E-COMMERCE: Fresh Food Draws Big Bucks from Alibaba, JD

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Bottom line: Fresh food sellers Yiguo and FruitDay could see strong growth and go public in the next 2-3 years, banking on strong partnerships with Alibaba and JD.com and growing consumer willingness to buy groceries online.

Yiguo in big new funding

Fresh fruit and other grocery items are the latest hot ticket in China e-commerce, with 2 up-and-coming players receiving big new fundings of $100 million or more. The larger of the pair has e-commerce leader Alibaba (NYSE: BABA) and global private equity giant KKR helping online fresh food seller Yiguo raise about $260 million in new money. The other has an online fruit specialist called FruitDay, whose backers include Alibaba arch-rival JD.com (Nasdaq: JD), raising its own $100 million.

This particular trend is really a sub-trend of a broader movement by China’s e-commerce giants into the grocery business over the last few years, encroaching on traditional supermarkets and also Wal-Mart’s (NYSE: WMT) Yihaodian that found early success in the space. Even Amazon (Nasdaq: AMZN) China has gotten into the business, though many of these companies specialize in more traditional packaged foods rather than fresh products.

The fact that both Yiguo and FruitDay could raise such big sums in the current climate reflects a growing divide in China’s economy between traditional industries and emerging ones. The former group has difficulty raising funds these days due to overcapacity and concerns about China’s slowing economy. But the latter is still able to attract big money from private equity firms like KKR and also China’s cash-rich largest tech companies like Alibaba and Baidu (Nasdaq: BIDU).

Alibaba was the leader in the latest funding for Yiguo, which raised between $240-$280 million in its latest round, the third since its founding, according to a new media report. (Chinese article) There’s not anymore detail about the actual investment, though Yiguo’s founder points out that Alibaba has been his company’s longtime strategic investor and that Yiguo operates a store on Alibaba’s main Tmall B2C platform.

Next there’s the other deal that has seen Meizi Digital Technology raise the smaller but still significant $100 million sum in its fourth funding to date. (English article; Chinese article) Again, besides the large size of the funding the most significant thing in this particular news is that JD.com is one of FruitDay’s main backers. Its other investors are mostly smaller private equity companies, including SIG Asia and ClearVue.

FruitDay saw its revenue jump from 500 million yuan ($77 million) in 2014 to 1 billion yuan last year, which shows just how fast the industry is growing. I can personally attest to that growth, since a delivery outlet for an e-commerce fruit seller just recently opened in a vacant space on the ground floor of my apartment building in Shanghai.

Feeding Frenzy

The media reports point out that Yiguo and FruitDay are just the latest companies raising big money in the fresh food delivery trend. Another site called womai.com, which appears to be backed by state-owned grains giant COFCO, recently raised $220 million in third-round funding, and another one called Bee Quick raised $70 million.

This particular trend isn’t that surprising, since entrepreneurs are realizing that Chinese consumers are very willing to buy almost anything over the Internet that used to be sold in traditional brick-and-mortar stores. Even highly perishable items like fruit and meat are following the trend, thanks to recent logistical improvements that are making same-day deliveries common, sometimes just an hour or two after an order is placed.

The only other question is how this industry is likely to develop, and whether or not it’s likely to experience a boom-bust that’s so common for China. In this case I expect that the future leaders will all have strong backing from one of the big e-commerce names like Alibaba, JD and Amazon.

That means the sector will ultimately consolidate around 3 or 4 major players that can ensure product and service quality. Anyone who can spot a future leader could make some good money if and when they go public, which I expect will happen in the next 2-3 years as these companies start to show sustainable profits.

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