PRC starts regulating online food-trading. Liabilities and risks for operators increase significantly. Business operators will have to check whether their business models and operations are fully in line with the Measures.
New rules entered into force on October 1, 2016 to regulate some key-aspects of online F&B business. The Measures for the Investigations and Punishment of Illegal Acts concerning Online Food Safety (“Measures”) in fact impose new obligations on both third-party online platform providers (“Online Platforms”) and online food traders.
In the recent years, online food market grew significantly: a survey by Analysys International showed that online transactions for food ordering and delivery in China generated revenues for more than 45 billion RMB ($6.7 billion) in 2015, more than 300% over the previous year.
While consumers will welcome these new regulations – which aim to increase food safety – for online food platforms and food traders it is time to work hard to ensure compliance as soon as possible with the new legal framework.
Currently, many online food players contend their market share, and their offers differentiate not in terms of products and price, but of business model.
The main distinction is between (i) food business operators (restaurants or retailers) which directly sell and deliver food products through their direct online store and (ii) online platform providers which third-party food operators’ products (so-called “O2O” – online-to-offline).
Under the first model, consumers order directly on the food operator’s website, and the food operator directly delivers the products to the consumers. We see – for instance – brands such as NOSH, MacDonald’s, KFC, Pizza Hut operating in this way.
On the other side, we have internet-based services whereby restaurants sign contracts with Online Platforms that handle orders from consumers in a specific area. Basically, consumers place orders on the Online Platform, which then sends the order to the selected restaurant and finally delivers to the consumer. There is no any direct interaction between the consumer and the restaurant. The largest players in the sector – Ele.me, Meituan and Baidu Waimai (backed respectively by internet giants Alibaba, Tencent and Baidu) accounted for around 85% of Chinese market of online food delivery services in 2015. Other famous platforms include Sherpa’s and Mealbay.
The online scene is however quickly evolving, and innovative concepts bloom. An interesting example is Xinwei Cook, where consumers can purchase online ingredients to cook their own meal. Xinwei Cook packages all the required ingredients with the right dosage and proper cooking instructions, and then delivers the box directly to the consumers.
The new regulation
The Measures introduce new obligations for online food providers:
- Online Platforms and food suppliers operating online food trade through own online system must file recordation documents with the China Food and Drug Administration (i.e. CFDA) within 30 business days after obtaining approval to establish an online sales system.
- Adequate technology.Online Platforms must maintain adequate technology, including data backup and restoration technology, to ensure the security of trading data. These provisions hopefully will be complemented with more precise standards or guidelines that will specify what “adequate” means.
- Management systems.Online Platforms must establish various procedures, including for the registration of food traders, self-inspection of food traders’ operations and information disclosure, prevention and reporting of illegal activities, termination of services for food traders who commit serious violations or are subject to food safety investigation, and customer food-safety complaints.
- License inspections.Online Platforms must examine and register the relevant food operation license of its registered food traders. Their food production or food operation license of the food operator shall be displayed in a visible place on the main business activities page of the Online Platform’s website.
- Online Platforms must establish archives for registered food traders to record their real contact information and management team information. This information shall be regularly updated.
- Trading records.Both Online Platforms and food suppliers operating through own online system must keep trading records for at least 6 months after the warranty period for any product, or for at least two years if no warranty period is specified.
- Delivery: Both Online Platforms and food suppliers operating through own online system shall take measures to guarantee the safe storage and transportation for food traded online.
Moreover, the Measures also focus and strengthen investigation and enforcement against illegal online food trading activities.
First of all, Online Platforms as well as food suppliers operating through own online system are liable for the authenticity of the information displayed on their websites.
They may also face penalties if they provide false information or if they do not guarantee an appropriate storage and transportation for food traded online.
CFDA has been granted the power to inspect online food providers, including by posing as consumers (and therefore acting under “plain clothes”), to buy products from randomly selected online stores, in order to assess any incompliance with the applicable laws and regulations. They can also employ other inspection methods, including onsite inspections, interviews, examinations, trade records and review of technical data.
Beside the Measures, other important areas of food regulation are being updated.
The CFDA has issued Measures for the Administration of Supervision and Inspection of Food Production and Operation that tighten inspections and regulation of food production activities – in particular for (i) producers of foods/food additives, (ii) producers of health foods, (iii) food distributors, and (iv) restaurant and catering service providers respectively.
Furthermore, the former food distribution license and restaurant service license are now combined into a sole food operation license, issued by the CFDA.
Before launching any operation – included online sale – online food operators using direct-owned web-site to collect orders shall obtain the food license (which shall perfectly suit the kind of foods and service that they provide): food production or – more often, as we mainly talk about restaurants – food operation license.
Of course, companies should only conduct online business purely within the scope of their food license.
Sanctions are various and – beside the abovementioned specific ones – generally speaking Online Platform may face penalties for failure to provide real contact registration of the food seller, examine their licenses or fails to perform reporting obligations: fines between RMB 50,000 and RMB 200,000; if serious consequences are caused (death or serious injuries), the platform’s operations may be suspended or – ultimately – the business license revoked; finally, the platform has joint liability with the food traders towards consumers in case of breach of consumers’ rights.