Need for Speed: Instant Retail
How the pandemic accelerated a new growth market for e-commerce
Table of contents
Things that caught our attention
Things that caught our attention
Chinese Premier Li Qiang met representatives from China's biggest internet companies. The meeting came after the National Development and Reform Commission praised several Big Tech firms for their investments. The closing of the investigation into Ant Group is seen as a softening of the government’s stance against Big Tech. (Source)
Earlier this year, we wrote about Douyin's moves into the local services market and how Meituan had started defensive tactics. Meituan has now started internal tests for an in-app livestream function called Meituan Live. (Source)
Meanwhile, Douyin has reorganised its local services business and elevated its hotel and travel business division to a first-level department under its lifestyle services business, on par with its in-store services. (Source)
And as if the local services market wasn’t heating up enough yet, Pinduoduo launched a local services portal on its main app. Currently, it mainly includes the sale of food and beverage coupons and self-pickup. The products sold are mainly concentrated in chain catering brands such as Wal-Mart, KFC, McDonald's, Starbucks, Luckin Coffee, Burger King, Pizza Hut, DQ, Heytea, and Haagen-Dazs. (Source, link in Chinese)
This month, both Alipay and WeChat Pay have opened up their apps to foreign credit cards. Read more about this and the instructions how to link them, so you can use them on your next trip to China in the Pekingnology newsletter.
Introduction
Recently, we published an article about Alibaba's Hema (Freshippo) supermarkets. Hema is one of the most successful examples of ‘new retail’, the merger of online and offline retail. But Hema is also an example of ‘instant retail'.
In this new article, our most elaborate report to date, and a future follow-up, we will dive deeper into this fascinating sector that exploded during the Covid years and has many different business models and players.
Free subscribers can read the first chapter defining instant retail and its three main categories. Paying subscribers can read the full article, including an extensive analysis of some of the main players in one of the main business models.
Freya Zhang, Ed Sander & Rui Ma
(click on the images above for information on the Tech Buzz China team)
Key Takeaways
Under the influence of the pandemic, growth of Instant Retail has accelerated. The market is expected to further grow to RMB 1.2 trillion in 2025.
Two meal delivery companies, Meituan (#1) and Ele.me (#3) have diversified into delivering any product. However, despite similarities in bringing products from A to B, several factors make goods delivery more complex.
Number 2 in the market, Dada Nexus, is a cooperation between courier platform Dada Kuaisong and Jingdong spin-off JD Daojia. JD Daojia has recently been integrated into the main JD app and is one of JD’s main growth engines.
JD Daojia is strong in the large supermarket and hypermarket sector, while Meituan sees more prominent business with small and medium sized store.
Instant retail can increase the customer base of offline stores substantially. However, it’s hard for smaller merchants to make money through instant retail. Delivery costs and service fees to platforms eat into their margins and often forces them to charge higher prices on the platforms than in their shops. Merchants have to participate or potentially lose business to their competitors.
Meituan offers merchants an alternative to ensure higher profit margins: lightning warehouses.
It is uncertain if there is as much demand for instant retail in the ‘sinking market’ as in 1st and 2nd tier cities. Still, Meituan and JD Daojia are making strong inroads.
None of the marketplace platforms discussed in this article was profitable yet in 2022. But they claim to be close to break-even.
What is ‘instant retail’?
Since the arrival of e-commerce, the speed of delivery has been continuously improving, first from 10 days to 3 days and later to next-day and even same-day delivery, like when JD.com started shipping from city warehouses. People’s need for speed has evolved together with this trend, or maybe it is the other way around.
Research by Accenture showed that more than 50% of post-95 consumers expect to receive their online orders the same day or even within half a day. But they have also become more rational and pay more attention to prices. Research by Beijing Normal University shows that 70% of young people take costs as their first consideration. Frequent promotions have also taught consumers not to stock up on too many consumable products as they used to do in earlier days when such price discounts were much less frequent.
With the myriad delivery options available to the Chinese consumer, the concept of ‘instant retail’ (即时零售 jishi lingshou) can be somewhat confusing. It refers to offline stores (supermarkets, convenience stores, department stores, etc.) and warehouses that are home-delivering orders that nearby consumers place online. In other words, instant retail combines local brick-and-mortar stores with instant delivery. Instant retail has upgraded the consumption motivation of traditional e-commerce from ‘product’ to ‘product + time + space'.
The app that consumers order on can either be a physical store (chain)’s own app (e.g. RT-Mart’s or Walmart’s app), a large self-operated webshop or a third-party marketplace platform (e.g. JD Daojia). Delivery to consumers in a radius of 3-5 kilometres is normally done within 30-60 minutes.
Instant Retail is sometimes called ‘On-Demand Retail’ or ‘Near-Field Retail’. ‘Near-field’ refers to fast delivery within an hour from a shop nearby, as opposed to ‘Middle-Field’, which is same or next day delivery from a warehouse in or near the city and ‘Far-Field’, which refers to delivery in 1-3 days from a warehouse further away (e.g. purchases on Taobao and Tmall).
Indeed, the e-commerce market can be categorised into multi-day delivery (Tmall, Taobao, Pinduoduo, etc.), next-day delivery (JD.com, community group-buying, Tmall Supermarket, etc.) and same-day delivery (Meituan, JD Daojia, Ele.me, Hema, etc.). Same-day delivery models that take longer than an hour are, strictly speaking, not instant retail, and neither are models that deliver goods the next day or where consumers have to go pick up the products somewhere (e.g. community group buying).
Alibaba, for instance, has, over the years, built several different solutions that cater to different target groups with different needs, often prioritising either speed or inexpensive goods. For instant retail, it has Hema and Ele.me, while Taoxianda and Alibaba-owned RT-Mart (part of Sun Art, which is largely owned by Alibaba) can deliver within the same day, normally within half a day (but sometimes faster). RT-Mart has hundreds of stores, warehouses, regional food processing centres, and suppliers. These also support other parts of the Alibaba ecosystem like Taoxianda, Tmall Supermarket and Taocaicai.
Image from Alibaba 2021 Investor Day
The idea behind instant retail is that it brings the busy (or lazy?), mostly young consumers, more convenience while the store or retail chain expands its service radius from 500 m - 1 km to several kilometres, thereby increasing its potential number of customers exponentially (an increase from 1 to 5 kilometres can lead to a 24-fold increase in potential customers). Through instant retail, a store can also compete with pure online players. What's more, merchants that can offer instant delivery can improve the brand image of their stores.
Instant retail can deliver faster product turnover (owing to higher conversion rates and higher consumption frequency) and higher regional marketing efficiency. Conversion rates are high because most instant retail users have a strong purpose for purchasing. Traditional e-commerce has a conversion rate of 5-10%, while instant retail sees 15-20% conversion. Regarding frequency, Kantar research found that customers that have tried O2O (online-to-offline) will show a 17% increase in FMCG purchases, mostly through higher purchase frequency. Considering these advantages, instant retail is considered a more efficient brand sales channel than traditional e-commerce.
Instant retail is basically quick home delivery for anything but meals. While takeaway food delivery by the likes of Ele.me and Meituan Waimai has been popular for many years, instant retail expands the same principle to any physical product from any store. Although one might think that instant retail doesn’t differ much from food delivery, they are actually worlds apart. Unlike food delivery, instant retail concerns products with a high degree of standardisation. On the other hand, the number of SKUs is much larger (for many stores, around 10,000) than the dozens of menu options that can be ordered from restaurants. These all need to be digitised for the online platforms. Furthermore, instant retail also comes with challenges in warehousing, order picking and keeping products undamaged, synchronising online and offline stock levels, returns, etc.
Instant retail used to be a solution in case of emergencies, but now it has become another shopping option. Linkshop mentioned several advantages that physical stores have compared to online ones and which they can capitalise on through instant retail:
Consumers have a higher degree of trust in the authenticity of products with offline stores than with online stores, especially those in their own neighbourhoods.
When a few years ago, pre-sales periods were introduced for Double 11 consumers had to wait a long time for online purchases to arrive. Buying deals through instant retail enables consumers to almost immediately enjoy their purchases.
For merchants, the traffic costs on the instant retail platforms are lower than on traditional e-commerce due to location variables (less competition in a limited area).
Products
Research by Meituan showed that instant retail is often used for goods with high immediacy (e.g. need for freshness like with fruit or impulse buying like with snacks) and low portability (think heavy bags or bottles of rice and cooking oil). Because of their high frequency, repeat purchases and fast consumption, instant retail fits FMCG quite well. According to Kantar Consulting, instant retail has brought 15% pure incremental growth to FMCG, and its growth rate of 65% is faster than other omni-channels.
Instant retail can be a more efficient model for certain products, like perishable food or products that need cold chain logistics when delivery takes longer than an hour.
High-frequency, low-value, and immediacy-based standard products are the main products. The main product categories of instant retail include fresh food, snacks and beverages, flour, oil, rice noodles, daily fast-moving consumer goods, etc. Most of the categories that are dominated by instant retail have low (traditional) e-commerce penetration rates, like groceries and fresh food.
Instant retail doesn't only provide fast delivery; it can also handle those products that traditional e-commerce isn't good at. Traditional e-commerce is particularly suitable for three types of products: those with high unit prices (allowing space for saving money through discounts), long consumption cycles and, therefore, low purchase frequency (durable goods) and non-standardized products (resulting in many different SKUs). Offline retail categories, and thereby instant retail, show the opposite characteristics: low unit price, standardised demand (products might not be standardised - think of different sizes of fruit - but the needs they fulfil are) and high consumption frequency.
A few statistics:
Instant retail for casual snacks had a penetration rate of 4.6% in 2021 and is expected to grow to 13-14% in 2025.
The penetration rate for fresh food in 2025 is estimated to be 15%.
The penetration rate for FMCG goods will also be relatively high.
Meituan Flash Shopping sales data from October 2022 showed that non-food products had a higher growth rate (90%) than food products (44%). Still, the penetration rate is expected to be only 8% in 2025.
The penetration rate for high-priced products like 3C is expected to be 5% in 2025.
Shoes and clothing are less compatible with instant retail.
Due to the low motivation to stock up, products with small quantities, small packages, and low unit prices are more compatible with instant retail, and such specifications often have higher gross profit margins.
Customers
According to data from iResearch, the post-85s and post-90s account for about 65% of instant retail users. The core instant retail users are 26-40 years old (accounting for 79% in 2020) and mainly live in high-tier cities (taking snacks as an example, users in first-tier and second-tier cities accounted for 76% in August 2022).
The number of instant retail users was estimated to be 300 million in 2021. As with meal delivery, changes in economic and demographic structure have driven the development of instant retail demand. But instant retail isn't simply an extension of meal delivery, and while meal delivery users have a higher probability of using instant retail, it's expected that instant retail will eventually have a bigger potential target audience. The ceiling is estimated to be 550-640 million users, which is higher than the number of meal delivery users (544 million in 2021) but lower than those of traditional e-commerce (842 in 2021). Some consumers do not or seldomly order takeaway meals because of health and safety concerns, but instant retail provides standardised products for home cooking. Moreover, instant retail meets more diverse consumption scenarios than planned meals (breakfast, lunch, dinner).
Still, the usage frequency of a single consumer and, thereby, the total number of orders could be significantly lower than that of meal delivery. The average order value is, however, expected to be significantly higher.
Three instant retail models
Three main models for instant retail deliver in one hour or less.
Self-operated ship-from-store model
Self-operated front-end warehouse model
Marketplace for offline retailers model
Let’s look at what sets these three apart.
Self-operated ship-from-store model
In this model, orders are picked in a store and the warehouse of the store (for fast-movers) and delivered by the store's own delivery service. Supermarkets already have the necessary logistical 'cold chain' in their own stores to keep products fresh. They only need to add couriers with styrofoam boxes to get the products to the consumer.
This model includes Alibaba’s Freshippo (Hema Xiansheng) and JD’s equivalent 7Fresh. Hema designed its stores so that store staff assigned to different parts of the store can use handheld devices to collect online orders. Bags containing these goods are placed in a transport system under the ceiling and transported to the warehouse at the back of the store. There, bags belonging to one order are consolidated, and the full order is handed over to the Hema couriers who are waiting behind the store. A Hema store is both a supermarket and a fulfilment centre. You can see for yourself in this video ChinaTalk.nl made several years ago.
Hema couriers receive deliveries at the back of a store.
The couriers deliver the orders to the customer within half an hour and within a radius of 3 kilometres (in China, regular supermarkets have a service area of 500 metres to 1 kilometre). Instead of opening more stores in cities it is already active in - which would require significant investments - Hema has recently decided to expand the delivery radius of certain stores to reach more potential customers.
Since we discussed Hema extensively last month, we won’t discuss this model at length in this article.
JD.com uses the same principle in its 7Fresh supermarket (Hema's CEO Hou Yi used to work for JD but moved to Alibaba when his idea for Hema was rejected at JD).
Some RT-Mart hypermarkets have been refurbished and use the same order-picking and fulfilment system as Hema. Consumers place their orders for the nearest Sun Art branches through Alibaba's Taoxianda or Ele.me platforms or through Sun Art's own platforms RT-Mart Fresh (Da Run Fa You Xian). When 50% of sales come from online orders, it makes sense to integrate stores and warehouses in the way Hema, RT-mart and 7 Fresh have done.
The self-operated front-end warehouse model
In this model, a platform runs its own front-end warehouses (small distribution centres close to the consumer) and delivers within an hour in a 3-kilometre radius. Examples include Meituan Maicai, Dingdong Maicai and the defunct MissFresh. These platforms self-operate purchasing, storage and delivery and are, therefore, basically retailers. Tech Buzz China first discussed this model in podcast episode 58: China Grocery E-Commerce: Bloodbath or Gold Mine? in 2020.
The front-end warehouse model has proven difficult to operate without enough scale because of the high investments in fixed assets like warehouses and self-operated logistics. Spreading resources too thinly can lead to disaster. Two major players in this market, Dingdong and Missfresh, both had their IPO in 2021. Missfresh had to scale back and faced problems paying loans, salaries and suppliers. It lost so much of its value that it has been asked to delist. Meanwhile, Dingdong had to scale back by leaving many provinces and focusing on those that showed (potential) profitability. Meanwhile, another player, Pupu Supermarket, continues to expand and is rumoured to seek its own IPO.
There’s a lot to learn from these cases. We will go back to the front-end warehouse model in a future article. For now, the rest of this article will focus on …
The marketplace for offline retailers model
This business model involves marketplaces that do not stock goods themselves but facilitate trade between consumers and retailers through their apps. The assortment of offline retailers is made available in the platform's app, and the platform normally also arranges for orders to be collected from the store and delivered to the consumer. Companies using this model are Dada Nexus/JD Daojia, Meituan (Shangou) and Ele.me. The latter two have expanded their services from food delivery to delivery of any products.
During the pandemic, even ride-hailing market leader Didi Chuxing provided similar services. For Meituan, Didi and Ele.me, the business model has similarities to their original business of meal delivery and ride-hailing. It's all about facilitating moving someone or something from A to B.
With the marketplace platforms, stores normally charge for delivery (examples we've seen were 4-5 RMB or 50 to 65 cents) and sometimes for packaging as well. Some merchants do not charge any delivery fee but will have around 10% higher prices than in the stores. Others charge RMB 5-10 for delivery and have minimum order values of around 100 yuan.
Getting enough merchants on the platform is essential. The more merchants in an area, the more orders, the lower the average delivery time and costs, the better the user experience.
In the early years of instant retail, many large supermarket chains built their own platforms and delivery logistics (the aforementioned ship-from-store model). Very few were successful. Nowadays, most choose to hand these tasks over to professionals and work with one or more of these marketplaces.
The advantages of the marketplace model lie in the fact that it does not feature self-operated retail and is a non-competitive cooperation with retailers.
(Note: the section below is only available to paid Tech Buzz China subscribers)