BS ALERT! ‘QUICK COMMERCE WORKS IN CHINA BECAUSE OF LOW LABOUR COSTS’

That's the claim I often hear when discussing instant retail (quick commerce) in China. And I would like to point out why I think that is nonsense.

In the table below, I have compared the situation in Beijing with that in our capital, Amsterdam, for a grocery/FMCG delivery case for instant retail.

If we talk about labour costs, we actually need to realise that this is relative. While the absolute labour costs of delivery couriers are lower in China, so is the average disposable income of consumers. If we compare the average salary of a Beijing delivery driver to one in Amsterdam, the one in Amsterdam is actually earning LESS!

Now, of course, the full-time delivery couriers in Beijing often work longer days. Since they get paid per order, they often work 10 or even 12 hours a day. Let's take this into account and adjust the figures to an 8-hour working day. We can conclude that, on an hourly basis, the income of delivery drivers in the two cities isn't all that different as a ratio of average disposable income.

Another way of looking at things is from the perspective of the instant retail companies. In Amsterdam, the average order is €40. In China, it's only €8.50. The gross margins are most comparable, but the delivery costs as a percentage of the gross margin are dramatically higher in Amsterdam.

Since we have already established that the labour costs are comparable on a relative basis, what causes this difference, and with that, the success of instant retail in China?

The true reason why this works in China is the population density in the cities. The central urban districts in Beijing have a population density that is 6 times as high as in Amsterdam. While in Amsterdam, many people live in houses, in Beijing, the majority of people live in apartment buildings of 20 floors or more, clustered together in 'xiao qu' (small districts).

If an instant retail company like Dingdong Maicai chooses strategic locations near such xiao qu, has enough front-end warehouses and couriers, its efficiency can be much higher than in Amsterdam. And that's why the delivery costs as part of gross margin are much lower in China.

Now, add to this the fact that many instant retail platforms are part of the ecosystems of big internet companies like JD, Meituan, and Alibaba. They can reach hundreds of millions of consumers through their existing apps and encourage existing users also to use their instant retail services.

And that, my friends, are the real reasons why instant retail in China works and will struggle in many other places.

-Ed