In recent years, fresh food e-commerce companies that once suffered heavy losses have gradually turned profitable, and the pre-warehouse model they pioneered is gaining renewed attention after years of silence, signaling a restart of the instant retail battle.

The industry has long criticized the pre-warehouse model for its high operating costs, deeming it unviable. After Miss Fresh exited, Dingdong Maicai and a few others remained steadfast. Now, many companies are re-entering the pre-warehouse space.

At the end of August this year, reports emerged that Hema had restarted its pre-warehouse model. In September, JD's fresh food business "Qixian" opened its first pre-warehouse in Beijing. In October, Miniso announced a "lightning warehouse" plan, aiming to add 70,000 such warehouses over the next three years. JD, Hema, Sam's Club, and others are once again competing on the same battlefield.

Dingdong Maicai, a veteran player in the pre-warehouse model, released its Q3 earnings on November 6, reporting profitability once again. This is attributed to its strategy of exiting underperforming cities, closing pre-warehouses with insufficient order density, reducing overall costs, and boosting margins through private label products.

Many are curious: how did the pre-warehouse model, once nearly written off, get validated and reverse its reputation? With many players entering the fray, will startups with deep regional focus prove stickier, or will giants with massive traffic advantages ultimately dominate? What new stories can the new entrants tell?

Dingdong Maicai Can Breathe a Sigh of Relief

As an e-commerce logistics and delivery model, pre-warehousing typically involves placing small warehouses near densely populated communities, stocking some products in advance, and delivering from the nearest warehouse after a customer places an order to shorten delivery time. This model was first used in fresh food e-commerce but led to years of losses due to high costs. However, recent signs indicate a shift.

Dingdong Maicai, quiet for a long time, has quietly achieved profitability for eight consecutive quarters.

Its latest Q3 2024 earnings report shows GMV of 7.27 billion yuan, up 28.3% year-over-year, and revenue of 6.538 billion yuan, up 27.2%. Non-GAAP net profit was 161 million yuan, a more than nine-fold increase year-over-year. Dingdong Maicai expects significant year-over-year growth in Q4 as well.

Chart / Dingjiao One

The data indicates that Dingdong Maicai has indeed emerged from the loss-making quagmire of two years ago, with performance trending positively.

Founded in 2017 and headquartered in Shanghai, Dingdong Maicai expanded to Jiangsu and Zhejiang in 2019, accelerated market capture in 2020-2021, and continued to enter second- and third-tier cities. It listed on the NYSE in June 2021.

However, faster growth brought larger losses. From 2019 to 2022, Dingdong Maicai recorded net losses of 1.87 billion, 3.18 billion, 6.43 billion, and 807 million yuan, respectively. The turning point came in Q4 2022, when it achieved profitability on a Non-GAAP basis, and has remained profitable since.

The reason is a strategic shift after prolonged losses.

Specifically, Dingdong Maicai slowed its pace of entering new cities, exited markets with low GMV contribution, and refocused on its core Yangtze River Delta region. Starting in May 2022, it exited cities like Chuzhou, Zhuhai, Tangshan, and Xiamen; in 2023, it suspended operations in Chengdu and Chongqing and closed over 30 stations in Guangzhou and Shenzhen, trimming underperforming markets. The number of pre-warehouses decreased from 1,400 at the end of 2021 to 1,100 at the end of 2022 and 1,000 at the end of 2023.

However, Dingdong Maicai sacrificed revenue scale to achieve profitability. Revenue was 11.3 billion yuan in 2020, 20.1 billion in 2021, 24.2 billion in 2022, and dropped to around 20 billion in 2023. In the short term, this adjustment has been quite effective.

In recent years, Dingdong Maicai's gross margin has also improved annually, reaching around 30%. A key reason for this strong margin in the fresh food category is its significant efforts in streamlining SKUs and developing private labels.

One approach is product curation: Dingdong Maicai adopts a "wide SPU, narrow SKU" strategy, offering a broad range of categories but with a streamlined product mix under each, selecting high-quality SKUs to strengthen price advantages. In private labels, Dingdong Maicai currently has brands like Dingdong Daman Guan, Quanji Xia, Baoluo Gongfang, and Cai Changqing, covering prepared dishes, meat, and other categories.

Although Dingdong Maicai's stock price rose after the latest earnings release, it is far from its post-IPO highs. As of the close on November 6, 2024, the stock was $4.45, with a market cap of $967 million, down about 80% from its listing.

Miss Fresh Fell, How Did Dingdong Maicai Survive?

Miss Fresh, another fresh food e-commerce pioneer, has almost exited the market.

In June 2021, Miss Fresh went public as the "first fresh food e-commerce stock," but soon after, reports of unpaid supplier debts and supply disruptions emerged. In early 2022, its stock fell below $1, facing delisting risk. In July 2022, Miss Fresh announced the closure of its pre-warehouse express delivery service and laid off hundreds of employees. Since then, Miss Fresh has been listed as a judgment debtor over ten times, involved in over 40 lawsuits as a defendant, and has not recovered.

Miss Fresh's failure is multifaceted. To fulfill its "fastest 30-minute delivery" promise, it built numerous pre-warehouses, leading to persistently high operating costs. From 2018 to 2021, cumulative losses reached 10.8 billion yuan, straining its cash flow. In 2020, a "dead fish sold as live fish" scandal triggered a trust crisis, exacerbating losses. Its attempt to pivot to a "smart wet market" business failed due to poor profitability and operations, and it was terminated. Finally, unpaid supplier debts, employee wages, and consumer prepayments led to widespread backlash.

Why did Miss Fresh fail while Dingdong Maicai is doing well?

Wang Guoping, a senior consultant at Lianwang, believes the pre-warehouse model itself was not flawed, but these financing-driven companies, eager to show better data to capital, burned cash on customer acquisition and expansion, with very little upstream transformation, leading to high costs and making the model difficult to sustain at the time.

In fact, China's market is diverse, with different formats serving different customer bases. Community group buying matches lower-tier markets well, while the hourly delivery model of fresh food e-commerce suits younger demographics in first- and second-tier cities.

So, the first reason for Dingdong Maicai's improved financials is regional adjustment. Na Mingyuan, co-founder of Haitun Think Tank, points out that the pre-warehouse model works in Beijing, Shanghai, and Guangzhou, but is unlikely to work in rural or small towns, indicating a lower limit. Operators need to determine the range of cities where the model can be profitable. After expansion, Dingdong Maicai exited regions where the model didn't work, leaving profitable areas, which naturally improved its data.

Image source / Dingdong Maicai official website

Second, costs are decreasing. On the customer acquisition side, Dingdong Maicai previously relied on paid promotions and subsidies, but now also uses live streaming. "By offering a few low-priced products to attract users and bundling other items, the loss on traffic-driving products is offset by profits from other items, reducing overall customer acquisition costs. There are now better tools to reach customers," says Wang Guoping.

On the other hand, procurement, delivery, and rent costs are also declining. Meng Qi, a retail industry practitioner, notes that large-scale online procurement offers cost advantages; as order volumes rise, delivery costs decrease; and commercial real estate costs have also been falling in recent years.

Another major reason for Dingdong Maicai's profitability is private labels. "Private labels are a necessary path for retailers. Typical convenience store products might have a gross margin of 32% at best, while private labels usually exceed 50%," says Na Mingyuan.

Wang Guoping also believes that channel players often lack pricing power against strong brands, but creating their own brand yields much higher profits. In fact, if you know the products well, making private labels isn't difficult; the challenge is selling them.

Finally, there is demand from buyers, advantages for sellers, and a match between supply and demand. Na Mingyuan argues that the demand for home delivery of groceries has always existed, and the habits cultivated during the pandemic years persist. Second, on the supply side, non-standard agricultural products often vary in quality, but fresh food e-commerce offers pre-packaged goods, and companies like Sam's Club, Dingdong Maicai, and Hema have supply chain advantages and better quality control.

Additionally, after Miss Fresh's collapse, Dingdong Maicai lost a strong competitor, allowing it to slow down and adjust. Moreover, the users that Miss Fresh educated with its cash burn have been harvested by Dingdong Maicai.

In summary, Dingdong Maicai's "landing" is due to both its own transformation and external favorable factors.

Pre-Warehouse Battle Restarts Where Is the Way Out?

Dingdong Maicai is not alone; in recent years, the pre-warehouse model has been revived by the industry, with many companies entering.

Current major players include Dingdong Maicai, Pupu Supermarket, Yonghui Satellite Warehouse, Qixian Pre-Warehouse, and Sam's Club Cloud Warehouse. Among them, Sam's Club has product strength, Dingdong Maicai has a solid user base in Jiangsu, Zhejiang, and Shanghai, and Pupu Supermarket is deeply rooted in Fujian and Xiamen.

However, industry insiders generally believe that each has its own advantages, and no company has a clear overall lead.

Public reports show that Sam's Club China's 2023 sales reached 80 billion yuan, with online sales around 40 billion, primarily contributed by its cloud warehouses. In the first half of 2024, Sam's Club China's online sales grew 29% year-over-year, accounting for about 50% of total sales.

Whether Pupu Supermarket is profitable is not yet clear, but insiders believe it has the ability to turn profitable at any time. This has led some to speculate that JD's push for Qixian pre-warehouses, and Hema and RT-Mart's plans to launch pre-warehouses, may be driven by seeing mainstream players turn profitable.

Image source / Pexels

However, even profitable Dingdong Maicai faces challenges.

After significant downsizing, it reduced revenue scale to achieve profitability, but long-term growth remains a challenge. Dingdong Maicai CEO Liang Changlin stated that the Jiangsu, Zhejiang, and Shanghai region has a large population, high density, and strong consumption power, and there is still significant room for growth there, expressing confidence in maintaining rapid growth in the region.

In the short term, Dingdong Maicai may deepen its presence in advantageous markets, but if it expands into new markets in the future, it might again face the situation of losses and forced contraction as seen in previous expansions.

Meng Qi believes that the pre-warehouse business does not follow a logic where costs decrease with scale, because opening new locations incurs new costs, and marginal costs cannot directly decrease as scale grows, making expansion difficult. Future opportunities lie in new attempts, such as adding high-ticket categories, similar to Sam's Club, to increase average order value.

Additionally, Wang Guoping thinks Dingdong Maicai's current product strength is insufficient. The founder once said they would become a food company, but Wang Guoping argues that being just a food company is not enough; having channels to sell products is key.

Returning to the essence of retail, the way out for all players lies in products. Specifically, one approach is to transform the supply chain, and another is to develop private labels. Wang Guoping says fresh food needs to go deep into the upstream supply chain, such as establishing origin warehouses, reforming upstream, securing lower prices, and controlling product quality.

Besides private labels, another approach is strict product selection and quality control. Wang Guoping points out that Costco's product quality is high because it has strong control over suppliers and can reverse-control contract manufacturers to ensure quality, but many domestic channel players cannot do this yet.

He adds that in the future, channel players must demand from suppliers from the consumer's perspective. "Only by protecting consumer interests and ensuring users are willing to pay can channel players thrive. The entire industry will undergo significant transformation, and product quality will see qualitative improvement."

The online retail battle triggered by pre-warehousing is just beginning; next, the competition will focus on product strength and channel capabilities.