A Hema store located in Kunshan, east China's Jiangsu Province, closed on May 31. It is the first one to shut down among the 150 stores that have been established across the country since 2016.

Operated by Alibaba, China's e-commerce giant, the stores are a chain of offline supermarkets which also provide meal preparation. Its business is based on its online platform through a specific app where orders placed can be delivered in 30 minutes within a 3-km radius.

Hou Yi, CEO of Hema, explained the decision as an adjustment to close stores with a poor outlook that are not bringing in profits when the scale of business is widening, noting that more stores will be opened in the future. With this move, the pioneer in the industry seems to have stepped on the brakes of the rapid expansion of fresh food retail.

A promising business

Hema is Alibaba's attempt to win a market share in new retail, a combination of online, offline and logistics services. From offline stores to rapid deliveries, new retail has penetrated every corner of people's life. It has injected impetus into consumption growth and upgrading while benefiting from robust domestic consumption.

In 2018, China's new retail went through changes where every mode of retail was looking for new opportunities. Fresh food retail was no exception, attracting major e-commerce companies.

JD.com opened its first offline 7FRESH supermarket on January 4, 2018, covering 4,000 square meters near its headquarters in south Beijing. About 75 percent of the products are fresh food, also sold online through a mobile app. Tencent is likewise exploring new frontiers in the new retail industry using digitalization, cooperating with retail companies such as Walmart and investing in Meiri Youxian, an e-commerce fresh food platform.

As a result, China's fresh food market scale has grown rapidly. Since 2013, its average annual growth rate has exceeded 6 percent, according to People's Daily. In 2018, its sales scale was nearly 2 trillion yuan ($289.2 billion), with the volume of e-commerce transactions accounting for 10 percent, indicating a potential growth area.

Among online consumers of fresh food, 41.4 percent are in first-tier cities and 40.4 percent in second-tier cities, with middle-class households making up the bulk. People whose monthly income exceeds 8,000 yuan ($1,155) account for 43.6 percent of the total, while the proportion of those between 26 and 35 years old is nearly 58 percent.

Unlike older generations, young people are more willing to buy fresh food instead of storing goods. Due to the services offered by diverse e-commerce platforms, fruit with a short shelf life and imported seafood that meets strict quality standards can appear on consumers' tables in record time.

This convenient and fast delivery service conforms to fast-paced urban life. For instance, during the 2019 Spring Festival, according to data from Meiri Youxian, which provided normal service during the holiday period, the average delivery time was 42 minutes and the shortest only 8 minutes.

Profits or problems

When new retail emerged, the major platforms combined fresh food retail and meal preparation. But prepared foods wrapped in nice packages at a high cost cannot meet the consumption habits of the public at large. Meanwhile, though fresh seafood is appealing, a regular or frequent purchase is unlikely due to its high cost.

Hou said that the success of one store cannot guarantee the prosperity of others given factors such as rent and labor costs. The operation of physical stores is different from online retail. For example, supply chains can be difficult to tackle for e-commerce and Internet enterprises whose traditional advantage is online business. Though they can use their considerable delivery services to win customers' hearts, their costs will inevitably increase.

SF Express (SF), a major delivery company, has closed some supermarkets across the country, marking a setback in its attempt to carve a niche in the new retail market. To date, all of its supermarkets in Shanghai have closed.

Taking advantage of its dominant delivery service, SF started its e-commerce business in 2006. Ten years later, it developed its online platform for fresh food, combined with physical stores. In 2017, there were nearly 1,600 stores in 21 provinces, with 60 of them in Beijing. However, its ambition resulted in blind expansion.

"Relying only on its delivery services, SF cannot form its core competitiveness," Ding Wei, a logistics industry professor, told International Finance. Regardless of a lack of orders and cooperation with e-commerce platforms, the ecosystem created by SF is very isolated. At the same time, its high-end position fails to attract customers in the fierce market competition, Ding said.

Hema and SF, along with other companies such as Meituan, China's largest on-demand online service provider, have recently closed physical stores to varying degrees. It is time for players in fresh food retail to make adjustments.

Specific solutions

Although the fresh food market can be profitable and has great potential, companies need to study their own characteristics and the current condition of the industry before entering the market, followed by clear positioning and appropriate strategies.

Hou added that since Hema has expanded from first-tier cities to other parts of the country, it needs more research to adapt to the consumption habits and purchasing power of the local people, developing a specific strategy for each area.

As for SF, insiders believe that as a delivery company, it needs more retail understanding and enhanced professionalism. Ding suggested that SF seek cooperation with others in order to gain more experience.

The location of physical stores is another vital issue that needs to be researched beforehand. Some enterprises initially thought their online business would make the location of the store irrelevant. This is not the case.

Due to restrictions such as the need for parking, companies can hardly open their large-scale stores in central business districts, while suburban areas are not a perfect choice because of the limited consumer flow. Appropriate locations combined with increasing online orders can be a good solution, Li Yongjian, a research fellow with the National Academy of Economic Strategy at the Chinese Academy of Social Sciences, told The Beijing News. He also pointed out it can only work when the number of online orders exceeds 70 percent of the total.

Supply chains play an important role in the healthy development of fresh food retail for e-commerce businesses. Meiri Youxian, which was able to maintain its regular prices despite increased demand and the general rise in prices during Spring Festival, has its supply chain to thank. It purchases vegetables locally and has located warehouses and distribution centers near customers so as to ensure adequate supply of goods and a shortened delivery time.

Furthermore, the application of advanced technologies like artificial intelligence can improve consumers' experience, which is an emphasis of new retail.

Essentially, new retail seeks to provide consumers with top-notch goods and services, making the improvement of product and service quality the foundation of business operations.

Copyedited by Rebeca Toledo

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