The New Landscape for Fresh Produce, Catering, and Food After the Pandemic | Frees Fund

In our era, eating has become extraordinarily complex. To cope with three meals a day, we've devised countless solutions. Around food, numerous business models have emerged. Among the most distinctly Chinese is the food delivery business, which grew up standing on the shoulders of mobile internet.

How did the pandemic reshape how we eat? With offline restaurants devastated, many of us tried our hands in the kitchen for the first time. To buy groceries, we likely downloaded a slew of fresh food e-commerce apps, then deleted all but the one or two we liked best. Unable to order delivery, we may have devoured a new generation of "instant noodles," then been surprised to find they were no longer just collections of chemical additives.

These pandemic-era facts about eating are reshaping the fresh food, restaurant, and packaged food markets. Because among the scenarios of eating — delivery, dine-in, home cooking, and convenience foods — growth in one means decline in the others.

This is a zero-sum game.

In this article, we will explore:

• Why will fresh food new retail decline relatively quickly after the pandemic? Who will survive, and what characteristics will they have?
• Ready-to-cook meals may rise on this momentum — will they become a new battleground for Meituan and Alibaba?
• Why might restaurant chains like Xibei and Haidilao, despite being severely wounded right now, actually gain more room for development after the pandemic and evolve into entirely new species? Could a "Xiaomi of the restaurant industry" emerge?
• Why will convenient, healthy food solutions see a wave of new growth?
• We will also introduce how one food supply chain brand achieved counter-trend growth during the pandemic.

After extensive conversations with industry experts and entrepreneurs, here are several preliminary views:

• Fresh food new retail, currently widely seen as a "dark horse," will quickly recede after the pandemic, accelerating elimination. What remains will be full-category, full-scenario retail platforms capable of integrating online and offline.
• If the sense of happiness and value that people have recently found in home cooking proves durable, busy young people who want to cook will need solutions that balance taste, time, and efficiency. This is the opportunity for ready-to-cook meals and semi-finished products. Regardless of whether they ultimately resemble food or restaurants more, the battle for the entry point may trigger fierce conflict between giants.
• Restaurant chains like Xibei and Haidilao have been severely impacted in the short term. But long-term, because of their extensive store networks, strong brand power, and supply chain capabilities, if they can strengthen their online capabilities, they may reach consumers directly and even become the "Xiaomi of the restaurant industry": both product and brand; reaching users directly, with over half of sales through owned channels; and selling both their own products and others'.
• Healthy, convenient foods will reach a new inflection point. The restaurant and food industries are developing new points of intersection.

We hope this offers fresh perspectives. We welcome your thoughts on "eating" at the end of the article.

/ 01 /

After the pandemic, pure online fresh food platforms will be eliminated faster, while full-category, full-scenario retail platforms integrating online and offline will survive

In our article "The New Era of 'Good Companies' After the Pandemic | Frees Fund" (click to read), we raised a question worth exploring: "The explosive growth of fresh food is clearly driven by nearly everyone staying home to cook — but what happens when people return to work?"

After further reflection, we lean toward the view that fresh food will recede relatively quickly after the pandemic, with fresh food e-commerce in particular facing accelerated elimination.

According to data from CITIC Securities Research & Development, China's fresh food sales reached 4.72 trillion RMB in 2017. Of fresh food transactions, online and offline retail accounted for 47%, roughly 2.21 trillion; food service accounted for 32%; and another 21% went B2B, serving various enterprises and institutions. Roughly speaking, nearly half of dining demand was met by households, and nearly 30% was handled by food service establishments.

During the pandemic, offline restaurants essentially shut down. The 30% of fresh food demand that would normally have been absorbed by food service establishments shifted almost entirely into households, met through fresh food purchasing and home cooking.

This explains why all fresh food platforms thrived during the pandemic: demand suddenly shifted in massive volume, creating severe supply shortages, so users tried virtually every app they knew to snap up groceries. The cause of this surge also planted the seeds for the fierce "elimination round" that would follow.

Regarding this high growth, we should note that while both traditional supermarkets and fresh food e-commerce platforms may have grown 3-5x, the former was from a high base — they normally stay open during Spring Festival — while the latter was from a low year-over-year base. The absolute GMV of these two platform types differs enormously.

Specifically, ranked by recent benefit, Freshippo and JD.com-type platforms lead.

From day one, Freshippo has pursued online-offline integration comprehensively. It operated normally during Spring Festival, with ample supply chains and knowledge of user preferences. JD.com similarly demonstrated the controllability and efficiency of its self-operated logistics system when other platforms were constrained by delivery capacity.

The next beneficiaries were traditional supermarkets with supply chain foundations, established brands, and early online efforts.

They possessed full-category supply chains and had already operated through Spring Festival, with staffing and inventory far exceeding pure online platforms. During the pandemic, whether young people or elderly parents, if people went out anywhere, the supermarket was likely the only destination.

CITIC Securities data shows: Wumart's daily vegetable volume of roughly 700 tons tripled during Spring Festival; Yonghui Life stocked over 200,000 vegetable portions, 3x normal levels; similarly, RT-Mart's procurement volume grew 4-5x year-over-year. (For more on RT-Mart, see "Li Feng Column 16 | The Fresh Food Retail War — Learning Early-Stage Investment from the Secondary Market")

Next were traditional supermarkets that hastily launched delivery services. According to Business Observer, Better Life supermarket rolled out its "Xiaobu Daojia" service in just 48 hours. In January 2020, Better Life's supermarket sales grew 43% year-over-year, while its online delivery business grew 3x month-over-month, with average order value exceeding 120 RMB.

After the pandemic, users' habit of purchasing fresh food online may persist. The long-term impact will be: forcing offline supermarkets and convenience stores to accelerate digitalization; testing full-category supply chain capabilities; intensifying competition and elimination; pushing users to mature and become more discerning; and significantly increasing brand concentration.

Thus, fresh food e-commerce platforms that have recently gained fame, after their brief surge, will ultimately face accelerated consolidation, with only a handful remaining.

One reason: after the pandemic, when the entire population is no longer panic-buying groceries, the total volume and frequency of C2C fresh food purchasing will drop substantially.

Working professionals returning to offices will have far less time to buy groceries and cook — dining out and ordering delivery will increase.

For homemakers, once family members return to work and children to school, they won't necessarily cook such large meals every time, so fresh food purchasing frequency and volume will decline.

Elderly people may return to wet markets and supermarkets. While online fresh food purchasing is convenient, going out to buy groceries while taking a stroll is their typical lifestyle. However, having discovered during the pandemic that nearby supermarkets also offer delivery, they may have supermarkets deliver heavy items like rice, flour, and oil.

Another reason fresh food new retail will face accelerated elimination: users are maturing. Through experiencing various online grocery platforms, users have repeatedly paid cognitive costs — they definitely know who has the fullest stock, the best prices, and the fastest delivery.

Undoubtedly, most apps and channels will likely be abandoned by users. What remains in users' minds will be one or two products and channels offering relatively the fullest selection (not just vegetables but other daily necessities), the best value, and the greatest convenience (online, offline, even office scenarios). This is the process of user brandization — users developing their own brand discernment and willingness to be loyal to brands they recognize.

So for the few fresh food e-commerce platforms that survive, what's next to continuously win users?

In our view, they will inevitably need to massively expand categories, becoming full-category platforms that meet household daily consumption scenarios, not just fresh food. This means potentially expanding from roughly 1,000 SKUs to nearly 10,000.

The underlying challenge: for any type of retail platform, building full-category (including fresh food) supply chain capability is not accomplished overnight.

/ 02 /

As ready-to-cook meals rise, the retail end will become a new battleground for Alibaba and Meituan

While the pandemic has finally put fresh food new retail back on the wind, as explained in Part 1, this emerging opportunity may not belong to fresh food e-commerce. We see a new category growing — ready-to-cook meals. Looking ahead, this category could well become a new battleground for Alibaba and Meituan.

Why do we say this?

Even if working professionals won't have abundant time to cook at home after fully returning to work, the time we spent in kitchens during the pandemic will undoubtedly help some users rediscover the happiness and sense of value in home cooking.

If this happiness and sense of value prove durable, busy working professionals and homebody young people will seek ways to cook that are time-efficient yet don't sacrifice taste.

This is the opportunity for ready-to-cook meals and semi-finished products. Because they balance taste, time, and efficiency, allowing users to bypass the cumbersome procedures of cooking — skipping washing, cutting, seasoning, and other steps — with simple processing to have a meal ready.

During the pandemic, we've already seen news of restaurant chains and fresh food e-commerce platforms selling ready-to-cook meals.

As for which market ready-to-cook meals will ultimately displace, we must return to our three main scenarios for solving three meals plus late-night snacks: home cooking, restaurant dine-in, and delivery. Assuming ready-to-cook meals become a fast-rising "dark horse," increasing the total volume and frequency of home cooking, in this zero-sum competition for eating, they will displace some delivery and restaurant business.

The pressing question: whose opportunity is this? The restaurant industry, the food industry, or both?

This involves two questions to watch: Where will supply come from? And where will the retail end be presented? The type and characteristics of supply will determine retail presentation.

We currently see two possible supply sources. The first is restaurants with central kitchens. Chain restaurants already need to portion and standardize dishes to reduce back-of-house pressure at individual locations. Whether ready-to-cook meals are ultimately sold through restaurant channels — on food delivery platforms like Ele.me and Meituan — or appear in fresh food sections of retail platforms is a question worth pondering.

The second supply source could be factories — producing ready-to-cook meals through food industrialization. If factories are the producers, will ready-to-cook meals, like other food products, primarily be sold through various retail platforms such as supermarket channels and offline convenience stores?

Regardless of whether they ultimately resemble restaurants or food more, this will trigger new wars among giants.

Because if they are primarily sold in retail scenarios — such as Tmall, JD.com, supermarkets, convenience stores — they may ultimately be "harvested" by retail giants. If they reach users through restaurants via our daily food delivery/restaurant discovery entry points Meituan and Ele.me, they strengthen food delivery platforms.

Therefore, looking ahead, ready-to-cook meals may evolve into a new battlefield between Alibaba and Meituan — the former being the archetypal retail representative, the latter representing the leading food delivery platform.

/ 03 /

Restaurant chains like Xibei and Haidilao, despite appearing severely wounded, will actually have greater room for development after the pandemic and may even evolve into new species

Currently, many restaurant brands are doing everything possible to save themselves. One approach is accelerating digitalization, fighting for as many online orders as possible to offset pandemic losses.

In our view, the players most likely to gain significant development space from this trend are leading restaurant chains like Xibei and Haidilao — precisely those that appear most severely wounded.

Because of their size, with revenue gone but fixed costs remaining high during the pandemic, their losses are especially severe. By rights, they should have stronger motivation to save themselves by filling online capability gaps.

Moreover, compared to smaller players, they have stronger brand appeal, larger store networks, and better supply chain capabilities — thus better positioned to strengthen online operations, manage "private domain traffic," and reach consumers directly.

Once they can reach consumers directly and establish their own systems, they could become the "Xiaomi of the restaurant industry."

Xiaomi's characteristics: both product and brand; reaching users directly, with over half of sales through owned channels; and selling both its own products and others'.

Previously, because the restaurant industry was too fragmented, no "Xiaomi" had emerged.

Recently, we've seen early signs from Xibei's latest moves.

Xibei is intensifying online operations, mainly in three areas: delivery, online marketplace, and recently launched group meal services. On its WeChat mini-program "Xibei Zhenxuan," it sells not only its own brand ready-to-cook products like oat noodle fish, beef ribs, and lamb spine hot pot, plus ingredients and snacks, but also other brands' products — such as CP Foods eggs.

Xibei's online efforts are showing visible results. According to a February 16 CCTV News report: "Through WeCom, Xibei added over 30,000 customers online in January. Now, more than 200 store managers nationwide maintain close connections with over 90,000 customers daily, providing online meal delivery and ingredient ordering services."

In the future, as restaurant enterprises' online capabilities generally improve, their multi-channel operations and direct-to-consumer capabilities will accelerate noticeably. When they grow large enough, they can partially bypass platforms and reach consumers through owned traffic — ultimately evolving into new super-species that can sell finished dishes, semi-finished products, cleaned vegetables and ready-to-cook items backed by supply chain infrastructure, and even other brands' products.

04 Upgraded convenience foods will see a wave of new growth

In solving the problem of eating, China's fresh food, restaurant, and packaged food markets have always advanced in interwoven fashion, with new models, applications, and infrastructure constantly emerging and iterating.

Under the pandemic, ready-to-cook meals aren't alone in affecting delivery and restaurant dine-in share — upgraded convenience foods are too.

Convenience foods have experienced ups and downs in recent years, consistently trying to reclaim market share stolen by food delivery. The pandemic has brought them a more pronounced inflection point.

According to data from Alibaba Business Advisor compiled by Jieshu Consulting, from January 9 to February 6, 2020, within the grain/oil/rice/flour/dried goods/seasonings category, instant rice noodles/vermicelli/river snail rice noodles, instant hot pot, along with noodles and dumplings/wontons, ranked in the top six subcategories by sales data.

The convenience foods we've eaten recently are mostly no longer the kind with 180-day shelf lives and packaging that reads "image for reference only, actual product may vary."

Their shelf lives have shortened considerably, some to just 60 days. And the abalone and fish maw chicken in ramen, the dried bamboo shoots and peanuts in river snail rice noodles, the yellow beef in rice noodles — these have started to be名副其实 (true to their names), existing in physical form. Frankly, their taste rivals food delivery, and they're convenient to prepare.

In other words, convenience foods are undergoing category upgrade and iteration. This benefits from the maturation and efficiency gains of the food industry chain — sourcing ingredients from various supply chains, while flavoring, processing, and packaging — and from the improvement of China's food processing capabilities, such as widespread application of freeze-drying technology.

Take instant coffee, another new category immune to the pandemic. Frees Fund portfolio company Saturnbird's star product, ultra-instant coffee, is freeze-dried coffee powder packaged in mini coffee cups, instantly soluble in cold water, hot water, milk, and other liquids.

When Starbucks, Luckin Coffee, and others temporarily closed offline locations, absent from coffee lovers' lives, instant coffee represented by Saturnbird rose on the trend of portability, becoming a substitute for freshly ground coffee. This partly explains Saturnbird's significant sales surge during the pandemic.

However, convenience is only a short-term advantage in special times. For instant coffee to compete long-term with freshly ground coffee and occupy user mindshare, it must return to product value. As a representative of Tmall's new brands, Saturnbird's instant coffee has already surpassed Nestlé to become the category leader. It upgraded coffee production processes, making the还原度 (fidelity) and taste nearly comparable to freshly ground coffee.

Whether it's convenience foods substituting for food delivery, or portable instant coffee replacing freshly ground coffee, both are products of Chinese food industry progress; and beyond dumplings and buns, represent another possible important intersection between the restaurant and food industries.

05 Deepening health consciousness will drive growth in healthy ingredients and push development of short-shelf-life, chilled products

After the pandemic, another opportunity that may not seem prominent now but represents a major long-term opportunity is health-related food solutions and substitute products.

Because after pandemic-era health education and elevated health consciousness, when we hold menus to order, push shopping carts to buy ingredients, or casually pick up a can of high-sugar beverage, we'll deliberate more than before about health impacts.

However, eating "healthy" doesn't mean eating only salads. "Healthy" first translates to "fresh and short-shelf-life," then to "ingredients and components beneficial to health."

Fresh and short-shelf-life encompasses not just fresh and chilled products, but also ambient short-shelf-life foods. Achieving freshness and short shelf life requires minimizing the time from farm to table. This demands extremely high digitalization and feedback speed across the entire production and supply chain.

We've seen that in recent years, accelerating digitalization in food-related industries has risen to a major strategic priority for leading food enterprises. Take Three Squirrels: it invested tens of millions to build the Squirrel Cloud Manufacturing system, connecting numerous food production enterprises through digital systems on one end, and connecting consumers through multi-channel, multi-scenario approaches on the other, shortening the link between them. As digitalization across the chain improves, system operation and response speed accelerate, enabling short shelf life.

Short shelf life also depends on logistics, cold chain, and other infrastructure development. However, because virtually the entire country is now transporting fresh food, cold chain technology supply and application scope have expanded further, with costs gradually declining. Frees Fund portfolio company ice cream brand Chicecream's development has benefited from this. That users in first-tier cities can eat "zero-additive" ice cream delivered via -22°C cold chain within 48 hours of ordering is absolutely an opportunity of the rapid cold chain development era.

Furthermore, attention to healthy ingredients and components is already an explicit micro-trend.

The "sugar-free" sparkling water brand Genki Forest reaching a 4 billion RMB valuation in three years, and vegetable snack subcategories launched by snack brands like Three Squirrels becoming high-growth areas in recent years, both illustrate this. Another example: Frees Fund portfolio company Matcha food brand Guancha, because it uses Japanese-imported matcha without artificial colors or flavors, has attracted many true matcha fans.

The pandemic may steepen this trend's growth curve, making it a more prominent trend.

06 Case Study: Xinliangji's counter-trend growth

Founded in 2016, Xinliangji is a food supply chain brand whose main products are frozen crayfish, basa fish, fish heads, snails, and other aquatic products.

Its significance as a case study: after being affected by the pandemic, Xinliangji found "opportunity in crisis," rapidly adjusted its business, and found new growth points. Its anxiety and困境 (predicament), decisiveness and adjustments, may also represent many entrepreneurial enterprises during the pandemic.

Before the pandemic, Frees Fund portfolio company Xinliangji primarily served B2B restaurant enterprises. With restaurants impacted by the pandemic, B2B restaurant business plummeted, and Xinliangji faced significant risk, with heavy inventory pressure.

In the founder's words, "If the pandemic is controlled by end of February, it'll be okay; if it lasts until May, we won't dare to produce."

Seeing the emerging ready-to-cook meal trend, Xinliangji promptly shifted strategy, going directly to C2C consumers and launching cleaned and seasoned crayfish on major platforms. Users need only heat them in a wok or microwave for a few minutes to enjoy a delicious plate of crayfish.

From February 7 to 17, 2020, Xinliangji's C2C daily sales grew more than 10x, from 80,000 to nearly 1 million RMB.

The key to Xinliangji's counter-trend growth lies in its food industry technology and product refinement.

Xinliangji uses "flash-freeze freshness lock" technology, rapidly freezing food at -196°C to lock in original moisture, making processed crayfish texture and quality closer to live crayfish.

For flavor, Xinliangji established the Asian Cuisine Joint Research Center, led by renowned third-generation inheritor of Xu-style Yanbang cuisine and Chinese culinary master Xu Bochun.

Of course, from an infrastructure perspective, Xinliangji's ability to deliver crayfish nationwide with guaranteed quality is inseparable from cold chain technology advances and cost reductions.

We're optimistic about Xinliangji's transformation. Post-transformation, it achieved a closed loop from production to processing to brand under one entity, with both B2B and C2C business — one of the few food enterprises we've observed that masters the full chain.

Summary

1. The restaurant industry itself improves efficiency through multi-channel operations and expanded sales scenarios, while the restaurant industry gradually industrializes — these two业态 (business forms) coexist and develop in interwoven fashion.

2. The pandemic has brought an inflection point for the rise of convenience foods and ready-to-cook products. Beyond dumplings and buns, the restaurant and food industries may once again have an important intersection.

3. The restaurant industry may eventually see a "Xiaomi-like" enterprise emerge: both product and brand; reaching users directly, with over half of sales through owned channels; and selling both its own products and others'.

4. After the pandemic ends, fresh food will recede relatively quickly, the restaurant industry will experience short-term revenge spending, and then users will have stronger health consciousness in eating. Therefore, healthy foods will welcome a new wave of growth.

5. Having experienced the pandemic, fresh food, restaurant, food, and other retail industries will value online presence and datafication far more than before.

Today's Question

We welcome your comments on what new opportunities you see regarding "eating" during the pandemic.

By 9 PM on February 27, the 6 most thoughtful contributors will receive crayfish gift boxes from "Xinliangji" — one麻辣 (mala/spicy) and one garlic flavor.

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