Fresh Produce E-commerce in China: the Fascinating, the Difficult

Food safety concerns and increasing income of Chinese families’ are motivations for fresh produce e-commerce sites to emerge in recent years: Businessmen bet that more and more Chinese would like to, or afford to, pay higher prices for quality fresh produce; people from tech industry came up with creative ways in doing such a business; big e-commerce players, such as 360Buy and Amazon China, also began offering this category of goods in 2012.

Motivated Tech Entrepreneurs

Yuan Tian Ju, such a business founded and ran by three veteran internet entrepreneurs, came to life from an idea that the three fathers wanted their kids to have safe chicken and eggs to eat. Led by Li Zhiguo, an investor and founder of Koubei.com which was one of the first user review services in China and became part of Alibaba group later, the trio leased a hill to raise chicken in a way to make sure its meat and eggs are healthy. Later on the company added vegetables and pork into the offerings. As they know how to do a Web business, the founding members created a way to do logistics to make sure what they deliver are fresh.

Not far from Yuan Tian Ju’s base, a super creative pig farm ushered in its first residents in November 2012 after a couple of years of preparation. Consumers who’d like to buy the pork output by the farm can watch its 24 hour reality show online thus to know how well their future food is treated and how properly it is processed. Initiated by William Ding, the once richest person in China and CEO of Netease, the endeavor was also motivated by desire for food when Mr. Ding and his gluttonous friends found raw materials of meals nowadays wasn’t so delicious as before and food safety became a social concern.

A Hard Business for Retailors

While Yuan Tian Ju and William Ding’s pig farm are more of long-term, value-added endeavors, more businesses in the sector are retailers, some of who have found it a hard business. For some reasons I’d mention below, big B2C e-commerce players usually take fresh produce as the last category to add to their offerings.

Yoocai, an online retailer that started with greens in 2010, unfortunately, is for sale. It isn’t that its founder, Ding Jingtao, lost confidence in fresh produce e-commerce, but that he acknowledged that he failed in operating such a business. After two years in operation, Yoocai has twenty thousand registered users, with four thousand active users. The website made three million yuan in revenue in 2012, with an average spending per transaction of about forty yuan. Metrics do seem discouraging.

Attrition rate of fresh goods, special logistics and the like with the business weigh down on margins. Now almost all fresh produce sites do logistics themselves for most courier services are not willing to deliver perishable goods. Yoocai’s gross profit margin is about 50%, while an offline market can make it as high as 150%. I met with an executive at Meiweidao, a site focusing on fruits, in early 2012 and learned that its gross margin was as low as 30% – 35%. Commodity costs, logistics, attrition rate and operation account for about 20%, 20%, 20% and 10%, respectively, in a transaction, according to Meiweidao.

Yoocai founder concluded that doing an end-to-end transaction eventually made the business out of his control, saying he’d outsource supply chain, logistics and inventory to third parties next time if he’d do it again. Alibaba would agree with him. The rumored fresh produce platform reportedly will launch soon and the company, like what they do with Taobao and Tmall, would be only for gathering retailers.

Other problems with Yoocai include marketing and fund raising. According to the founder, it’s possible to raise a small amount of funding but hard to get a big one. His team raised two million yuan of funding before and now is asking a price of 1.5 million yuan.

Nevertheless, newcomers just went bold. Benlai became a rising star in the sector by offering products from all around the country. Though the company are working hard on making improvements on the whole chain, it’s hard to say whether they’d find themselves in the same situation as Yoocai was ever in.