At more than $1 trillion, China is the world’s largest grocery market. Sheer size does not equal efficiency, however. Economies of scale aside, when it comes to getting goods on the shelves, China’s supply chain for transporting fresh produce, dairy, meats and other perishable goods is fragmented and outmoded, leading to spoilage rates that some estimate are as high as 40 percent.

Amid all those rotten tomatoes and cartons of sour milk, there is opportunity. E-commerce companies, aiming to provide China’s 600 million online consumers a door-to-door alternative to grocery shopping, are teaming up with shipping firms to streamline the county’s “cold-chain” logistics network.

Cold-chain logistics involves the transport of perishable goods in refrigerated trucks immediately after processing and providing cold storage facilities and distribution to the point of sale. As China’s middle class grows, consumers are increasingly seeking out fresher, better food. To meet their needs, companies transporting comestibles from field to market are starting to invest in cold-chain infrastructure to improve efficiency.

“The demand and the willingness of customers to pay higher price points for what they perceive to be higher quality food has indirectly driven the demand for the cold chain infrastructure in China,” said Waldemar Jap, managing director at Boston Consulting Group. Roland Berger Strategy Consultants estimates that China’s cold chain logistics industry will grow 25 percent annually to hit RMB 470 billion in 2017.

The cold supply chain usually serves the wholesale, business-to-business market, experts said, whether it is transporting perishables to a supermarket or to a restaurant. But the real boom is happening in China’s online business-to-consumer (B2C) logistics segment, which Roland Berger expects will grow about 120 percent annually from RMB 400 million ($65 million) in 2012.

Alibaba Group-owned Tmall.com, China’s largest B2C website, launched a fresh food vertical last year, offering Chinese consumers dragon fruits from Vietnam, steak from Australia and cod fish from Canada delivered direct to their homes. The vertical saw growth of 200 percent last year in terms of gross merchandise value transacted, while the fresh fruit segment rose 500 percent.

“Nowadays, Chinese people want to eat the freshest produce and try regional and imported specialties,” said Maggie Chen, senior logistics manager at China Smart Logistics, also known as Cainiao, an Alibaba Group affiliated company. “But these products need cold chain logistics in order to give the consumer the freshest possible results, so this has led to China’s cold chain logistics entering a rapid growth stage.”

Modernization is sorely needed in China if online grocery shopping is to continue expanding.

In developed countries like the U.S., mega-retailers like Wal-Mart have had decades to build robust, countrywide supply chains. Experts interviewed said 100 percent of meat and seafood produce in the U.S. are shipped and handled in sub-zero conditions, while 95 percent of fruits and vegetables are transported and distributed using the cold chain. This means a spoilage rate of about five percent.

In China, the country’s vast geography, fragmented transportation networks and regionalized markets present tough challenges. Investment in a national cold chain network has been largely an afterthought. Chen estimated that about 80 percent of all fruits and vegetables in China are transported at room temperature in outdated trucks, leading to a spoilage rate as high as 40 percent.

To combat waste and feed the demand for imported and regional fresh food, Alibaba Group together with partners announced last year a $16 billion investment plan to develop China’s nascent logistics industry. Cainiao was a product of that venture—Alibaba Group owns 48 percent of the company. Cainiao is a logistics information-sharing platform that merchants and third-party vendors use to manage their logistics needs.

Cainiao works with more than 300 logistics vendors and more than 100 merchants to ship perishables all over China. One such merchant is Dalian-based seafood producer Zhangzidao Group. The company harvests sea urchins, conchs and oysters for export and domestic consumption, and also imports Alaskan king crabs and Boston lobsters to sell in China.

Although Zhangzidao, which launched a Tmal.com store in March, operates its own cold chain, the company works with Cainiao for regional and “last mile” deliveries. Despite employing modern methodology to ship live seafood all across China and having 50,000 tonnes of cold warehouse space, more development is needed, according to company officials.

 

“We still face delivery limitations in China,” said He Chunlei, Zhangzidao’s chief executive. “There are about 34 cities that we are unable to serve and another 12 that we have issues with last-mile delivery.”

To ease logistic bottlenecks, He said the company will invest RMB 650 million ($106 million) over the next few years in cold chain logistics. The first phase of investment, which involves the acquisition of cold warehouses, has already begun while the second phase of investment, which is the acquisition of refrigerated trucks, will begin in 2015.

China is two to three decades behind developed countries and a lot of capital will be needed before the country is caught up, analysts said. Barriers to growth go beyond the acquisition of modern refrigerated warehouses and trucks. Logistics processes and practices need to be upgraded, and workers must be educated in the importance of maintaining a product’s freshness. Many long-haul truck drivers, for example, shut off their engines to save fuel while taking breaks or waiting in traffic, which also turns off refrigeration machinery, allowing food to spoil.

“The (cold) supply chain hasn’t worked well in a way that it has created awareness and a priority amongst the workers in the system about its importance,” said Gan Chee Wee, principle at consultancy AT Kearney. Gan said the lack of cold distribution points and lack of training mean that perishables and fresh meat and seafood would sometimes be defrosted and then frozen again as it was transported from one place to another.

“The cost of running cold chain is not cheap, especially in a market like China, where the product is produced inland but the point of consumption is at the coastal cities,” Gan said. “In the end you are going to need the pull factor from the consumers in order to really move development of cold chain.”