food delivery. Just like JD, Amazon is working to expand its network, realizing that a stronger network opens up opportunities for customers not served by the current ecosystem. In 2019, Amazon started to offer select customers the opportunity to use Amazon Shipping as an alternative for FedEx or UPS.
The spread of the Coronavirus is slowing down in most cities in China this week. I have seen more customers visit physical stores to purchase food. From my own experience, the waiting time on Dingdong was half a day in Shanghai during the Chinese New Year holiday, but only about 1 hour this week. This poses challenges to all fresh food e-commerce players to retain their newly acquired customer base after the crisis subsides. According to MissFresh’s CFO Wang Jun, the panicked customers not only bought fresh food, but also cooking oil and grains. Wang believes this stocking might not be a type of purchasing behavior that can be sustained.
However, the coronavirus epidemic posed an unexpected opportunity for new customer acquisition and education. The epidemic has provided important lessons to the fresh food e-commerce industry on how to build a system that is more reliable and responsive to market changes. Figuring out how to consolidate their market gains during the crisis, by transforming the short-term increase in demand into long-term customer habits, will be the focus for all the fresh food e-commerce players going forward.