China’s second largest ecommerce company, JD.com, just invested US$70 million in an importer of fresh produce, FruitDay.
FruitDay is one of many firms seeking to deliver fresh fruit and vegetables to China’s middle class. They claim to deliver in up to 300 cities, but the vast majority of sales probably come from less than 10 cities.
One reason for this is differing income levels across cities, but more importantly is the lack of cold chain infrastructure across China. Modern cold storage facilities are expensive and until recently few companies were willing to pay for it.
Today the cost of land is so high in many cities that it can be impossible to create a winning business plan for cold storage facilities. Similar problems arise for operators of cold storage trucks. These are problems that will be solved, even if it involves local government subsidizing land used for cold storage facilities. I expect that the Shanghai Free Trade Zone will soon host a few of these facilities.
Imported = safe
Chinese consumers associate imported fruit and vegetables with safety and quality, as they do with imported milk. This creates a willingness to pay a premium. Additionally, consumers have less trust in what they buy in a store, believing that produce has passed through multiple distributors to get to the store. And so even if it was high quality originally, it may have been diluted or mixed with lower quality produce somewhere along the way.
Buying directly online makes consumers more comfortable
Buying online directly from the importer and having produce delivered direct to the home by the importer gives greater comfort that the produce is what it says on the packet (and if it turns out not to be the case, there is at least a single company to go after). Demand ranges from traditional apples to cherries, avocados and kiwis. This is good news for many farmers outside China.
Expect Chinese investment in overseas farms
Producers of fruits and vegetables can expect to see rapidly growing demand for a wide range of their output. As usual this will likely be accompanied by large flows of Chinese capital to invest in farms.
I see this today in countries ranging from Chile, to the United States and to many parts of South East Asia. I have not seen it, but it would not surprise me if we see agricultural exports from Japan to China growing fast also, given the Chinese middle class fascination with the quality of all things Japanese.
Greater international competition will directly or indirectly lead to greater consolidation, investment in domestic agriculture, and an acceleration in raising standards.
This will be good news for international cold storage logistics service providers, both by air and ship. It’s also good news for governments that subsidize their farmers – there should be less need to do so. And finally, it’ll be good news for the Chinese government that wants the domestic agricultural industry to shape up and improve its quality and safety.