The Rise of Online Grocery in China
By: Sol Ahn, CFA, Portfolio Manager
Online grocery has been a rising star within the e-commerce industry in the past year. It is one of the most underpenetrated categories with significant market potential, thus many online players have joined the game to gain market share with various business models and strategies. It is still too early to say who the winner will be in this segment, as e-grocery development is still in a nascent stage with uncertainties around the regulatory environment. We believe that e-grocery is more fragmented compared to other goods and categories as there are more players with various business models in this segment. It will be an interesting and important area to watch out for in the coming years.
Online Grocery in China
The Grocery segment in China is an 11 trillion RMB (Chinese Yuan) market comprised mainly of fresh food, with 45% of the market and Fast Moving Consumer Goods (FMCG) with 54% of the market. According to Goldman Sachs, in 2019, less than 10% and 20% of total grocery spending in China was spent online for fresh and FMCG, respectively. Overall, online grocery penetration was estimated to be 15% compared to 23% for overall online retail and over 50% for categories like apparel and home appliances in 2019. As grocery is one of the key categories accounting for more than a third of the total consumption in China, it is natural for all e-commerce players to be keen to gain shares in this segment.
Why is e-grocery so underpenetrated in China?
E-grocery in China is a very fragmented industry. Sun Art, the largest hypermarket in China only accounts for single-digit shares. This is because food is a very regional product with local delicacies and tastes, and thus, supply chains have been developed on a regional basis. Also, logistics and infrastructure have not been developed, with cold chain penetration at only 30% in China compared to over 95% in the US. Lastly, grocery is a low-margin business by nature. Fresh food is a traffic driver but a very low-margin business, whether it’s online or offline. Thus, unit economics are not good, even when online, for this segment, while supply chain cost is high. Having said that, more consumers who used to prefer buying fresh from offline were forced to try online grocery due to the COVID-19 panemic and their shopping habits have changed dramatically.
What has the pandemic changed in e-grocery industry?
From a demand perspective, COVID-19 lockdown measures intitally forced many consumers to try online grocery. We expect this has changed consumer habits in the long run as many have found the convenience of ordering online once they tried. Many companies have developed various strategies and business models to capture this opportunity from the supply perspective. This means more investment has been made than ever before in this segment. It is likely to remain this way, which should lead to more investment into infrastructure and to improvement in overall efficiencies of the supply chain. These investments will enhance the unit economics of online groceries; however, we believe this alone may not be enough. Companies need to cross-sell other goods and categories on top of fresh food to be meaningfully profitable.
E-grocery players in China
E-grocery players are classified into three groups:
- Platform owners like Alibaba, JD, and Pinduoduo (PDD)
- Offline retailers such as Hema, Sun Art, and Yonghui.
- Emerging players like Meituan, Didi, Xing Sheng You Xuan, and Shi Hui Tuan for community group buying and smaller players like Miss Fresh and Ding Dong Mai Cai for Font Distribution Center (FDC) or Micro warehouse to home model.
Platform owners play the key role in e-grocery, with Alibaba, JD, and PDD taking 75% of online grocery shares by Gross Merchandise Value (GMV) in 2020. In terms of business model, typical 1P (first-party) and 3P (third-party) e-commerce models contributed over 80% of total online groceries sales in 2020. We think this will remain a large part of online grocery, considering their already established ability to cross-sell other categories on top of fresh food. However, their shares will also depend on how fast the community group purchase segment, which has been a dark horse in e-grocery, grows.
Community Group Purchase Model
Community group purchase has been the fastest growing and the most competitive segment with Meituan and Didi joining the game on top of existing players like Alibaba, PDD, and private incumbents like Xingshengyouxuan and Shihuituan. According to Goldman Sachs, community group purchases may take 19% of e-grocery shares by 2025E compared to 6% in 2020E (E=expected). Community group purchase is a unique business model developed in China where consumers order groceries through their local group leaders via Wechat the night before and self-pickup the next day at designated stores. Meituan, PDD, and Didi have been particularly aggressive in the past several months, providing subsidies to gain market shares within this segment. Meituan and PDD have moved the fastest in terms of geographical expansion and both are very committed to this market segment. Meituan management shared in its Third Quarter Financial Year 2020 earnings call that Meituan Select is its top priority. The company can leverage its know-how from its food delivery business as there are similarities between the two businesses in dealing with offline partners and routing of complex on the ground fulfillment/delivery. PDD also has an advantage as the company has already built a supply chain specialized in sourcing agricultural products for many years for its e-commerce platform business which they can leverage into the community group purchase business as well. Meituan and PDD seem to be the most formidable players in the community group purchase segment so far. It will be interesting to see how much share these players or community group purchase can gain in the online grocery segment in the next 2-3 years. They will also have to prove this can be a profitable and sustainable business model.
We believe online grocery will be one of the fastest-growing segments in the next few years within the e-commerce industry. There is still uncertainty around the regulatory environment, with increasing anti-trust regulation as well as regulation on community group purchase that may affect competitive dynamics in the industry. Yet, we believe this segment will continue to grow with various business models and companies in a healthier competitive environment.
 Goldman Sachs, November 2020
 Bernstein, July 2020
: Goldman Sachs, November 2020
Gross Merchandise Value (GMV) is the total value of merchandise sold over a given period of time through a customer-to-customer exchange site.
Margin is the difference between a product or service's selling price and the cost of production, or the ratio of profit to revenue.
Stock Keeping Unit (SKU) is a product code that you can use to search and identify stock on hand from lists, invoices, or order forms
Unit Economics describes a specific business model's revenues and costs in relation to an individual unit.
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