Cashing in on health scares, China online food sales boom

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Chinese consumers are responding to a powerful new marketing tactic that plays to a widespread fear of food contamination - the promise of safe groceries sold online.

Pledging produce direct from the farm, vendors have found food is becoming one of the fastest-growing segments of Internet retailing as they cash in on scares from cadmium-tainted rice to recycled cooking oil.

The trend is adding momentum to a Chinese online retail boom driven by a rapidly expanding middle class, with companies such as COFCO Ltd and Shunfeng Express betting that a decent slice of a 1.3 billion population will pay for the peace of mind they say their services offer.

"I think people are willing to pay a higher premium than in the West. In other markets, like the UK, food e-commerce is about convenience. Here, there's going to be a higher quality and safety premium," said Chen Yougang, a partner at consultancy McKinsey.

(Read more: Fearing Contamination, Chinese Pay More for Imported Infant Goods)

But convincing some skeptical Chinese consumers on food quality will remain a battle. Shanghai-based Zhang Lei expressed doubt on the credentials of some products being touted as organic.

"Everyone knows that in China organic is not the real thing," said the mother of one.

Nonetheless, total online sales of fresh produce in China could rocket to 40 billion yuan ($6.5 billion) in five years from about 11.5 billion yuan this year, said Zhou Wen Quan, a senior analyst at Beijing Orient Agribusiness Consulting.

Research firm Euromonitor has more modest expectations, but still sees growth comfortably beating major overseas markets. It looks at volumes rather than values of online purchases of fresh food, with the Chinese market expected to grow by around 8 percent by 2017 from 664 million tonnes this year, compared to U.S. growth of about 5 percent from 77 million tonnes.

(Read more: Chinese Take to Mobile Shopping Faster Than Peers)

So far, most food sold on China's largest online shopping sites such as Yihaodian, majority owned by Wal-Mart, and Jingdong Mall has been packaged items or fruit with a relatively long shelf-life.

But a wave of new businesses are focusing on fresh and premium produce, using the Internet to target higher-income consumers than supermarkets, which typically serve a broader customer base, analysts say.

"The vegetables are really fresh," said Beijing resident Lei Na, who shops on websites such as Womai.com, owned by China's top food processor and trader COFCO.

"Supermarket food doesn't look that fresh, especially if you only get there in the evening."

Shunfeng Express, China's largest delivery company, last year launched Shunfeng First Choice offering a range of food to around 500,000 consumers.

About 70 percent are imported products such as wine and milk powder, but it also sells local seafood, meat and vegetables.

"We go directly to the farms to pick the produce, and then using our own logistics, deliver straight to the consumer. So from the tree to the consumer's dining table, we'll remove all the sectors in between," said Yang Jun, director of sales and marketing.

Delivering on promises?

Persuading customers they can meet promises on food safety is crucial for online retailers.

"If I'm busy I use websites. But if I have time, I prefer to drive to the supermarket and choose vegetables myself," said Zhang in Shanghai.

(Read more: Youku Emerging a Goliath in China Internet)

But vendors say that cutting out middlemen increases freshness and makes food more traceable, while packaging barcodes that can be read by smartphones help consumers verify the origin of items.

And companies go to some lengths to describe their products online. Customers looking at free-range chickens on the Benlai Shenghuo website, a 2012 start-up whose name roughly translates as 'original life', get details on the breed they are selecting and its diet, along with photos of the birds wandering on farms.

Online customer reviews and ratings are also key in convincing potential buyers of quality, said Chen Liang, a senior research expert at Alibaba, owner of China's biggest online marketplace Taobao.

With its 10 million users per minute, Taobao has ridden the e-commerce boom in China, with its customers moving from non-essential items such as books and electronics to clothes and recently food. Its sales of meat, seafood, fruit and vegetables grew 42 percent last year to nearly 1.3 billion yuan.

(Read more: China halts milk powder imports from New Zealand, Australia)

"Before, people thought the Internet wasn't suitable for selling clothes. But now it's the most suitable channel. I think food will follow this trend," Chen said.

Another major challenge facing e-commerce food firms is the cost of developing nationwide cold chain logistics, with McKinsey's Chen suggesting players work together to connect suppliers with a network of cold storage facilities.

But with food scandals hitting Chinese shoppers thick and fast - products from the world's largest dairy exporter Fonterra have just been recalled from Chinese shelves - firms are confident they can overcome hurdles in the market.

"During the bird flu outbreak, our chicken sales exploded," said Steve Liang, founder of Shanghai-based online retailer Fields, referring to a jump in sales after a new strain of the virus discovered in February that killed over 40 people in China and Taiwan.