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China’s On-demand Delivery Sees Rising Demand
Online groceries will be one of the major growth drivers of the overall e-commerce industry in China. With China’s e-commerce penetration reaching 35%, analysts expect further growth in the low teens over the next three years.1 While online penetration is high for certain product categories like home appliances (44%) and beauty and personal care (39%), the penetration rate for online groceries is only 15.7%.2,3 On-demand delivery has been a rising star in online groceries this year, and we expect this business to sustain its robust growth in the coming years. For investors, we believe this shift presents a compelling opportunity to capitalise on the competitive advantages of leading food delivery players as they grow their presence in the on-demand delivery space.
- On-demand delivery businesses are emerging as a key driver of online grocery sales growth across China.
- The penetration of on-demand delivery still has significant headroom for growth, representing just 2-3% of total grocery sales in China.4 We expect the channel to sustain robust growth, driven by changing consumer habits, focused investment from e-commerce players, value-added benefits for merchants, and government support.
- Leading e-commerce and food delivery businesses that can leverage existing rider networks have a strong competitive advantage to lead in the on-demand delivery segment.
On-demand Delivery to Drive Growth of Online Groceries
Since the pandemic, major e-commerce players have invested heavily in their Community Group Purchase (CGP) businesses as consumers shifted to purchasing groceries online. However, the growth of CGP businesses has slowed down this year partly due to government regulation. Large platform companies were found to be selling grocery products at significantly discounted prices, sometimes even at a loss, mainly to gain market share. These pricing tactics competed not only with other e-commerce companies but also directly with small mom-and-pop stores, leading to the government’s intervention.
Since then, companies have gradually shifted their focus from CGP to on-demand delivery businesses. For example,
On-demand delivery has shown a robust growth rate, with a large part of the sales mix coming from grocery products like fast-moving consumer goods (FMCG) and fresh products.5 Globally, on-demand delivery businesses are facing challenges with the rising cost of capital. However, we believe that Chinese companies can leverage their moats in food delivery to sustain high growth rates in on-demand delivery businesses and become profitable in the near future. Key success factors of China’s food delivery industry include the country’s high population density and lower rider costs compared to other developed economies. By applying this same logic to on-demand delivery businesses, we expect this service will be a leading driver of China’s online grocery growth in the years to come.
Low Penetration Provides Headroom for Growth
China’s penetration of on-demand delivery is currently low, representing just 2-3% of total grocery sales and around RMB 254 billion in gross merchandise value (GMV) across the top players in 2021.6 For the leading player,
Despite the low penetration rate, on-demand delivery is already a meaningful channel for leading supermarkets. According to Bernstein, on-demand delivery represented around 18% of revenues for the top 20 supermarket chains in China.8 Thus, we expect on-demand delivery to sustain robust growth and take a greater share of China’s overall grocery market, supported by several key drivers:
- Changing consumer habits: Many consumers relied on on-demand delivery services during the lockdowns in China this year. After trying the service, many consumers are willing to pay a premium for the extra convenience. In addition, younger consumers tend to have a higher willingness to pay for convenience, especially in China, where like other major Asian countries such as Thailand, Taiwan, Japan, and Korea, we see high penetration of convenience stores.
- Investments by e-commerce companies: As mentioned above, platform companies are shifting their investments to on-demand delivery businesses. In particular, the focus is on the grocery category, where online penetration remains low and presents ample growth opportunities.
- Value add for merchants: More merchants are willing to join on-delivery platforms as the service provides incremental revenue with delivery enabling larger catchment areas. While the top 20 supermarket chains already have 18% of their revenue from on-demand delivery, this figure is still tiny for smaller merchants and has significant room for growth.9 Moreover, on-demand delivery is not only for grocery products but also extends to flowers, consumer appliances, pharmaceutical products, etc. For
Meituan, Instashopping increased the number of new merchants by more than 30% year-on-year in 2Q22.10
- Government support: The Chinese government supports on-demand delivery as the business model helps digitise small- and medium-sized merchants. But, more importantly, on-demand delivery supports small and medium enterprises (SMEs) rather than taking shares from them, which was the case previously with the CGP model.
Leading Platforms Have a Head Start in the On-demand Delivery Segment
We believe leading e-commerce names like
Most players are currently loss-making. Thus, considering unit economics, we think players with food delivery businesses may continue to gain market share while front distribution centre models like Dingdong and Missfresh will lose.
October 14, 2022
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1. Source: Morgan Stanley, July 2022
2. Source: Euromonitor, Morgan Stanley, July 2022
3. See our previous note which touched on why e-grocery penetration has been lower than other categories
4. Source: Bernstein, August 2022
5. Source: Bernstein analysis, August 2022
6. Source: Bernstein, August 2022
7. Source: Ibid.
8. Source: Ibid.
9. Source: Bernstein, August 2022
10. Source: Company data, August 2022
11. Source: Morgan Stanley, May 2022
12. Source: Bernstein estimates, August 2022
13. Source: Company data, August 2022
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