Dingdong Maicai's Ordeal

In July this year, as news of Miss Fresh's 'on-the-spot dissolution' spread, the company, once hailed as the 'first stock of fresh food e-commerce', ultimately met its downfall. Dingdong Maicai, which shares striking similarities with Miss Fresh in terms of the front-warehouse model, operational strategies, and even financing pace, has come under more intense scrutiny from the outside world following Miss Fresh's collapse. Recently, Dingdong Maicai released its Q3 2022 financial report, showing total revenue of 5.943 billion yuan, a year-on-year decrease of 4%; net loss of 345 million yuan, and Non-GAAP net loss of 285 million yuan, with the loss narrowing by 85.6% year-on-year. After establishing a strategy prioritizing efficiency while balancing fairness, Dingdong Maicai's gross margin reached 30%, a significant improvement from 18.2% in the same period last year. Management expects to basically achieve Non-GAAP breakeven in Q4 while maintaining stable growth. It seems Dingdong Maicai has emerged from the shadow of Miss Fresh, but capital markets have remained extremely indifferent to its improved performance. As of the close of US stocks on November 18, Dingdong Maicai's stock price fell 3.25% to $4.17 per share, down over 90% from the $46 high on its first day of listing. Currently, Dingdong Maicai's market value is $902 million, down more than 80% from the $5.5 billion at the time of its initial offering. The capital market has not given optimistic guidance, the profitability problem remains unsolved, and key data such as total user numbers and total order volumes have been deliberately omitted. The current situation of Dingdong Maicai does not seem as optimistic as management estimates.

Neglected 'Core' Indicators:

Revenue Decline, Negative GMV Growth To this day, Dingdong Maicai has not yet achieved a viable business model or self-sustaining profitability. In the latest quarterly report, Dingdong Maicai's revenue decreased by 4% year-on-year, GMV was 6.512 billion yuan, down 7.2% from the same period in 2021, and Non-GAAP net loss decreased by 85.6% year-on-year. Total operating costs and expenses were 6.255 billion yuan, down 23.8% from the same period in 2021, with cost of goods sold decreasing by 17.9%, fulfillment expenses decreasing by 30.9%, and sales and marketing expenses seeing the largest cut, down 70.3% year-on-year. Revenue and GMV both declined, yet Dingdong Maicai's losses narrowed, driven by large-scale layoffs and city withdrawals and warehouse closures, rather than improved operational efficiency. 'Defending rather than attacking' has been Dingdong Maicai's theme this year. At the beginning of the year, news of large-scale layoffs at Dingdong Maicai sparked widespread discussion. Some employees said in interviews that the total number of employees had decreased by more than 10,000 compared to the company's peak. Several former employees also admitted that forced scheduling of rest days for front-warehouse service station staff was common. Alongside layoffs and disguised salary cuts, Dingdong Maicai has been continuously withdrawing from cities and closing warehouses. In May this year, Dingdong Maicai successively withdrew from cities such as Zhongshan, Zhuhai, and Chuzhou, and in October closed its Xiamen station. According to statistics, in the first half of this year, Dingdong Maicai closed 10 second- and third-tier cities that were not suitable for the front-warehouse model, reducing the number of cities it serves from 37 at the end of 2021 to 27, focusing more on super first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen, and some first-tier cities. With Miss Fresh as a cautionary tale, front-warehouse fresh food e-commerce is not an easy business, as both supply and demand are extremely uncontrollable. The core of the front-warehouse model lies in high density; the location and density of warehouses bring extremely high costs. On one hand, fresh products have high requirements for quality and delivery speed; on the other hand, fresh products are highly homogeneous, and competition between channels mainly relies on price. High costs, high fulfillment, and high quality require it to be established in first-tier cities with high population density and sufficient purchasing power to have a chance at profitability. This also means a narrow user base, difficulty in sinking to lower-tier markets, limited business expansion, and insufficient imagination space. Shanghai is Dingdong Maicai's home base. After the Q3 report, management mentioned that the East China region has had positive operating margins for three consecutive quarters. However, validation in East China does not mean it can be replicated nationwide. At the end of last year, Dingdong Maicai was able to profit in Shanghai, depending on two indicators: average order value and fulfillment expense ratio. The average order value in Shanghai exceeded 66 yuan, and the comprehensive fulfillment expense ratio was about 21%. Looking nationwide, in Q3 2022, Dingdong Maicai's fulfillment expense ratio was 26.8%, higher than in Shanghai. Without disclosing specific order numbers, it is impossible to calculate the average order value, but we can speculate that residents in third- and fourth-tier cities have lower incomes, so the average order value cannot align with cities like Shanghai. Moreover, many users in lower-tier cities have fixed shopping habits, and changing them is costly and difficult. Some industry analysts believe that Dingdong Maicai will further reduce regions where user habits are difficult to cultivate, and in the next one to two years, it will deeply cultivate the Jiangsu, Zhejiang, and Shanghai region. From the current situation, this trend is becoming increasingly evident. Since Q3 2021, Dingdong Maicai has been 'cutting off its arm to survive', shifting its strategy from 'scale first, efficiency second' to 'efficiency first, scale second'. As of now, there are only 27 cities where orders can be placed normally on the Dingdong Maicai app, a decrease of 10 from the peak in September 2021, of which 18 are in the Yangtze River Delta, accounting for 66.7%. After all the twists and turns, Dingdong Maicai has not escaped the fate of being a 'regional brand'. Front-warehouse fresh food e-commerce is no longer a darling of capital, especially after Miss Fresh's collapse, which has increased capital's doubts about the front-warehouse model. Signs had already appeared in 2021. The IPO was a watershed for Dingdong Maicai. Before the IPO, Dingdong Maicai was a true capital favorite, receiving 10 rounds of financing in four years, with investors including well-known institutions such as SoftBank Vision, Capital Today, and Sequoia Capital. Xu Xin, founder of Capital Today, frequently publicly supported Dingdong Maicai and even coined the phrase, 'The last fortress of e-commerce is fresh food; those who win fresh food win the world.' At the time of the IPO, however, Dingdong Maicai suffered from both model doubts and tightening international liquidity, and was no longer favored by capital. On June 9, 2021, Dingdong Maicai filed an IPO application with the U.S. Securities and Exchange Commission (SEC), aiming to issue 14 million American Depositary Shares (ADS) to raise $357 million. But just before listing, Dingdong Maicai proactively adjusted its offering size, planning to issue 3.702 million ADS, raising at most $94.4 million, a reduction of about 74%, and the amount raised was even less than the previous financing round. In the new quarterly report, Dingdong Maicai has been emphasizing the decline in total operating costs and expenses, sales and marketing expenses, and delivery costs, but has avoided discussing the scale contraction and the gap in TAM (Total Addressable Market) compared to the IPO. It is clear that Dingdong Maicai's business development has hit a ceiling, and its current performance has not vindicated itself.

Not Disclosing User Numbers and Order Volumes

Core Data 'Riddles' In fact, over the years, there has been much discussion about whether the front-warehouse model is a 'pseudo-proposition'. Besides Miss Fresh and Dingdong Maicai, other players have also tried. Yonghui incubated Yonghui front warehouses, Meituan referenced Pumu Supermarket to test 800m large front warehouses, and Hema also experimented with 'Hema Xiaozhan', and even conducted a 'horse race' between Xiaozhan and Hema mini (small Hema stores). Liang Changlin has always believed that front warehouses can be profitable. He once shared Dingdong Maicai's revenue formula as 'order volume * average order value * gross margin'. As order volume grows, the per-unit costs of utilities, warehousing, and management decrease, making costs sub-linear while revenue is super-linear. His vision for profitability was that each front warehouse, after one year of operation, could achieve 1,000 daily orders and an average order value exceeding 65 yuan, with operating profit per order expected to exceed 3% after deducting fulfillment costs. However, a review of Dingdong Maicai's financial reports over the past two years reveals that Liang Changlin was overly optimistic. Not to mention that Dingdong Maicai has been continuously losing money, data on repurchase rates and related indicators, such as total order volume and total user numbers, have been deliberately omitted. Total user numbers (10.5 million) stopped at Q3 2021, total order volume (80.6 million) stopped at Q1 2022, and the number of front warehouses stopped at Q4 2021. As an internet platform, total user numbers and total order volumes are important indicators for investors to directly understand the company's business situation. With total user numbers, the outside world can calculate new user growth, retention rates, repurchase rates, and other transaction behavior data. Combining order data with total revenue can reveal whether revenue growth is driven by increased order volume due to operational optimization or by short-term price increases. Order volume and average order value are important drivers of GMV growth, but Dingdong Maicai has not disclosed either the supply-side metrics (number of front warehouses * orders per warehouse) or the demand-side metrics (number of purchasing users * purchase frequency). Combined with the simultaneous decline in revenue and GMV this quarter, it can be concluded that Dingdong Maicai is 'playing riddles' with these key data because user data and order volumes are not that impressive and are even declining. One reason for the loss is price increases, which have driven away some price-sensitive users. In Q3 2022, Dingdong Maicai's average order value increased by 25.0% year-on-year, while the customer acquisition cost per new user decreased by 32.6% year-on-year. In Q3 2022, Dingdong Maicai's gross margin increased by 11.8 percentage points year-on-year to 30%. Management attributed the gross margin improvement to the company's focus on enhancing the digitalization of the supply chain, optimizing processes from product development to sorting centers and front warehouses, contributing to efficiency far higher than traditional retail. But in the view of New Distribution, increasing the proportion of private label products and high-margin prepared dishes is the more important reason. This year, Dingdong Maicai has been betting on private label products and prepared dishes, developing over 20 private brands such as Dingdong Wangpaicai, Quanji Xia, Baoluo Gongfang, Liangxin Jiangren, and Dingdong Daguancheng. In the Q3 earnings call, Dingdong Maicai introduced the concept of 'clean labels' for the first time in the industry, advocating 'no unnecessary additives' starting with private label products, and customizing new platform access standards for different sub-categories such as bakery, prepared dishes, rice and flour products, beverages, and dairy. Prior to this, Dingdong Maicai had upgraded its original procurement and sales center to a product development center, abandoning cost-effectiveness in favor of 'quality-price ratio', indicating that the company will enhance its ability to sell high-value items and raise average order values. Users in various regions have already noticed that Dingdong Maicai has significantly raised the threshold for free delivery. In the second half of fresh food e-commerce, low prices to attract users no longer work; product strength and supply chain have become the keys to winning. To optimize costs through private label products, it is necessary to squeeze costs from raw materials, auxiliary materials, trunk lines, processing, and other links, which means the company must deeply cultivate the supply chain, seek traffic from products, and seek efficiency from the supply chain. This is another long-term investment and construction effort, but Dingdong Maicai no longer has much capital to burn.

Dingdong Maicai's 'Ordeal' The cash flow break was the last straw that crushed Miss Fresh, and Dingdong Maicai's situation is also not good. The direct manifestation is that Dingdong Maicai is already 'insolvent'. In the Q3 report, Dingdong Maicai's total current assets were 6.97 billion yuan, down 13.79% year-on-year; short-term and long-term debt was 5.067 billion yuan, up 39.83% year-on-year; total current liabilities were 7.943 billion yuan, up 2.47% year-on-year. Current liabilities exceed current assets, indicating tight operating cash flow. In addition, short-term liabilities exceed directly realizable assets, meaning Dingdong Maicai also bears enormous debt pressure. Among current assets, cash and cash equivalents were 1.4 billion yuan, and short-term investments were 4.46 billion yuan, meaning directly realizable assets totaled 5.86 billion yuan, which represents Dingdong Maicai's debt repayment ability. Short-term liabilities mainly include accounts payable and short-term borrowings in current liabilities, totaling 5.933 billion yuan, of which 4.258 billion yuan in short-term borrowings are interest-bearing liabilities, including short-term bank loans and reverse factoring, with reverse factoring being the main component.

(Red indicates debt repayment ability, blue indicates debt liability)

In reverse factoring, suppliers to some extent act as 'blood donors' for Dingdong Maicai, while Dingdong Maicai is the 'beneficiary', using mortgage loans from financial institutions as 'cash' to pay suppliers, transferring risk to suppliers and maintaining a 'beautiful' cash flow. As of December 31, 2021, Dingdong Maicai had a credit line of 4.45 billion yuan available through reverse factoring. Even with partial risk transfer to suppliers through reverse factoring, Dingdong Maicai's operating conditions remain far from optimistic. Data shows that from 2019 to 2021, Dingdong Maicai's net cash flow from operating activities continued to show outflows, at -964 million yuan, -2.056 billion yuan, and -5.667 billion yuan, respectively. If this burn rate continues in 2022, the company's cash on hand will be depleted within a year, and the company is prone to cash flow breaks. Dingdong Maicai has attempted to address liquidity through supply chain finance. At the beginning of the pandemic, Bank of Shanghai expanded its financial support to Dingdong Maicai to 8 billion yuan and will customize various financial products based on Dingdong Maicai's needs, including project loans, supply chain financing, and other forms. Especially in the agricultural assistance field, both parties will prioritize supply chain finance models to help Dingdong Maicai's small agricultural households achieve 'zero payment period' for accounts receivable and quickly recover payments. But this means of optimizing cash flow is 'treating the symptoms, not the root cause' for Dingdong Maicai, not only implying more interest payments in the future but also posing significant operational risks. Dingdong Maicai has always maintained normal cash flow by occupying supplier payments. Suppliers typically have a 3-6 month payment period after supplying goods. Under normal circumstances, this is fine, but once the company's operating losses increase, not only will the strategy fail, but banks providing funds will also adopt stricter credit policies.

Conclusion: After Miss Fresh's fall, Dingdong Maicai's competitors are no longer just front-warehouse players, but many players in the fresh food-to-home track, or more precisely, players in instant retail. Yonghui Superstores has obvious advantages in low-priced fresh food; after acquiring ParknShop, taking a stake in Zhongbai, and acting as an agent for Australia's Woolworths in the domestic offline retail brand, it has expanded more product categories, sales channels, and overseas markets. Hema Fresh promotes the integration of warehouse and store, offering not only fresh vegetables but also instant processing services, and has set up eight supply chain centers nationwide. Meituan, with 500,000 delivery riders, is deploying flash warehouses, and JD.com, in partnership with Dada, can cover users' needs for hourly delivery and minute-level delivery... Every entrant is eager and eyeing the market. In the future, Dingdong Maicai will face a more intense business battlefield, with no shortage of challenges ahead.