Source: Kaiboluo Finance (ID: kaiboluocaijing)
Nine months ago, MissFresh and Dingdong Maicai were racing to become the "first listed fresh food e-commerce company," with Shanghai as a key battleground. After establishing a strong presence in Beijing, MissFresh, with the confidence of being the industry leader and 1 billion yuan in funding, set its sights on Shanghai.
This is Dingdong Maicai's home turf. Founder Liang Changlin stated early last year that Dingdong Maicai's market share in Shanghai was 10 times that of MissFresh.
Now, in the face of Shanghai's COVID outbreak and surging demand, the "fast" story of the two companies, which rely on the front-warehouse model, has failed.
Social media is flooded with complaints about "difficulty buying groceries in Shanghai." An employee at a Dingdong Maicai station in Shanghai told Kaiboluo Finance that in his area, groceries on the platform sell out in less than a minute. On one hand, there's no stock; on the other, there aren't enough riders to deliver even if there were.
An investor focused on the fresh food e-commerce sector said the two companies are no longer as combative as they were before going public. Where has the fighting spirit of the front-warehouse leader and runner-up gone? The superficial reason might be that both are too preoccupied with their own troubles: Dingdong Maicai is under investigation for passing off dead fish as live, and MissFresh has been reported to have suppliers demanding payment at its headquarters. A deeper change is that MissFresh, the former front-warehouse leader, has shifted direction and is telling a new story, leaving Dingdong Maicai to go further down the front-warehouse path.
But competitors show no signs of letting up. Hema CEO Hou Yi repeatedly called out Dingdong Maicai, saying, "It's brutal, tens of billions of funds trapped inside," and "Old Liang (referring to Dingdong Maicai CEO Liang Changlin) is really anxious, and so are his investors; they might face a margin call soon..." Hou Yi also attached Dingdong Maicai's stock price chart.
However, even as Hou Yi was making these remarks, Hema closed five fresh food stores.
The stock price performance has been embarrassing for both. Dingdong Maicai's market value has fallen from an initial $5.5 billion to just $900 million, a drop of over 80% in nine months. MissFresh has fallen to just a fraction of its peak, with its market value dropping from a high of $3.2 billion since its IPO to $380 million.
Is the front-warehouse model wrong? Can burning cash buy a future? These doubts have always been there. With this question in mind, this article attempts to dissect the two companies and answer the following questions:
- Besides the pandemic, who should bear the blame for the difficulty in grabbing groceries, lack of freshness, and slow delivery: the companies or the front-warehouse model?
- Behind the rumors of layoffs and unpaid debts, are the cash flows of the two companies still stable?
- How much reference value do the regional profitability signals released by the two companies have?
- Setting aside the broader decline of Chinese stocks, what do the secondary market performances of the two companies say about the prospects of the front-warehouse model?
****Who Should Bear the Blame?
During this period, Dingdong Maicai and MissFresh have exposed thorny issues on the consumer side, mainly two types. The first is poor consumer experience, which both companies have suffered from. Consumer complaints focus on severe stockouts and untimely delivery.
These complaints existed earlier, but they have been amplified by the recent localized outbreak. "I tried to grab groceries on both Dingdong Maicai and MissFresh, but failed. It's as hard as grabbing orders at 0:00 on Double 11. I finally managed to order vegetables on Dingdong Maicai, but they didn't arrive until the next afternoon. In the end, I bought leafy greens at a fresh food store near my community," a Shanghai resident complained to Kaiboluo Finance.
The second type is food safety and freshness issues, which have been exposed at Dingdong Maicai. In January and February, it was fined over 500,000 yuan for selling substandard fresh products. In March, right after 3·15, reports emerged of dead fish being "revived" and "repackaged" with new labels, further tearing open the food safety gap at Dingdong Maicai.
Who should bear the blame for "instant" delivery not being timely and fresh food e-commerce not being fresh? Let's first state the conclusion: this is not a drawback of a particular model; the problem lies within the companies, involving management issues and cost control factors.
First, look at the "difficulty buying groceries" and "untimely delivery." Feng Yanjiao, a partner at CIC灼识咨询, analyzed that the recent pandemic is a special situation, leading to a surge in orders and a short-term shortage of delivery capacity. Leading fresh food e-commerce platforms are also trying to introduce crowdsourced delivery models to solve the problem of a sudden surge in orders.
In the view of Yu Mingyang, managing director at Celtic Asia, the scheduling and supply chain upstream and downstream supply issues are just the trigger. The deeper reason is that the order density in certain regions is insufficient, so the number of riders and inventory cannot support a sudden spike in orders.
As for "fresh food not being fresh," in his view, it appears to be caused by poor management, but in essence, it's an extreme way to reduce loss. According to a report by The Beijing News, at Dingdong Maicai's Beijing Sanyuan station, dead fish that should have been scrapped were sent to consumers under the guise of "fresh slaughter" because if all dead fish were reported as losses according to regulations, the station's loss rate would increase, directly affecting some employees' wages. The practice of relabeling expired vegetables was because sorters are paid by piecework, and overtime would result in deductions. Directly relabeling expired fruits and vegetables not only reduces the station's loss rate but also improves sorting efficiency and income.
"When a company lacks a scientific and reasonable supervision process, some violations may occur. Of course, supervision costs money, which also exposes that some companies do not value the supervision process, even treating food safety as a joke to save costs," said Zhang Ao, an analyst focusing on the e-commerce industry. On March 16, Dingdong Maicai was summoned by the Haidian District Market Supervision Administration and an investigation was initiated.
"What you assess is what you develop. Similar problems are not uncommon in this industry," Gu Wei, a fresh food e-commerce practitioner, told Kaiboluo Finance. For a fresh food retail company, among the three key elements of cost, efficiency, and experience, it depends on which one you are willing to amplify and which one to shrink. When a company is neither profitable nor under profit pressure, this choice becomes even harder.
****Cash Flow: Is It Still Okay?
These two companies have recently encountered a third type of trouble: money issues. At the end of last year and the beginning of this year, Dingdong Maicai was reported to have laid off a large number of employees, with "procurement, algorithms, operations, and recruitment departments cutting 20% to 50% of staff." However, this news was later denied by Dingdong Maicai, which said that "individual position changes are normal organizational resource adjustments."
MissFresh recently saw reports of suppliers coming to its headquarters to demand payment. Some media reported that it owed many suppliers for goods, with the largest amount owed close to 10 million yuan, and some suppliers even hung banners at its headquarters to demand payment. This scene had been seen in bankrupt fresh food e-commerce companies like Dailuobo, Tongcheng Life, and Shixianghui.
Compared with Dingdong Maicai, MissFresh is more dependent on suppliers. Zheng Yuan, an investor focusing on the fresh food e-commerce sector, said that both companies make their own branded products and prepared dishes, but their supply-side strategies differ. Dingdong Maicai has its own food R&D and processing plants, while MissFresh uses a model of cooperating with factories for OEM production.
The above news of layoffs and debt collection has been interpreted by some as signs that the cash flows of the two companies may be problematic. When news of layoffs and unpaid debts is linked to companies with huge losses, the market is inevitably sensitive. However, Zhuang Shuai, founder of Bailian Consulting, analyzed MissFresh's situation, saying that if the reports of owing suppliers are true, the amount and period of the arrears need to be examined to determine the risk.
"This is not a problem of a specific platform, nor is it limited to front-warehouse models, because rising costs force unprofitable retailers to find ways to ensure cash flow space, and extending supplier payment terms is one of the means," Gu Wei admitted. A fresh food supplier told Kaiboluo Finance that multiple retailers are in similar difficulties and use similar means, with some platforms extending payment terms from one to two months to three months or even half a year.
"This is the industry status quo, but it must be admitted that arrears mean unhealthy, and unhealthy needs treatment," Gu Wei said.
From the financial reports, the cash flows of both companies have always been tight, which makes suppliers even more worried. First, look at Dingdong Maicai. Its Q4 2021 financial report shows current assets of 6.516 billion yuan and current liabilities of 7.348 billion yuan, meaning current assets can no longer cover current liabilities. Among current assets, cash and cash equivalents are 663 million yuan, short-term investments are 4.568 billion yuan, and the most directly liquid assets total 5.231 billion yuan. The most direct short-term debts include accounts payable and short-term borrowings in current liabilities, which together amount to 5.28 billion yuan.
Dingdong Maicai 2021 Q4 Balance Sheet
MissFresh, whose revenue scale has been overtaken and is getting further from the top spot in fresh food, has a cash flow that is not much better. Its Q3 2021 financial report shows that current assets also cannot cover current liabilities. The above two categories of assets with strong liquidity total 2.302 billion yuan, while the amount that needs to be repaid and paid in the short term is 2.408 billion yuan.
MissFresh 2021 Q3 Balance Sheet
An industry insider analyzed that for these two companies, the ratio of the most directly liquid assets to short-term debts is less than 1, indicating tight cash flows. "Even if prepayments and other current assets are included, the ratio is just over 1, indicating that the cash flow situation can barely support the short term, but it is not conducive to development and will definitely require further financing." Both companies need to find ways to raise money, either by quickly achieving profitability in operations or by seeking more investment.
****Regional Profitability: Is It Replicable?
Regardless of the path, they must solve the biggest immediate problem: vindicating the widely questioned front-warehouse model.
The front-warehouse is the core business model of both companies, characterized by "speed." The platform sets up small warehouses close to consumers (in office buildings, communities, etc.), and goods are sent from large warehouses to the front-warehouses in advance. When users place orders, delivery can be as fast as half an hour.
But the costs are extremely high. To meet instant delivery needs, the platform must lay out a sufficient density of front-warehouses and equip enough riders.
MissFresh, founded in 2015, is one of the earliest front-warehouse fresh food e-commerce companies. Dingdong Maicai transformed from an O2O model in 2017. Regardless of seniority, both have suffered huge losses for years. Dingdong Maicai accumulated a net loss of 11.4 billion yuan over three years. MissFresh lost 9.8 billion yuan over three years and three quarters.
Yu Mingyang analyzed for Kaiboluo Finance that since their listings, the operating conditions of both have not improved significantly. The core problem is low average order value, low gross margin, and high fulfillment costs.
The only good news is that in Q4 2021, Dingdong Maicai's gross margin improved from 15.1% in the same period last year to 27.7%, but fulfillment costs were as high as 1.7 billion yuan. Moreover, this quarter also had bad news: it experienced its first quarter-on-quarter revenue decline since Q1 2019.
Investors need confidence and hope. MissFresh and Dingdong Maicai have also been releasing regional profitability signals. As early as July 2016, MissFresh announced it had achieved regional profitability in Beijing; in May 2019, it claimed to have achieved positive operating cash flow nationwide; in July 2020, it said it had achieved profitability excluding headquarters personnel costs by the end of 2019.
These statements do not represent a signal that MissFresh has turned losses into profits. Yu Mingyang found that the calculation methods for fulfillment costs differ among companies, and if the calculation method for this item changes, it may turn an originally loss-making model into a positive one.
Under professional accounting standards, the full-chain fulfillment cost includes six items: warehouse rent, warehouse staff costs, delivery costs, large warehouse logistics costs, depreciation, and utilities.
"If a company counts the cost of replenishing front-warehouses from large warehouses and delivery costs as group costs, and the gross margin is sufficient, a single warehouse can indeed be profitable, but it does not mean the business model is viable," Zheng Yuan said.
Dingdong Maicai's good news also comes from its home base. At the Q4 2021 earnings call, Liang Changlin announced that in December 2021, Dingdong Maicai had achieved full profitability in Shanghai, and it aims to achieve full profitability in the Yangtze River Delta by the end of Q2 2022, and approach profitability nationwide in Q4.
Can its performance in other regions match Shanghai? Liang Changlin's vision for profitability is as follows: after one year of operation, each front-warehouse should achieve a daily order volume of 1,000 orders, with an average order value exceeding 65 yuan, and after deducting fulfillment costs, the operating profit per order is expected to exceed 3%.
Dingdong Maicai's profitability in Shanghai depends on two indicators: average order value and fulfillment expense ratio. In the Shanghai region, the average order value exceeds 66 yuan, and the comprehensive fulfillment expense ratio is about 21%. Nationwide, the corresponding average order value is 60 yuan, and the comprehensive fulfillment expense ratio is 33%.
It can be seen that in the Shanghai region, Dingdong Maicai has stronger user spending power and cost control capabilities, and there is a big gap with other regions.
The boss releases profitability signals, but the company is playing a guessing game, selectively disclosing data. In the Q3 2021 financial report, user data was disclosed, but order scale was not. In the Q4 report, there was no user data, replaced by fulfillment order scale data. "Given the decline in revenue, GMV, and average order value, the user data may not look good," Zheng Yuan speculated. It may be that price increases led to a loss of users and orders, resulting in lower revenue.
After dissecting the unit economics of the front-warehouse model, Yu Mingyang said, "This model is still difficult to make work, and continuous cash burning is the current situation." "The means to achieve profitability are nothing more than increasing average order value, improving gross margin, or optimizing fulfillment costs by increasing order density. But adjusting any one of these alone cannot turn the operating profit of a single warehouse positive."
He believes that at least two items need to be optimized, meaning that in regions with high order density and high average order value, the model may turn positive. Moreover, this is without considering the group headquarters' marketing expenses, R&D expenses, and management expenses.
The difficulty of replicating Shanghai's success to other regions is obvious. Zhuang Shuai analyzed for Kaiboluo Finance that the profit model of front-warehouses is already very clear. Dingdong Maicai and MissFresh currently mainly occupy first-tier and new first-tier cities. Expanding to other markets would actually drag down their metrics.
After all, besides Shanghai, how many large cities with strong spending power and high population density can meet the requirements of the front-warehouse model and have a large demand for "instant" fresh food delivery?
****Can the Front-Warehouse Model Still Work?
"The inflection point for profitability of the front-warehouse business model has not yet arrived," Yu Mingyang said.
The cash-burning front-warehouse model is avoided even by giants. "Windfall investment queen" Xu Xin once said that the last fortress of e-commerce is fresh food, and "those who win fresh food win the world." Alibaba and JD.com are eager to invest in other fresh food e-commerce models but do not focus on the front-warehouse model.
The only bold one is Meituan, which launched Meituan Maicai, but even attached to the local life services giant, it has fallen into a loss vortex.
Meituan's Q3 2021 financial report shows that new businesses and others, including Meituan Select, Meituan Maicai, and Meituan Flash Purchase, generated revenue of 13.723 billion yuan, with a loss of 10.906 billion yuan, a year-on-year loss expansion of 4 times.
But MissFresh and Dingdong Maicai, without a "father" to back them, have seen their stock prices languish in the secondary market after years of losses. In the nine months since listing, Dingdong Maicai has fallen from an IPO price of $23.5 to $3.84, and MissFresh has fallen from $13 to $1.62.
Yu Mingyang analyzed that there is market sentiment from the decline of Chinese stocks, but the long-term factor is that investor confidence is severely insufficient, with continuous losses, cash flow problems exposed, and no hope of profitability in the front-warehouse model. "At this stage, profitability is weak, and the continuous decline in secondary market stock prices will seriously affect future refinancing. If the stock price continues to fall and cannot meet the listing requirements for circulation, it could even lead to delisting, which would have a huge impact on the company," said Wei Jianhui, an analyst at Analysys.
Under heavy pressure, the two companies have taken different paths: one is telling a new story, and the other is still expanding scale.
After listing, MissFresh quickly changed lanes, cutting the number of front-warehouses from 1,500 in 2020 to half, and turned to telling the story of digital vegetable markets and promoting a new retail cloud business.
But since its launch in 2020, the new business has not made a significant contribution to revenue. Yu Mingyang told Kaiboluo Finance that adjusting the overall business model mix carries risks. For MissFresh, strategic direction adjustment is more urgent than scale and profitability.
On the front-warehouse path, besides Meituan Maicai under Meituan and Pupu in the southern region, Dingdong Maicai is the only one expanding nationwide. For it, scale is the most urgent. In Yu Mingyang's view, Dingdong Maicai must expand its scale and growth rate as quickly as possible, continuously test in new cities, and build more warehouse locations. How to stabilize profitable warehouses after the land grab, optimize warehouses on the breakeven line, and reduce warehouses with continuous losses is the core of capturing profit points in the future.
But Dingdong Maicai has already slowed down. "With many community group buying companies going bankrupt, the industry has shifted from bleeding to compete for market share to being profit-oriented," Wei Jianhui said. Dingdong Maicai has also begun strategic contraction, focusing on mature advantageous regions.
Both paths are difficult. How to solve their respective "joint pains" is a choice that MissFresh and Dingdong Maicai must make. From company strategy—whether to go all the way or turn around, whether to prioritize scale or profit—to the management of a single station or the fate of a dead fish, these are all choices. It depends on what you choose and what you give up.
*Cover image and in-text images are from Unsplash. At the request of the interviewees, Zheng Yuan and Gu Wei are pseudonyms.
Are you "watching" me?