Cherries and shrimps among the weapons in JD.com’s push into China’s booming market for online fresh food shopping

From cherries and shrimps to beef, 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, 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.

The transaction volume for the fresh food e-commerce industry reached US$13.6 billion in 2016, and is expected to reach US$35.6 billion in 2018, according to I Research, a Chinese internet business research firm.

The problem for companies wanting a slice of the market is the sheer cost of setting up the logistics required to make deliveries timely enough to keep the food fresh. That means the market is likely to be limited to existing, deep-pocketed e-commerce giants like JD and rival Alibaba.

Alibaba, the owner of the South China Morning Post, recently injected US$300 million in its latest investment in Yiguo.com, China’s largest business-to-consumer fresh produce online marketplace, and has put money into platforms that run both physical stores and online delivery services, allowing it to offer 24-hour delivery services in over 700 cities.

“Fresh food has become the new battlefield among China’s e-commerce firms,” said Hong Tao, an analyst at GF securities. “However, so far there are seldom profitable operations because the infrastructure for cold-chain logistics is not well developed in China and it is not easy to store and deliver perishable food.”

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 investment 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.”

Cao said JD will expand its cold-chain centres – warehouses from which the distribution of fresh food is coordinated – in China’s central and western areas. It already operates 11 centres in major cities such as Beijing and Shanghai, but regional cities remain a largely untapped market.

Also on the agenda is diversifying the range of food on offer, he said. Overseas products such as cherries from Chile, sweet shrimps from Canada and beef from Australia are the most popular on the JD platform, he added.

But this also poses challenges of its own.

“I met some farmers in a remote area of South America ... they have a large supply of fresh products but do not know who JD.com is or how big China’s e-commerce market is,” said Cao.

“Another difficulty in the fresh food business is how to keep the taste of the food consistent” when it comes from different suppliers. “There is risk of hurting the customer experience if, for example, some fruit tastes sweet but some sour,” he said.

JD is cooperating with embassies, industry associations and local banks to help in its search for new supplies, he said.

“These third parties are all good at connecting JD and suppliers. We can build more of a sense of trust with the support of official institutions who know about JD and China’s e-commerce,” he said.

JD.com will be hoping to catch more people like Adam Lu, a 28-year-old Shenzhen resident who works as a game programmer and considers himself a loyal customer.

“I am quite fond of buying fruit and frozen meat from the JD platform ... The products are always quite fresh, the courier is polite and guarantees a timely delivery,” he said.

Still, he noted one area that highlighted the perils facing fresh food e-commerce firms.

“We were disappointed at my mum’s birthday party to find the two lobsters we ordered were dead, although the courier did promise to deliver two more,” he said. “For seafood, I buy more from physical stores than online.”