China’s e-commerce sector set for rapid growth as consumers go online for daily essentials

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China’s e-commerce giants will enjoy fast growth as more people turn to online shopping for daily necessities such as biscuits, shampoo and drinks, according to new research by Goldman Sachs.

The market for so-called fast moving consumer goods (FMCG) is so large that it will support high sales growth for both Alibaba and JD.com as they take business away from offline stores in the coming years, according to a report published by the investment bank.

However, the online retailers face major challenges as they look for ways to bring fresh produce such as vegetables and live seafood to households across the country, said Goldman Sachs analysts led by Ronald Keung.

FMCG accounts for 37 per cent of all retail spending in the mainland, and the market is expected to expand by an average of 6 per cent annually before reaching US$2 trillion in 2020.

But due to low margins and a lack of fast delivery services, only 5 per cent of those purchases are currently from online shops, compared with 30 to 40 per cent for clothes and electronics.

The game is changing as e-commerce firms battle for new and innovative ways to spur growth. Last year, both Alibaba and JD.com finished building their key nationwide ‘fulfilment centres’ – warehouses from which the distribution of goods is coordinated – allowing people in more than 200 cities to enjoy same- or next-day delivery for groceries ordered online.

“We expect Tmall and JD’s new supermarket initiativesto drive further online growth in the supermarket segment,” Keung said.

“These will be enabled by their logistics improvements, wider FMCG brand participation and ongoing new user adoption. We see the FMCG market big enough for two online winners.”

Alibaba’s Tmall – its business-to-consumer online shopping platform – is likely to see sales of daily necessities quadruple to 297 billion yuan in 2020 from last year’s 75 billion yuan, according to the report.

Alibaba Group is the owner of the South China Morning Post.

The value of FMCG products sold through JD.com will increase from 63 billion yuan to 279 billion yuan over the next five years, the analysts estimate.

However, the e-commerce giants will find it hard to crack the largest category within the groceries segment – fresh foods – which accounts for almost half of FMCG spending in China, analysts say.

Fresh food has presented a challenge to online retailers globally, due to the high costs of cold-chain delivery and the low shipping fee consumers are prepared to pay.

Amazon rolled out its food delivery offering, AmazonFresh, in the US in 2007 but the 24-hour delivery service is still only available in a few cities after 10 years of testing.

Google launched its online grocery shopping platform, Google Express, in 2013 to offer same-day or overnight delivery from physical stores to people’s homes. The service now covers eight cities in the US.

In China, just 2 per cent of fresh food is purchased online. The huge growth potential has prompted investors to plough vast amounts of capital into e-commerce start-ups that sell fruit, vegetables and flowers.

But many such firms have gone bankrupt because of the high delivery costs and the large subsidies they need to offer to win new customers. These retailers had fallen in number from 10,000 to about 5,000 by September 2016, according to the report.

Analysts say the massive operation cost means the two e-commerce giants will be the ultimate winners in the segment, though that’s likely to be after a long time spent experimenting.

Both Alibaba and JD are testing different business models for selling perishable food online.

For example, Tmall and JD Supermarket Fresh bring the goods from warehouses to consumers’ homes directly, while the two companies have also invested in platforms that run both physical stores and online delivery services.

“We expect fresh food to remain a challenging category,” Keung said. “Players with scale, cold-chain infrastructure and close partnerships with offline stores would be relatively better positioned, although consumer behaviour will take time to cultivate.”

Read the original article on the South China Morning Post.

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