Alibaba and Meituan Are Both Opening Fresh-Food Supermarkets Offline. In the End It's Still an Online Business

After several failed attempts, e-commerce companies are using physical stores to teach people the habit of buying fresh food online.

Go by Dianping reviews alone and Alibaba's Freshippo (Hema Xiansheng) looks more like an internet-famous restaurant.

Photo after photo of salmon sashimi, lobster, mini hot pot; comments about bringing family and best friends along to "tick it off the list"; reviews that talk about what the food costs and how it tastes.

Beijing and Shanghai have never lacked restaurants worth queueing several hours for. But this one is a little different.

"We got here at 10 in the morning, right when it opened, waited about 50 minutes, and we're finally eating." On a weekday in July, at 11 a.m., we met a couple in the dining area of Freshippo's Shilipu store in Beijing. On the table in front of them sat the store's signature dish, Boston lobster.

They had timed their arrival deliberately. Once before, they had waited more than three hours for a lobster.

The seafood-cooking counter hands out queue numbers too. The seafood here costs almost half what it does at a seafood market, and having it cooked on the spot adds only 20 to 30 yuan in processing fees.

But Freshippo's kitchen can only handle so much, and the wait from queue number to plate is often two or three hours.

At 4 p.m. on a weekday, a few women finally got the baked lobster they had ordered two hours earlier. On their table sat the empty plates of the shrimp, sushi and juice they had already worked through.

"There were so many people. We got here at 11, queued an hour and a half just to get a number and place the order, and only now are we eating," one of them told us while shelling a shrimp. "We came this time just to try it."

At mealtimes, even if you skip the queue at the popular seafood counter, you may find yourself holding a tray of food with nowhere to sit.

As for how the supermarket's food tastes, what the reviews mention most is the low price, not the flavor.

Clearly, Freshippo never meant for anyone to treat this place as a restaurant.

This is the 13th store it has opened in a little over a year, and the dining area still takes up the same share as in the first one: a third of the floor space. Judging by the waits, the kitchens in the newer stores haven't grown much either.

What Freshippo wants, in the end, is for you to taste the food, get used to walking the aisles, start trusting the fresh produce here — and then get into the habit of ordering from home.

In the way it feels, Freshippo differs from a traditional supermarket in many ways

Celia is a college student from Hebei. When her school broke up for the summer in July, she took a holiday job at a supermarket on Dacheng Road in Beijing.

Starting a week before the opening, her job was to tell passing residents about the supermarket that was about to open and, more importantly, to get them to download its app.

The supermarket sits one floor below ground in a department store, and you can pick up its free Wi-Fi at the department store's entrance. Internally, Celia's job is called "little bee."

The first time you walk into the mall that houses Freshippo, a "little bee" is the first employee you meet — because the only way this supermarket will take your money is through the Freshippo app, with an Alipay account linked to it and a code scanned at the register.

Pulling out your phone to pay in a supermarket, large or small, is no longer news, and clerks will steer you toward following the store's official account and signing up as a member on WeChat. But a shop where cash simply doesn't work is still not that common.

A traditional supermarket asks you not to open anything until you've paid and left. At Freshippo you can pay while you're still browsing — a bit like shopping online, where you can keep looking after you've bought something instead of settling up all at once at the end.

The seafood counter that fills the reviews is only a small part of the store. Freshippo's supermarkets also house food-and-drink concessions: mini hot pot, charcoal-grilled steak, Yuanmai Shanqiu bakery, Gong Cha, fresh juice, build-your-own salads. Every concession's register runs on the supermarket's own system, so a clerk holding a scanner can be making milk tea or grilling a steak and still ring up everything else in your basket.

At the self-checkout machine near the exit, we found that an ordinary Alipay payment code worked fine. But at the dining checkout inside the store, a cashier told us that cashiers get fined when a customer doesn't pay through the Freshippo app. At the staffed checkout near the exit, meanwhile, Freshippo has opened a "cash proxy payment" channel for customers who can't easily pay through the app.

Besides reminding customers to have the app ready before they pay, Celia's job includes telling those who have downloaded it that if they live within 3 kilometers of the store, they can buy from the app, wait half an hour, and a Freshippo rider will bring the order to their door.

Strip away the rows of shelves behind her and what Celia does is no different from the street promotion internet companies hire people to do.

Unlike Wumart, Yonghui and the rest, none of the shelves here stand taller than 1.5 meters. "That comes from ergonomic design, so you can reach anything just by raising your arm," a Freshippo staff member told us. The price tags on the shelves are all electronic, and besides the product name and price, each carries a QR code unique to that item; scan it in the Freshippo app and the item drops into your cart.

The aisles are wider than in an ordinary supermarket too — three shopping carts can pass side by side. "A lot of our customers come as a whole family, sometimes pushing a stroller, so when you shop with friends or family it isn't so crowded."

A month or so after the Shilipu store opened, this staff member has taken to calling himself a "tour guide": speaker on his belt, microphone in hand, walking colleagues and reporters who come to have a look around the store. He can do it in his sleep by now. Freshippo does too many things differently from a traditional supermarket, and since the Beijing store opened in July, the curious have arrived in waves that haven't stopped.

Boston lobster at 99 yuan each, abalone at 3.9 yuan each, Russian king crab at 245 yuan a jin (500 g) — the seafood here costs almost half what it does at a seafood market.

Outside the seafood section, there isn't a single weighing station anywhere in the store, the kind you find in every ordinary supermarket. That is part of why Freshippo looks tidier than a traditional one.

The fruit, vegetables and meat here come pre-packed and are sold by the portion — closer to an e-commerce unit than the traditional supermarket's price per 500 g or per kilogram. By Freshippo's published figures, a portion of vegetables weighs 300 to 500 g, exactly enough for a family of three to stir-fry one dish. No need to stock up: if you want more tomorrow, you come back tomorrow and buy it fresh.

Most of the vegetables carry Freshippo's own "Daily Fresh" label, with the day of the week printed on the bag. They cost 2 to 5 yuan, and whatever doesn't sell is thrown out that same day. This is the vegetable brand Freshippo builds in every city it enters, supplied directly under agreements with local growing bases.

Much of the fresh food Freshippo sells comes from exactly the same source as what Tmall sells.

Take the Shilipu store in Beijing: it carries about 6,000 items (SKUs). That isn't many, and fresh food accounts for half of them. By comparison, upscale supermarkets such as Ole' carry more than 20,000, and convenience stores such as 7-Eleven and FamilyMart carry more than 2,000.

Here you can find plenty of Tmall bestsellers — in-season cherries, Boston lobster. Since the start of this year, Freshippo's supply chain and Tmall's have begun to merge.

A Boston lobster is hauled out of the water in Canada, flown to China, cleared through customs and quarantine, and sent straight to a Freshippo store. The only difference between buying it on Tmall and buying it at Freshippo is the last step: from Freshippo, a Freshippo rider carries it out of the store; from Tmall, a courier brings it to your door.

Apart from the back room where the packers work, Freshippo has no warehouse at all. The whole store runs on electronic price tags and an inventory system Freshippo built itself; orders placed in the app are picked straight off the shelves. As a rule, what's left on the shelf is the entire stock, and when an item falls below a set level the system notifies the supplier to restock automatically. "On a weekend we might restock several times in one day."

In each of the store's sections, a few staff members stand about with Freshippo shopping bags and handheld scanners, each responsible for picking in one area only. Every order placed in the app is split into several parts and pushed to the handhelds of the pickers who cover each part. Depending on the temperature and storage the goods need, the picking bags come in gray, green, purple and blue.

Once a picker finishes, the bag goes onto a conveyor running along the ceiling, which carries it to the back of the store, where the parts are put back together, packed, and handed to the delivery team.

Those riders are all full-time employees of the store. Freshippo CEO Hou Yi has said in an earlier interview that riders plan their own routes within their zone — they know better than the store does how to save time and money.

Most of the staff here have clearly never worked in a supermarket, and quite a few are students on summer jobs. At both the entrance and the exit of the Dacheng store, recruiting posters for shop staff hang where you can't miss them, and plenty of people come in to ask. A staffer fielding recruitment questions at the service desk told our reporter that anyone who meets the age requirement, holds a health certificate and gets through the interview can start; what they really want to know is how long a student taking temporary work will stay.

On the job sites, Freshippo is also hiring for senior posts — "gold-medal store manager," "category-buying expert" — with the work address given as "Wudaokou."

Inside Alibaba, Freshippo's original code name was "Wudaokou." For a long time after the project was set up it was kept secret. Alibaba had invested in and taken stakes in plenty of offline supermarkets, but opening one from scratch was a first.

Freshippo is now scouting sites across Beijing. "As long as the floor area is above 4,000 square meters, we'll consider it," a Freshippo executive said. A traditional supermarket has to weigh foot traffic and its surroundings when picking a site; Freshippo's new stores are less fussy about location. "Because we deliver within 3 kilometers, we can cover Guomao without having to put a store in Guomao."

By Hou Yi's account, a city the size of Beijing or Shanghai can hold at least 50 Freshippo stores. Freshippo already has 8 in Shanghai, with delivery covering essentially the whole core urban area inside the Middle Ring Road.

Before the project was approved, persuading Alibaba CEO Daniel Zhang, Hou Yi said: "Build 3-kilometer delivery on top of a supermarket and you can replace cold-chain logistics with ambient-temperature delivery, with costs under control."

The reason for a format that puts supermarket, restaurant and delivery together, Hou said, is that "without traffic, a warehouse sitting on its own has no way to gather customers; if you rely on street promotion or on buying traffic from someone else's platform, you're no different from traditional e-commerce."

In the end, Hou Yi and Daniel Zhang settled on this: build a supermarket, make fresh food the specialty, put the weight offline on the experience and online on the transaction.

Meituan has opened a supermarket too. It looks more like an ordinary one

Ten kilometers from Freshippo's Shilipu store, in Wangjing, another supermarket built around fresh food and home delivery has just opened. Like Freshippo, Zhangyu Fresh sits in an area ringed by residential compounds. The staff member handing you a basket at the door, and the posters inside, both remind customers to download the app: order online and it arrives within an hour.

As at Freshippo, the prices on the shelves are on electronic tags. But Zhangyu Fresh covers just over 2,000 square meters and has no dining area. Apart from the staff holding shopping bags and getting ready to pick orders, this new supermarket may not look very different from an ordinary one; its ceiling, unlike Freshippo's, has no conveyor hung with shopping bags to keep reminding you that it delivers.

The store was opened by Baobao Aichi Technology Development Co., Ltd., a wholly owned subsidiary of Meituan, and the deliveries are taken by Meituan's food-delivery riders. Meituan's food-delivery users inside Zhangyu Fresh's delivery zone can also find the store, labeled a "brand merchant," in the app's fresh-food section.

Zhangyu Fresh says it will add food service before long. Business records show the company behind the supermarket changed its legal representative in February this year and added food service to a registered scope of business that already covered the sale of food, vegetables and fruit, and catering management.

Meituan did not respond to QDaily's request for more information, but it's fair to guess that the store took the company half a year to prepare, at most. At Zhangyu, a staff member working the meat shelves told us he found the job on 58.com and was trained for a month before the opening; asked what exactly makes this supermarket different from any other, he couldn't say.

Zhangyu may be the first supermarket Meituan has opened, but Meituan started trying to carry supermarket goods to people's homes two years ago. Customers order and pay online, and the platform sends a rider to the door.

Meituan opened a supermarket for the sake of its food-delivery business. Alibaba, which has worked on this quietly for more than two years and now has 13 Freshippo stores, is doing it for the sake of fresh-food e-commerce.

E-commerce has already moved into the fresh-food supply chain, but it has never built the habit

After all these years, fresh-food e-commerce is still burning money to buy users.

The number of users is the problem it cannot get around. Fresh food and fruit are things ordinary consumers reach for every day, yet hardly anyone is used to buying them online.

Figures from the China E-Commerce Center put domestic fresh-food e-commerce turnover at about 91.3 billion yuan in 2016, 80% more than in 2015. The fresh-food market as a whole runs into the trillions: National Bureau of Statistics data puts it at 1.36 trillion yuan in 2016. That works out to an online penetration rate of under 0.7%.

Fresh food is the biggest market e-commerce has yet to take. It is big enough to feed the growth Alibaba, Tencent, Amazon and others will need for the next decade and more.

Research from GF Securities finds that 38% of that 1.36 trillion yuan is sold through fresh-food supermarkets. BCG's survey of fresh-food consumption finds that among fresh goods sold online, the more standardized categories — fruit, dried goods — have higher penetration, while meat and seafood lag.

Fresh-food e-commerce has always demanded heavy investment: these goods are hard on storage and delivery. Almost every company in the business makes a point of advertising the warehousing and delivery network it built itself, and because fresh food stays fresh for only so long, the demands on operating efficiency are higher still.

Over the past few years, the big e-commerce platforms have all invested in fresh-food companies, pulled them onto their own platforms and fed them traffic.

Fruitday took JD.com's money and set up shop on JD's site. Yiguo Fresh took Alibaba's money and moved onto Tmall, taking over fruit supply for both Tmall and Suning. MissFresh took Tencent's money and moved onto sales channels including Meituan food delivery and Ele.me. COFCO's Womai.com took Baidu's money. Benlai Life's most recent round was US$117 million from Zhongcheng Investment, Shanghai Nandu, China Equity and Joyoung; it has taken nothing from Alibaba, Tencent or Baidu, and Benlai Life recently opened its own first physical store, in Chengdu.

The big platforms have also tried to avoid overcommitting by investing in independent fresh-food companies rather than doing it themselves. But capital, traffic and an expensive cold chain have not, between them, built the habit.

Cutting losses out of the fresh-food sales process is not mainly a cold-chain problem. The harder part is how fast the goods sell — the turnover rate. If an item has to sit for months before it moves, the best cold chain in the world won't help.

Some companies went under. Others, to protect turnover, pushed only a handful of bestsellers, which left consumers with very little to choose from. With less to choose from, people bought even less often.

Now fresh-food supermarkets are being used to talk people who never bought fresh food online into doing it

Since last year, the general e-commerce platforms that had stayed backstage have started selling fresh food themselves.

In December 2016, Tmall reorganized into three business units, folding Tmall Supermarket and Tmall Fresh into the fast-moving consumer goods unit; at the same time it began pushing hard on globally sourced fresh produce.

On August 2 this year, Tmall announced another US$400 million for Yiguo Fresh. Counting Alibaba's and Suning's earlier investments, this is the fourth round Yiguo has taken from the Alibaba camp. Alibaba now holds a controlling stake.

Yiguo is now the exclusive operator of Tmall Supermarket's fresh-food section. By what Yiguo founder Jin Guanglei has told media, Tmall Supermarket supplies more than 50% of Yiguo's orders.

In 2016, JD.com raised fresh food from a second-tier department to a first-tier business unit, on a par with 3C electronics and home appliances. Richard Liu moved Wang Xiaosong, who had run the 3C unit, over to fresh food, and at that year's company meeting said JD would put 10 billion yuan over three years into building a cold-chain logistics network.

At about the same time, Freshippo's first store opened in Shanghai.

Freshippo store openings

2016.1

The Jinqiao Plaza store opens in Shanghai; a year and a half later it is declared profitable

2016.9

The Daning and Hongqiao stores in Shanghai, among others, open one after another

2016.12

The second-generation format, "Freshippo Market," debuts at the Yaohan store in Shanghai

2016.12

A partnership with Sanjiang Shopping Club opens the first store in Ningbo

2017.3

The first Beijing store was to open; it is delayed

2017.6

The first Beijing store opens, also a second-generation "Freshippo Market"

2017.7

Jack Ma makes Freshippo's relationship with Alibaba public; by now Freshippo has opened 13 stores

Over the past few years, Alibaba has assembled a supply chain and invested in logistics as it built out fresh food as a category, and it has not spent little doing so. But that very first step — converting a user into a buyer — has been stuck for a long time too.

Freshippo now has thirteen stores nationwide. The first, at Jinqiao Plaza in Shanghai, opened in January 2016; it is also the one Jack Ma visited in mid-July.

GF Securities' research, based on its own field survey, says that store did 23.8 million yuan in combined online and offline sales over 28 days, at a gross margin of 20% to 25%. Online and offline retail can share logistics and warehousing costs, so once online orders grow, all you have to add is e-bikes, insulated boxes and riders.

By Freshippo's published figures, across its open stores online and offline orders each account for roughly half. At Jinqiao the online-to-offline split has already reached 7:3, and sales per square meter run 4 to 5 times those of a traditional supermarket.

Look at how the Shanghai Jinqiao store has done over the year and a half since it opened, and Freshippo has, to a degree, broken the deadlock on that first step. The seafood counter may have a queue every single day, but as an offline experience store, Freshippo is already educating its users.

Buy a book or a phone, and what you saw online is almost exactly what you pull out of the box.

But with seafood — and with the more everyday fruit, vegetables and meat — what a customer sees on an e-commerce page and what finally arrives are often not the same thing.

The answer e-commerce companies have arrived at is to use physical stores to draw in people who only ever bought fresh food offline: a store you can walk around, eat in, and leave having downloaded the app. Then, on a day when they don't feel like walking around a supermarket, those same people can pick up a phone and order.

Freshippo still has plenty that isn't finished. It hasn't lined up all of Alibaba's internal resources: Fengniao delivery isn't plugged into Freshippo's logistics, and the merging of Tmall Fresh's procurement with Freshippo's has only just begun.

A few days ago Tmall announced it would build a "three-kilometer ideal-life circle" in Beijing, with Tmall Supermarket rolling out steep discounts across the city. Whether Tmall Supermarket, Freshippo and even Alibaba-backed Yiguo Fresh end up working against each other, and whether they can be merged to any effect, is one of the challenges Alibaba faces next.

Whether it's Meituan or JD Daojia, coming at fresh food through delivery, or Freshippo, leaning on the offline experience, this is in the end a business that uses every method it can find to pull people online — the way Taobao once got people used to buying clothes on the internet.

As for "New Retail," the phrase Alibaba has been so fond of since last year: what it is building is still an online business.

Cover image from Visual Hunt