Fresh produce is now the battleground, and no longer just a customer magnet
Over the past year, both brick-and-mortar retailers and e-commerce players have made fresh produce a core area of development, and recently each has been acting frequently. Upstream: Walmart established a central distribution center; Yihaodian launched “Specialty China,” building a unique supply chain through a direct-from-origin model; Yonghui brought in Dairy Farm International, intending to strengthen its procurement channels. Midstream: China Resources Vanguard rolled out a “fresh produce partner” system to optimize internal management. Downstream, Carrefour and Metro opened convenience stores; SF Express promoted “Heka,” and community “street battles” are in full swing.
“For brick-and-mortar supermarkets, this is their ‘last fortress’ against e-commerce, and logistics and packaging are their natural advantages. For the latter, they are more skilled at promoting high-value-added products.” Zhu Zhenjia, editor-in-chief of Linkshop, told a Southern Metropolis Daily reporter that the current fresh produce channel war benefits both sides. “With low product overlap, the future will make the market more specialized and more brand-driven.”
Products: high-end fruit vs. mass-market fresh produce
“The SF platform currently focuses on high-end offerings, mainly selecting products with channel scarcity, for example imported fruit accounts for more than 40% of total SKUs, while frozen goods and fruit account for more than 40% of sales.” Chen Xu, vice president of SFbest, told reporters that fresh produce e-commerce is just emerging, consumer awareness is insufficient, and high-end foods have enough gross margin to cover logistics costs, making them a relatively good entry point.
According to him, SFbest hopes to seize market share with lower prices, but still has a gross margin of more than 10%. By comparison, the gross margin of supermarket fresh produce departments hovers around 10%. Zhu Zhenjia, editor-in-chief of Linkshop, added: “Fruit is relatively standardized with low spoilage, making it quite suitable for the e-commerce format.”
It is no coincidence that Yihaodian, Benlai Life and others entering the fresh produce sector also focus on the fruit category. This year, Yihaodian set up a separate fresh produce division, and Specialty China, established in May, is its key strategic project. “Specialty China has a total of 3,000 SKUs, with fresh fruit accounting for about 10%, but sales account for more than 50%.” Tao Yi, operations director of Yihaodian Specialty China, who once worked at Trust-Mart, told reporters, “Unlike supermarkets, which sell on a daily and mass-market basis, e-commerce considers relying on promotional campaigns to push the products with the largest sales.”
Yihaodian adopts a pre-sale model of contract farming, which not only avoids losses in logistics costs but also ensures the freshness of the fruit. “For example, through traditional channels, Xinjiang grapes are picked when 90% ripe, while we pick them at 75% ripe, and adding transport time, we ensure they are still fresh when they reach consumers.”
Compared with e-commerce players choosing standardized fruit as their entry point, non-standardized leafy vegetables and meat are the core competitiveness of supermarkets. The best-selling products at Walmart and Changdachang Supermarket both come from mass consumer goods such as leafy vegetables and meat. “Food sales now account for 50% of total supermarket sales, 60% of which comes from fresh vegetables and meat, while fruit is only 10%.” Zhen Yuefei, general manager of Changdachang Supermarket, said: “At present, e-commerce may have profit room in high-gross-margin products such as imported fruit, but it is impossible for e-commerce to enter mass-market, low-value products.”
Zhang Qinglin, human resources director of China Resources Vanguard South China, added: “Mass-market products require timeliness and interactivity, and a sense of trust is very important. Shopping in a supermarket for fresh produce is a ‘lifestyle,’ and e-commerce cannot replace this dimension.”
Logistics: last mile vs. central distribution center
Comparatively speaking, logistics cost is currently the biggest pain point for every fresh produce e-commerce player. According to Tao Yi, Yihaodian's fresh produce business is mainly an open marketplace with joint operations, and the self-operated proportion is very low. “Self-operated logistics costs more than 35 yuan per order, which is very hard to cover.” As for Specialty China, Yihaodian is mainly responsible for marketing and promotion and monitoring backend data, while specific logistics and after-sales are handled by local partners. “But in Yihaodian's three key regions of Beijing, Shanghai and Guangzhou, we also cooperate with third parties to build cold-chain teams. If order scale exceeds 10,000 yuan, self-built logistics may drop to 10 yuan per item, cheaper than third-party logistics at 15 yuan per item.”
SFbest, backed by SF Express, derives 80% of sales from self-operated B2C projects, but the last mile is equally difficult. “Cold chain is one of our core competitiveness. We currently achieve fresh produce delivery in 55 cities, mainly because those places have SF Express cold storage and cold-chain teams, and the upfront investment in this part is at the tens-of-millions level, with an extremely high threshold.” Chen Xu said as much, and on delivery routes, apart from Beijing, Shanghai and Guangzhou, which use cold-storage vehicles, other cities all adopt a simple model with foam boxes and dry ice. Last year, a reporter interviewed Du Fei, general manager of Tuotuo Gongshe. At that time, Tuotuo Gongshe had a total of 4 cold storage facilities and 15 delivery stations, totaling 4,000 sq m, with total logistics investment also reaching tens of millions, accounting for more than 50% of total costs, and after more than 5 years of development, its delivery range is currently only within Beijing's Sixth Ring Road.
“E-commerce must rebuild logistics centers, but each individual supermarket store is itself a delivery point; as long as the relationship between sales and inventory is well controlled, there is absolutely no need to pile too much cost onto logistics.” Retail expert Ding Liguo told reporters that he is not optimistic about fresh produce e-commerce mainly because supply chain investment in the fresh produce sector is far higher than in other sectors, and this is the core of supermarkets.
Zhen Yuefei also told reporters that Changdachang mainly distributes from four self-operated bases, with two long-distance deliveries per day, and each store becomes a distribution center for surrounding specialty agricultural products, with products going in and out along the way, avoiding the inflated costs of empty runs. “At the same time, compared with e-commerce shipping a few dozen jin at a time, each of our vehicles carries 5 tons, a transport scale that cannot be compared.” According to him, Changdachang's fresh produce logistics cost accounts for about 5% of the selling price.
Walmart likewise established fresh produce distribution centers, but its purpose is to streamline suppliers and reduce distribution and wholesale links. Zhang Weilin, media manager of Walmart South China, revealed that Walmart currently has a total of 10 fresh produce distribution centers, and the 11th will be put into use by the end of this year, thereby achieving nationwide coverage. Walmart senior vice president Bo Rui once told the media that one center requires an investment of more than 10 million US dollars, but through fresh produce distribution centers, Walmart has reduced the spoilage and management costs of the vast majority of intermediate links. Over the past year, Walmart's all-category suppliers and pork suppliers numbered 8,000 and 80 respectively, both one-third of last year's figures.
Not merely a customer magnet
Whether e-commerce or supermarkets, the greatest value of fresh produce has always been as a means of attracting customers. “Fresh produce accounts for less than 1% of overall e-commerce sales, but every e-commerce player is involved because the customer stickiness value it brings is far higher than the product itself.” Tao Yi told reporters that Yihaodian is strict in selecting Specialty China partners: first, they must be the only dealer authorized by the local government; second, contracts are signed once a year; and there are scoring requirements. Two months ago, 5 specialty halls were closed because of low scores. According to him, Specialty China has no sales KPI assessment, and fresh produce products only charge a 2% service fee on sales plus a 150 yuan monthly fee, far from covering costs.
“For supermarkets, fresh produce accounts for 40% of sales but only about 10% of profit. But as the market becomes increasingly sluggish, continuing to try to expand traditional e-commerce apparel sales is not as good as finding ways to raise fresh produce gross margin.” Ding Liguo said as much.
Zhen Yuefei told reporters that the flexibility of fresh produce is where supermarkets generate the most benefit. “For example, the Zhanjiang store may have mostly seafood, while the Baiyun store has many migrant workers and may lean toward spicy flavors, while prices align with the wholesale markets around the store.” Although some fresh produce is sold at a loss, such as necessities like eggs, through flexible management Changdachang still maintains a 10% gross margin on fresh produce. “Although the gross margin cannot match other categories, fresh produce is a supermarket's most stable cash flow.”
China Resources Vanguard also sees this. “Fresh produce is the category over which frontline employees have the greatest degree of control; for example, the processing stage and production planning stage can affect gross margin, while pricing and promotional promotion have a big impact on sales.” Zhang Qinglin, human resources director of China Resources Vanguard South China, told reporters that unlike the non-fresh produce sector, where pricing power and promotional activities are uniformly arranged or reported by headquarters, in the fresh produce sector frontline employees have pricing decision-making power, setting prices and promotions within the quotation range set by headquarters through factors such as product grade, time of day and nearby competitors.
In July this year, China Resources Vanguard introduced a “fresh produce partner” mechanism, under which excess profits from store fresh produce departments are shared by fresh produce employees. Many employees thus received nearly half a year's extra pay, and higher enthusiasm also brought obvious changes in performance. “We expect this performance mechanism to reflect growth in gross margin. After running for one quarter, gross margin has grown by 1%.” Zhang Qinglin believes that in the future fresh produce will not only be a supermarket's customer magnet but also a profit tool.