Buying groceries in large Chinese cities can be a nightmare for busy professionals. After a long day at work, shoppers often don’t want to deal with overcrowded supermarkets, impossibly long lines at the payment counter, and the trek home with heavy grocery bags.

E-commerce players in China, always quick to smell a business opportunity, are trying to take the sting out of grocery shopping for these busy urbanites. They are devising solutions to give shoppers the convenience of ordering groceries online to be delivered to their doorsteps within days and sometimes hours.

Entering the fray

Yihaodian, China’s first online supermarket, launched 1,000 augmented reality stores across the country in October 2012. These “stores” are open public spaces where shoppers can use their smartphones to view a virtual supermarket with 1,200 meters of floor space and 1,000 items in stock. They can fill virtual shopping baskets by scanning the item codes before checkout. The company then delivers their purchases directly to their homes in a day or two. Yihaodian’s virtual supermarkets have attracted attention in China and abroad. The company won a Silver Lion for the best use of mobile devices at the 2013 Cannes Media Lions awards.

The company’s chairman, Yu Gang, says that the virtual supermarkets are less about actual sales and more about helping Yihaodian build its brand. When he and his partner Liu Junling founded Yihaodian in 2008, the company was China’s first online supermarket. (Wal-Mart Stores, Inc. purchased a controlling stake of Yihaodian in August 2012.) But today the field is getting increasingly crowded—with everyone from e-commerce companies to players in the logistics industry jumping into the fray—and it is becoming important to build a strong brand to rise above the noise. Yu estimates that online purchases of food and drink stand at just 1-2 percent of purchases at physical supermarkets. He believes the figure will eventually grow to 20-30 percent.

Others are taking note, too. Online retailer Jingdong Mall (until recently called 360Buy), which specializes in computers, communications and consumer electronics (3C) products, recently added fast-moving consumer goods—products like groceries or toiletries that are sold quickly and at a relatively low cost—to its array of products. In April, the company launched a new online supermarket service.

Not to be left behind, Alibaba Group’s Taobao, China’s leading consumer-to-consumer (C2C) site, launched 24 Taobao as an experimental C2C supermarket platform. When Alibaba Vice President Tao Ran, launched 24 Taobao in January 2013, he said it was because the company had identified a need among local grocery suppliers to have a platform to sell their products nationwide and help them reach more customers. Still in early stages, the company has limited its operations to Beijing and Hangzhou, where Alibaba’s headquarters are based. But the company has plans to expand to more than 10 cities in the coming months.

Oceanne Zhang, leader of market insights at Kantar Retail, says selling groceries online is increasingly becoming a key differentiator for China’s online retailers, who are struggling to attract new shoppers and gain market share in an increasingly overcrowded sector. “(Online retailers) want to sell everything online, but they are still not attractive to people because they have lots of competitors. Since people do grocery shopping on a more frequent basis, this can help the e-commerce companies drive more traffic and build customer loyalty,” she says.

Competing in a new arena

“Selling fast-moving products, like supermarkets do, is the biggest thing for Jingdong,” says Shi Tao, Jingdong’s vice president for retail. Since its launch in 1998, Jingdong Mall has been continuously expanding the categories on offer, and grocery was the only one left, says Shi. This category-expansion strategy has worked for Jingdong so far. The company is the second-largest business-to-consumer (B2C) company in China, with a 16 percent share of the market in 2012, according to China Internet Watch.

Reactions to Jingdong’s expansion have been mixed. Will Tao, analysis director at iResearch, an internet industry research firm, says Jingdong is trying to differentiate itself from competitors. At the same time, “they can attract new buyers through new categories because people can (now) buy everything from the same place,” he says. Zhang of Kantar is less optimistic and believes that Jingdong seems to be losing focus by “opening to all categories.”

Jingdong has one advantage, though. The company owns a logistics system, which gives it an edge over other online grocery shopping platforms that rely on third-party logistics providers. Jingdong had to invest in improving its facilities to store and distribute perishable products. Shi is confident about this new venture and says the brand can rely on its strong distribution network and its wide reach in big cities. “The customer (base) is huge there, and it allows us to test the market and see which aspects we should improve,” he says.

A practical move?

But will expanding into groceries really help Chinese online retailers achieve market supremacy?

iResearch’s Tao doubts there is a large consumer base in China for online grocery shopping, but he says that it might be a sustainable strategy “as long as these companies limit their operations to major cities” where they have well-established supply chains in place.

When people go grocery shopping, they typically like to browse and sift through products before picking what they want. Given this consumer trait, companies need to give shoppers a compelling reason to shop for groceries online. A recent report by Kantar Retail compares the pricing strategies of China’s online and offline supermarkets. The study concludes that consumers who shop for groceries online save just 4 percent compared to shopping at brick-and-mortar stores. Yihaodian is the only online grocery retailer that stands out, according to the report, because of its low prices on imported food.

As Zhang from Kantar Retail explains, Yihaodian has the highest level of customer loyalty among online grocery retailers because it started with groceries before expanding into new categories like apparel and cosmetics. “Shoppers who decide to buy groceries online usually have higher loyalty,” she says. The company has also developed its own logistics system and infrastructure to optimize product distribution and to ensure its 20 million registered users have good shopping experiences.

“Our business model might be easy to copy, but the supply chain management is very difficult to copy,” Yihaodian’s Yu Gang says. “It’s been specially designed to ensure low operation costs that really pass the benefits to customers and ensures (the) success of e-commerce companies.”

Other online retailers selling groceries face a greater challenge. Jingdong, for example, enjoys a good reputation among its customers for its 3C products. But it will be difficult for the company to transfer this trust to its new grocery operations.

The last frontier

According to Xu Yong, senior consultant at China Express Consulting, the real competition between China’s online grocery retailers will start in the next few years with the delivery of frozen food. Currently, China’s logistics infrastructure cannot ensure a seamless cold chain. Players who manage to advance in this field will enjoy a unique advantage. “Online supermarkets like Yihaodian will need to build refrigerator warehouses, equip delivery branches with freezers, and own a fleet of refrigerator trucks,” Xu says.

This is an opportunity SF Express, a Shenzhen-based logistics provider that launched online grocer SF Best, doesn’t want to miss. Launched in 2012 in Beijing, SF Best quickly expanded to other major cities, including Shanghai and Shenzhen. Its mission is to offer healthy and high quality imported produce with the best shopping experience. It also guarantees an “unbroken” cold-chain. iResearch’s Tao says the company is confident that people will trust their service because of SF Express’ reputation in shipping goods. “They have the advantage and they have the shipment infrastructure. So why not use the extra room and make money from that? They can get extra stock on a plane, so everything (they get) will be a profit,” he adds.

Companies are still experimenting with new ways of attracting customers, reducing costs, and earning a profit, according to a recent McKinsey report. Profitability requires innovation especially for China’s online retailers, who are already struggling with intense competition and squeezed profit margins. But many companies see opportunity. As Jingdong’s Shi Tao says, “With e-supermarkets (in the picture), the real battle with offline stores has begun.”

[box] This article has been reprinted with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China’s leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge. [/box]

(Photo by star5112 via Flickr)

Posted by Christina Nelson