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Breakingviews - Chinese web grocer’s IPO requires a strong stomach
September 14, 2017 / 7:24 AM / 3 months ago

Breakingviews - Chinese web grocer’s IPO requires a strong stomach

HONG KONG (Reuters Breakingviews) - A Chinese online grocer’s flotation may struggle to pique investor appetites. Food giant COFCO wants to raise up to $600 million in Hong Kong floating its supermarket website, IFR reported on Aug. 26. Ordering fresh food online is hot, with sales in China on track to top $36 billion by next year, estimates iResearch. But the group is loss-making and battling it out with rivals in a price war.

Customers select meat at a supermarket in Hangzhou, Zhejiang province, China, June 9, 2016. REUTERS/Stringer

Womai, which translates to “I buy”, is an oddity in Chinese e-commerce. It is controlled by a state-owned behemoth, COFCO, which has global and domestic businesses spanning commodities trading, food processing and packaging.

Ties with the parent may give the company an edge. Womai, which sells both own brands and imported products like Evian water, can use COFCO’s supply chains to source goods more cheaply than rivals. The web grocer already relies on COFCO subsidiaries for one-third of purchases. Earlier this year, Womai took control of its parent’s food export and import business, giving it direct access to suppliers in Europe, Japan and the United Kingdom.

Yet unlike a classic internet business, providing groceries ties up a lot of capital and requires a lot of investment. The company has to finance and manage inventory, operate its own delivery network, and invest in things like refrigerated warehouses and delivery stations.

To make things worse, fierce competition has made profit elusive. E-commerce giants like Alibaba and JD, traditional supermarket chains, and hordes of fruit and vegetable startups lure shoppers by offering discounts, special promotions and same or next-day delivery.

Womai had yet to turn a profit, and losses in the first six months of this year topped 838 million yuan. Revenue is growing fast – it jumped 59 percent to 2.3 billion yuan in 2016 - but Womai expects to be loss-making this year and the next.

One industry report estimates that just 1 percent of the 4,000-odd online supermarkets in China are profitable. Many will have to shut down. Backing potential winners requires a strong stomach.

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