Cao Shuangtao: The uncertainty brought by the pandemic in the past year has rapidly increased consumer reliance on fresh food e-commerce. However, the pandemic also disrupted supply chains, raising costs across all stages. In transportation, varying pandemic prevention policies across regions extended drivers' time on highways, increasing both transport and spoilage costs. In storage, different fresh products have varying shelf lives; for example, leafy greens stored in cold storage for extended periods suffer reduced quality and are prone to spoilage upon removal, leading to higher damage costs. Although the fresh supply chain has fully recovered by 2023, in-depth discussions with frontline suppliers and community group buying leaders reveal that the industry's problems persist, making this year a true test for fresh food e-commerce.

Fresh Food E-commerce Platforms: Accelerating into a Shakeout Phase Since its rise in 2012, fresh food e-commerce has traversed a decade. The vast market scale has attracted entrepreneurs, capital, and enterprises. To capture more market share, various emerging fresh food e-commerce models targeting the C-end have continuously risen.

Image source: China Merchants Bank Research Institute

In the view of fresh food supplier An Yang (pseudonym), no matter how downstream business models innovate, the upstream procurement process has not and will not undergo major changes. Typically, the procurement process for fresh food e-commerce platforms is as follows: operations staff determine seasonal fruits and vegetables to list, and procurement finds local medium-to-large suppliers. Suppliers then contact local agricultural brokers (known as agents, charging a service fee of 0.05 yuan per jin). Agents then collect goods from farmers. The existence of agents in the procurement chain is due to: first, suppliers from outside may face local oppression, hindering procurement and potentially causing disputes. Local agents, being locals, can better mediate and ensure smooth transactions. Second, China's agriculture remains smallholder farming with high fragmentation, meaning individual farmers' output of a certain fresh product is insufficient to meet supplier demand and lacks bargaining power. Through agent organization, multiple farmers' output can achieve scale, enhancing negotiation power and ensuring supply chain interests. In the entire transaction, agents and farmers, suppliers and agents transact in cash on delivery, with no credit periods. However, platforms and suppliers typically settle with goods first and payment later, involving varying credit periods. For example, Duoduo Maicai and Meituan Youxuan have 30-day credit periods for fresh suppliers. Due to this credit period, over the past decade, every fresh food e-commerce platform collapse has left many suppliers' debts unrecovered, making them the biggest victims.

Lu Qiming (pseudonym), a fresh supplier from Sichuan, told us he previously supplied fresh products worth 5 million yuan to Miss Fresh. After Miss Fresh's collapse last year, he tried various methods including visits and lawsuits to recover the payment. To this day, the debt remains unresolved, wasting years of hard work. Consequently, many fresh suppliers now fear supplying to fresh food e-commerce platforms. They all state that their cooperation premise is cash on delivery, accepting no credit periods; otherwise, they refuse to supply, as no one knows which platform will collapse next. Clearly, when "cash on delivery" becomes the norm for upstream suppliers, midstream e-commerce platforms face greater cash flow pressure. Many existing fresh food e-commerce platforms already have tight cash flows. For instance, Dingdong Maicai's financial reports show that from 2019 to the first three quarters of 2022, net cash flows from operating activities were consistently negative: -964 million yuan, -2.056 billion yuan, -5.667 billion yuan, and -575 million yuan, never achieving positive operating cash inflows.

Data source: Dingdong financial reports

Additionally, as of September 30, 2022, Dingdong Maicai had cash and cash equivalents and short-term investments of 5.862 billion yuan, while accounts payable and notes payable plus current portion of short-term borrowings totaled 5.94 billion yuan, indicating a clear cash flow crunch. This year, the short-term cash flow problems of fresh food e-commerce platforms are unlikely to be effectively resolved. Theoretically, a company seeking financial support typically obtains it through shareholder or investor injections, bank loans, or leverage. However, Li Rui (pseudonym), an investor from Beijing, told us that in recent years, due to persistently low stock prices of fresh food companies in the secondary market, the price gap between primary and secondary markets has narrowed, even severely inverted, preventing many investment institutions from arbitraging and causing heavy losses. Now, few investors pay attention to the fresh food sector. The sector's excessive "money-burning" nature also means that even shareholder injections and bank loans are only short-term palliatives, not sustainable. Without sufficient cash flow, many fresh food e-commerce platforms will continue to shut down operations in multiple cities this year, and the number of SKUs on their platforms will decrease. But without enough products, how can platforms increase user stickiness and achieve profitability?

Therefore, 2023 will bring a new round of shakeout for fresh food e-commerce platforms. In this process, some platforms will be abandoned by the market like Miss Fresh. Others will abandon internal friction and seek mutual support, with industry resources concentrating on companies with ample cash flow.

Downstream Market Fresh Food E-commerce: Difficulty in Achieving Profitability In fact, after a decade of development, fresh food e-commerce has long penetrated from high-tier cities to county towns.

Notably, Pinduoduo, through years of deep cultivation in lower-tier markets, holds a relatively high position in the minds of consumers there. This user mindshare provides additional trust endorsement for Duoduo Maicai, reducing transaction costs and stabilizing user retention. Consequently, Duoduo Maicai currently holds a significant market share in lower-tier markets.

Image source: Guojin Securities Research Institute

Rong Yunyun (pseudonym) from Jieshou City, Anhui Province, told us she is responsible for operating both Duoduo Maicai and Meituan Youxuan at the village level. Currently, Duoduo Maicai averages about 20 orders per day, rising to over 50 around the Spring Festival. However, Meituan Youxuan averages only a few orders daily, sometimes zero. But it must be noted that even with Duoduo Maicai's advantages, it cannot simply "lie down and win." First, unlike high-tier cities, many county towns to townships have long delivery distances. Zhao Yifan (pseudonym), head of a Duoduo Maicai outlet in Fujing Town, Shenqiu County, Henan Province, told us that the drive from the Shenqiu County Duoduo Maicai distribution center to his outlet takes about an hour. This translates to platforms bearing vehicle depreciation, higher labor costs, fuel costs, etc. If these costs are spread over each item, the order fulfillment cost is at least 50% higher than in high-tier cities, and this cost is hard to reduce. Second, each lower-tier market has typical regional characteristics. For example, eastern county towns, with relatively developed economies, see less outflow of young people, while central and western county towns are the opposite. Another example: Shenxian County, Liaocheng City, Shandong Province, known as "China's No.1 Vegetable County," has abundant vegetable production, but western regions with relatively barren land have generally average vegetable output. The biggest issue with regionality is that a profitable model in one county cannot be easily replicated in another. Even Duoduo Maicai, with ample cash flow, faces many unresolved issues in lower-tier markets. For fresh food e-commerce companies with insufficient funds, the pressure of "gold panning" in lower-tier markets is naturally immense. Therefore, in 2023, more fresh food e-commerce companies targeting lower-tier markets will exit.

Intensified Competition for Private Domain Traffic It is worth mentioning that after the 2021 shakeout in fresh food community group buying, surviving small and medium-sized community group buying companies have gradually found their own profitable methods. Qian Mi (pseudonym), head of a community group buying company in Wuhan, told us that many small and medium-sized fresh food community group buying companies no longer expand into multiple cities or lease large numbers of front warehouses; they pursue asset-light operations. This reduces costs and provides them with some cash flow to ensure normal procurement of fresh products. Monetizing private domain traffic is the core of their operations, and to achieve user retention, repurchase, and subsequent fission, they have significantly adjusted their fresh product operations. One obvious change is reducing SKU numbers from many to few, with daily products categorized into welfare items, high-margin profit items, etc. For example, leafy greens have relatively transparent prices, with gross margins typically between 5% and 10%. When handling such products, small community group buying companies often control quality while lowering prices. For high-end fruits like cherries and durians, they often pursue profits to offset operational costs. In terms of shipping, they use a drop-shipping model. However, before suppliers ship, many small group buying companies arrange dedicated personnel to visit the origin to control shipping quality and reduce after-sales issues.

Although small and medium-sized fresh food community group buying companies have achieved a virtuous cycle through private domain traffic, entering 2023, offline fresh food shopping channels such as large supermarkets represented by Yonghui and Walmart, and fruit stores like Pagoda, have all recovered. After three years of pandemic, with retail stores under pressure, offline fresh channels are paying more attention to private domain traffic, using various marketing activities to boost private domain conversion. The entry of multiple enterprises will inevitably intensify the competition for private domain traffic in the fresh food sector this year.

Image source: Pagoda

Currently, compared to large supermarkets and specialized fruit chains, small and medium-sized community group buying companies have lower procurement frequency and volume, making it difficult to gain bargaining advantages over upstream suppliers. If offline fresh channels leverage their procurement advantages to launch price wars on certain fruits in private domains, they will inevitably take away more users from small and medium-sized community group buying companies. Later, with professional private domain operations, they can gradually generate continuous repurchases from new users. Therefore, small and medium-sized fresh food community group buying companies that have achieved initial profitability will not have an easy time in 2023.

Conclusion: "You must learn how to control spoilage," is a phrase repeatedly mentioned in our discussions with multiple fresh food suppliers. Indeed, as these suppliers say, for a long time, the fresh food e-commerce industry has repeatedly emphasized how to better reach consumers and innovate business models. But let's think about a question: Why has the traditional agricultural wholesale model, despite the impact of various fresh food e-commerce, not withered like other industries but still holds a significant market share? The reason is that this model ensures relatively balanced interests among all parties, and practitioners along the chain have learned through years of experience how to minimize fresh product spoilage. Take the common summer fruit cantaloupe as an example: some large fruit wholesalers control spoilage during procurement, transportation, and storage, reducing the typical 20% spoilage rate to 15% or even lower. This controlled spoilage can be converted into profit.

Therefore, for fresh food e-commerce in 2023, it is time to abandon unrealistic fantasies and truly settle down to control fresh product spoilage. Only then can they find a way out and achieve a breakthrough.