Using trust, reliability and convenience to tackle China’s grocery market

by Ella Kidron

In the last half-year, COVID-19 has undoubtedly accelerated the shift to grocery e-commerce around the world. China’s largest retailer, JD.com, saw fresh food sales in the month February alone increase 260%. From January 20^th to February 28^th, JD supplied 220 million items of rice, flour, and oil, meat, eggs, veggies, dairy and other fresh products, weighing over 290,000 tons. In first quarter earnings just announced today, revenues from sales of general merchandise products (of which fresh food and fast-moving consumer goods play a significant role) were RMB 52.5 billion (US$7.4 billion) for the first quarter of 2020, an increase of 38.2% compared with the first quarter of 2019. From January to March 2020, sales of chicken and eggs; vegetables; pork, beef and lamb; and grain, oil and condiments on JD increased 301%, 207%, 116% and 79% respectively.

iiMedia research expects China’s online grocery market to grow 62.9% in 2020, compared to 29.2% growth in 2019. Some question whether the rapid shift to online grocery will endure post-COVID-19, while others predict that it will. A report by top market research firm, Euromonitor, “COVID-19 Implications for Snacks in 2020”, writes that “the short-term acceleration in e-commerce under COVID-19 may result in consumers sticking to it in some markets”. The report highlights expedited shipping, immediate purchase and ease of availability and delivery as the key motivations for the move to online grocery.

Even before COVID-19 broke out, however, online grocery retail in China had already been gaining significant traction. According to a report by EMR titled, ‘China Online Food Grocery Market Report and Forecast 2020-2025’, in 2019 the market reached nearly USD $65.5 billion. While the e-grocery start-up sector in the country continues to soar, with funding reaching US $2.1 billion in 2019, according to IGD data cited by Food Navigator, a 25% increase from 2018, the market is still led by JD, the largest online grocery retailer, and Alibaba.

In comparison, the race for a share of the online grocery market in the U.S. has resulted in the emergence of a relatively long list of players – in addition to Amazon, top grocery players like Walmart, Kroger, Target and Aldi have invested in their own grocery capabilities or partnered with third parties like Instacart to compete with Amazon. 2019 e-grocery penetration in the U.S. reached 4.5% of the $839 billion grocery market (roughly $37.5 billion), according to figures from Deutsche Bank cited by e-fulfillment technology provider Fabric. Coresight Research estimates that online accounts for just 2.6% of the U.S. food and beverage market.

JD is seemingly the only retailer who has been able to crack the online grocery market. JD Super, the online supermarket brand of JD.com is the country’s largest supermarket online or offline. The company also has a growing brand of omnichannel supermarkets of different formats under the 7FRESH brand.

Some may say that the global pandemic is an anomaly which in some cases has given people no choice but to shop for their groceries online. There are, however, other factors at work. What else has it taken for JD to convince people to shop for their groceries online? It boils down to three things: Trust, reliable transportation and convenience.

 

It starts with trust

One of the biggest challenges that must be overcome to make online grocery work is how to make customers trust a process they cannot see. In traditional grocery shopping, the customer is in the ‘driver’s seat’. Walking through the fresh produce aisle in a supermarket, and don’t like the look of that apple? Simply skip it and pick another one. Prefer slightly smaller, darker-colored and sweeter pears? Spend a few extra minutes rifling through the box to pick the most ideal ones. The farmer’s market offers a different element of control – an opportunity to speak to the farmers, understand the origin of particular products, and even get recommendations on new things to try.

When grocery shopping goes online, however, much of that control is transferred to the retailer as soon as the customer places the order. Online descriptions and customer service representatives take the place of in-store shop assistants and farmers. The question of which pears are put in a customer’s basket is 100% the retailers call. Whether or not the items arrive at the door unscathed and on time is dependent on the logistics provider’s care and attention to detail. For items like dairy products, there is little way to check that the products have been refrigerated at the right temperature during the entire process, unless they emit a particularly foul odor.

As such, it is incumbent on an online retailer to establish an extraordinary level of trust with customers to make online grocery work. It covers the pre-sale process where customers can research which products to buy, the actual picking process once the order is placed, and finally the logistics process from the warehouse (or multiple warehouses depending on where the product is coming from) down to the last mile to the customer’s door. If any link in the chain is broken or lagging behind, it can affect the entire experience. This is important globally, but particularly in China where food safety incidents have made consumers hyper-cautious about what they buy and where they buy it from.

At the same time, as demonstrated by JD, online grocery offers a tremendous opportunity to demonstrate trust to consumers. With JD’s solution, the entire supply chain of a particular product from procurement to storage is easily laid out on the product description page. There are even some hints as to how best to enjoy the item, whether it is a recipe or a suggested combination of ingredients. In some cases, food products can even be traced with blockchain, providing access to information ranging from the contact details of the team performing quality control to the license plate of the delivery truck that transported it to the warehouse, as well as more accessible information like how the product was stored.

Detailed information about avocados for sale through JD’s first party retail business 

Another huge benefit of online grocery retail is product selection. Whereas grocery stores have limited space and limited inventory, an effective e-commerce grocery selection greatly expands choice. During JD’s Singles Day (November 11^th) sales period in 2019, imported milk sales and sales of Penfolds wine were up 5 times the same period in 2018, while a2 milk sales were up 2.5 times. All products that are not necessarily found in typical local brick and mortar, non-specialty grocery stores (with the exception of omnichannel models – more on that later).

 

From trust to transportation

With traditional grocery shopping, once the process is completed, groceries are bagged and the customer puts them in their car or on their backs for the journey home. Once at home, they are put in the fridge or freezer. To convince customers to shop online instead, the speed of delivery needs to be at, or at very least, close to that of the consumer taking the product home themselves for basic necessities, and within a day or two for things that might not be needed as urgently. Above all, quality needs to be guaranteed.

JD’s self-operated nationwide logistics network makes it stand out in this regard. First, JD is able to deliver over 90% of orders same- or next-day to customers all across China. Second, JD Logistics is the only B2C e-commerce logistics company covering six major networks – normal-sized items, bulky items, cold chain, B2B, cross-border and crowdsourced logistics, with over 730 warehouses covering approximately 17 million square meters. Cold chain that stands out here because it allows for the safe transport of temperature-sensitive goods along the supply chain.

Put simply, cold chain logistics includes all of the means used to ensure a constant temperature for a product that is not heat stable, from the time it is manufactured until the time it is delivered. It includes cold storage, cooling systems, cold transport, cold processing and cold distribution. The ins and outs of it are highly complex – Proper sanitizing, cleaning and sorting must be done prior to packaging and loading to prevent product quality issues; proper packaging is important to prevent contamination; all steps of cold chain supply management need to be well-documented; time tables need to be kept to; and any temperature variation, whether from human intervention or weather conditions, can be detrimental to the process.

JD first entered the cold chain logistics industry in order to support its fresh food business back in 2014. JD currently operates 20 cold chain warehouses covering four different temperature levels – cryogenic, freezing, refrigerated and temperature-controlled. The company’s cold chain network (which integrated F2B2C –farm/factory to business, or farm/factory to customer directly, covering B2B, B2C and more) includes sophisticated cold chain technology, as well as cold chain trucks, warehouses and even cold chain specific delivery boxes. The delivery boxes are reusable and can be left outside for the courier to pick up when convenient. With all of this, JD can control the transport of temperature sensitive products all the way from farms down to the last mile.

JD warehouse worker in cold chain warehouse

One anecdote, reported by Forbes Asia several years ago, shines a light on how much attention the company attaches to quality logistics. Chairman and CEO Richard Liu ordered ice cream through JD that arrived slightly melted. According to the report, Liu said that there would be no further expansion of the company’s new grocery delivery business until the problem was fixed.

 

Omnichannel: Enhanced convenience

Same- and next-day delivery is already well above the industry standard. For customers who are used to taking their groceries home right away, however, it’s not enough to convince them to shift online. JD offers a mix of omnichannel solutions to solve this problem. Omnichannel Fulfillment (referred to as 物竞天择 in Chinese), an innovative inventory integration model which sources inventory from offline stores nearest to customers, rather than having the goods come from warehouses. Through the program, delivery is available within as fast as 30 minutes to an hour. JD’s 7FRESH supermarkets also offer an omnichannel option where customers can either go into the store themselves or opt for delivery via the app, receiving items in as fast as 30 minutes within a 3km radius of the store. While consumers may be willing to wait a day for imported seafood coming from Canada (in the case of 7FRESH, however, they actually wouldn’t have to), they may be less willing to wait for essentials like oil or rice. Omnichannel is helping to address the immediacy of some consumer needs.

At the end of the day, however, it still comes back to trust. Because consumers inherently trust JD – due to a long-term effort to build a reputation for authenticity, high quality, and exemplary service, and strong technology capabilities that serve as the engine driving the process – they are willing to put their fate of their bellies (and by extension, other important aspects of their lives) in the company’s hands.

 

(ella@jd.com)

by Ling Cao

JD’s cold chain logistics has been key in both ensuring livelihood during the epidemic as well as transporting medical supplies that have specific temperature requirements.

JD internal data shows that JD cold chain orders in Q1 2020 increased 200% y-o-y. In early April, with resumption of transportation in and around Hubei province, JD’s Asia No.1 logistics park in Wuhan is seeing robust growth in number of orders, with almost 1,400 tons of fresh food products from Hubei sold on JD.com within one week. Among these, oranges, crawfish and lotus roots were the best-sellers.

 

From food to medical supplies

JD cold chain was also key to medical supply delivery, especially when there were insufficient transportation resources during the virus outbreak. During these challenging times, JD consistently transported COVID-19 nucleic acid testing kits, insulin and other medical supplies from medical institutions to cities in China, and the integrated fulfillment process was cold chain guaranteed.

Unlike typical delivery, cold chain logistics has a higher standard. As one of JD’s six major logistics networks (with the other five being normal-sized items, bulky items, B2B, cross-border, and crowd-sourced), JD established its cold chain logistics network in 2014, which was in response to the increasing demand for JD’s fresh food orders.

Customers tend to buy high quality products on JD, which gives rise to the needs for this type of delivery service. While delivery is only a small part of the entire cold chain logistics infrastructure (since the product is produced from a farm or made in a factory) the whole supply chain need be protected by the cold chain. That’s also why in 2018, in addition to the B2C (business to customer) cold chain delivery, JD cold chain has started to build the B2B (business to business) network.

Now JD has already built China’s leading F2B2C (farm/factory to business, or business to customers, or farm/factory to customers directly) cold chain network for all kinds of models itself and by integrating industry resources. Taking the food industry for example, cold chain is the infrastructure employed for food product circulation.

For instance, cherries are harvested in April, and they are delicious while easy to rot. Conditions cannot be too dry or too damp, and they require a specific rigorous fulfillment process. JD has built over 10 sorting centers around the country near places of origin, including Yantai, Weifang in Shandong province and Dalian in Liaoning province, so that JD can transport the cherries from farms to customers directly. JD’s cold chain logistics is able to provide cherry delivery to 300 cities across China in as fast as within 24 hours.

 

The case of ice cream

Ice cream is another example. It is popular especially during summer time, but when customers buy a cup of ice cream at the supermarket, they sometimes discover ice slag on the cover, which negatively impacts the taste. This occurs because the product has lost temperature control for at least 15 minutes during the course of transportation. This results in external air moisture entering to form condensed water. JD cold chain logistics can help deal with this challenge.

Mengniu, China’s leading manufacturing and distribution company of dairy products and ice cream, is one of JD’s important partners for cold chain logistics since June 18^th, 2019, when JD had a Grand Promotion Day. According to the partnership, JD provides Mengniu’s frozen food products with integrated cold chain warehousing, transportation and delivery service, creating integrated cold chain solutions from Mengniu’s factory to the customers’ table.

Logistics quality is a perennial challenge for ice cream sales – especially for ice cream that has richer dairy content, which will melt immediately when the temperature rises. To address the challenge, besides JD’s existing integrated cold chain network, JD also leverages technology to meet demand. For example, JD will stock the ice cream in different sectors of the warehouse, normally -18℃ and -35℃, and leverage the self-developed smart temperature control platform which can ensure that the whole supply chain is transparent and traceable. It can also provide tailored solutions corresponding to different temperature requirements.

JD also leverages a goods-to-person sorting system in its cold chain warehouse, which will improve efficiency for the sorting process, shortening the length of time for the product to arrive to customers. Using JD’s Beijing cold chain sorting center as an example, the automatic sorting facility has increased 300% sorting efficiency, as well as shortening the fulfillment process.

By being technology-driven and based on a mature cold chain infrastructure, JD has helped Mengniu manage its inventory for all online sales channels, which is essential to protecting the products’ consistent temperature requirement for the whole process.

A spokesperson from Mengniu said, “Our cooperation with JD is a creative initiative that will strengthen our cold chain logistics capability, as well as enable expansion to lower tier markets, providing more customers with fresher frozen food products.”

JD and Mengniu’s cooperation continues. During the epidemic, JD received a request from Mengniu to help them with B2C delivery services in response to new business demands, helping them launch the new business in just four days.

“Our new business launched on February 15th during the peak period of the virus, when there was a lack of trucks and personnel in the market. Despite the challenges, JD helped us launch the business as we expected,” the Mengniu spokesperson added.

 

A ￥400B yuan market

The CCLC (Cold Chain Logistics Committee) from CFLP (China Federation of Logistics & Purchasing) forecasts that the market share of China’s cold chain logistics will hit RMB 400 billion yuan in 2020. Yet, cold chain service providers haven’t reached a large scale, and 90% of them are regional enterprises which only provide some services for specific products.

Compared with some developed countries which have mature cold chain logistics, the cold chain logistics industry in China is still developing. The main industry pain points include low shipping standards and multiple small logistics suppliers. JD has tried to address these by building an innovative network design that combines a self-developed network with partner cooperation. Specifically, JD will build key and core nationwide warehousing and transportation network. Regarding regional resources, JD will select qualified local partners, which will shift the nature of previous competition to shared value. At the same time, JD will also open its supply chain management solutions to help local partners upgrade their efficiency overall.

Xiuqiang Li, head of strategy and planning for JD cold chain logistics said, “JD’s advantage is integrating social resources together, which will benefit all stakeholders, eventually improving the overall customer experience.”

 

Four temperature layers

JD has already explored a unique way to develop its own cold chain logistics. Regarding how to make the business sustainable and profitable, Li said, “It’s a matter of being cost-effective and at scale. We believe JD’s business model for cold chain is a win-win initiative for the industry, partners and customers, and we will continue to develop our network and deepen our cooperation with partners throughout the supply chain.”

So far, JD has operated over 20 cold chain warehouses for fresh food, covering four temperature layers: cryogenic, freezing, refrigerated and temperature-controlled.  Temperature ranges from -30 ℃  to normal temperature to satisfy tailored storage needs. For the B2B business, JD’s integrated cold chain logistics network within one city can cover 23 cities, and will expand to 34 cities this year, the less-than-truck-load network   can cover over 240 cities, will expand to 350 cities this year, and develop further.

JD can also personalize the containers, offering dry ice and other refrigerants for different products. In 2019, JD used green recycling boxes and cold chain containers a total of 47 million times, making the business more sustainable.

In sum, cold chain logistics is a key way that JD will continue to build trust with partners and consumers – building strength on strength with its supply chain.

 

(ling.cao@jd.com)