Introduction: Front Warehouse Breakthrough Strategy – Regional Focus, Heavy Warehousing, Refined Operations
Author 丨Wang Shiqin Review 丨Gou Gou Layout 丨He Wen
In July last year, with the "on-the-spot dissolution" of Miss Fresh, the former "first stock of fresh e-commerce" did not escape the curse of decline. Whether in the front warehouse model, operational tactics, or even financing rhythm, Dingdong Maicai is extremely similar to Miss Fresh. After Miss Fresh's collapse, Dingdong Maicai began to face pressure. Dingdong Maicai's Q3 2022 financial report showed total revenue of 5.943 billion yuan, a year-on-year decrease of 4%; net loss of 345 million yuan, Non-GAAP net loss of 285 million yuan, with the loss narrowing by 85.6% year-on-year. Recently, Dingdong Maicai directly withdrew from the Sichuan-Chongqing market, proving that all good things must come to an end. The high spirits at the time of partnership now turn into sighs at separation. However, in contrast, Dingdong Maicai has been deeply rooted in Ningbo for many years and has become one of the leading fresh e-commerce companies in Ningbo. Will the withdrawal from the Sichuan-Chongqing market affect the Ningbo market? Local media once raised such a question.
The core of fresh e-commerce operations is the front warehouse service radius of 3-5 kilometers. Leading companies often choose the "city sorting center + community front warehouse" model, and the model of large warehouses shipping to small warehouses is now basically outdated. Fresh products are perishable and require cold chain, making the fulfillment cost of the front warehouse model relatively high, which has been the most critical factor dragging down this model. So, can the front warehouse model still work?
Current Status of Players like Dingdong and Pupu
The front warehouse is a warehousing and distribution model where each store is a small to medium-sized warehousing and distribution center, allowing the central warehouse to supply goods to stores. After consumers place orders, goods are shipped directly from nearby retail stores, rather than from a warehouse in the suburbs. The author has observed Dingdong's development process; at the time, "Wind Investment Queen" Xu Xin invested in Dingdong because she valued Dingdong's front warehouse strategy. By placing warehouses in the city rather than only outside, it reduced transportation costs and got closer to consumers. Dingdong focuses on fresh e-commerce, where freshness is crucial to the brand. The closer the delivery, the higher the freshness. Fresh products differ from some products; taste can determine survival. Here, I'd like to mention that Yonghui's previous difficulties also stemmed from consumer feedback that products in supermarkets were not fresh, which caused its market value to evaporate. After strictly controlling quality, Yonghui's stock price began to rise. In fact, the adjustments were also in front warehouses and supply chains; Yonghui now calls them satellite warehouses.
An interesting recent phenomenon is that while revenue and GMV both declined, Dingdong Maicai's losses narrowed, relying on large-scale layoffs and city closures to reduce costs, not on improved operational efficiency. Shifting from offense to defense is Dingdong Maicai's main theme this year. In Xiamen, Pupu has stronger SKU richness and product service capabilities than Dingdong, and Dingdong Maicai's national layout is too scattered. The core of the front warehouse lies in high density; the location and density of warehouses bring extremely high costs. At that time, Dingdong's stations covered at least 3 kilometers. Each station had 1 station manager, 2-3 pickers, 2 aquatic staff, 2 warehouse keepers, 2-4 night shift workers, and about 15-25 delivery personnel. In other words, Dingdong really raises its own fish, which is another cost.
In the early days of the fresh food war in 2020, Pupu aggressively entered South China, and other platforms also pushed several rounds. When the market was basically saturated, Pupu's ground promotion team still insisted on repeated promotion, backed by larger front warehouses and more SKUs. Pupu is a front warehouse fresh e-commerce with large warehouses; its main warehouses are as large as 800-1000 square meters, with 6000-8000 SKUs, while Dingdong Maicai uses small warehouses of 300 square meters. Different models, but with more SKUs, the tolerance for error is higher.
Secondly, the fresh food track is too "money-burning," and front warehouses need to grasp delivery efficiency, which is a cliché. The image below reflects the situation between Miss Fresh and Dingdong Maicai at that time. The large warehouse order volume was not advantageous, and the average warehouse could not push through, which was Miss Fresh's problem, also proving the importance of Dingdong Maicai's streamlining.
Image source: Internet
Regarding future expansion, Dingdong Maicai stated that it has no short-term plans to increase warehouse density or expand scale; the primary task is still to improve refined operation management and profitability. Some industry practitioners believe that the problems caused by community group buying and Miss Fresh's collapse have turned a large number of supplier debts into bad debts, with some suppliers even owing 5 million yuan because they could not recover these debts. In their words: "The platforms have scared everyone." Now, suppliers cooperating with fresh e-commerce must demand cash on delivery, otherwise no one dares to supply. In the past year, Miss Fresh and Shihuituan collapsed, Chengxin Youxuan transformed, and Xingsheng Youxuan laid off staff. In the fresh food track, public data shows that only 4% of domestic fresh e-commerce companies break even, over 80% are loss-making, and ultimately only 1% achieve profitability.
Since August 2021, Dingdong Maicai has adjusted its operational strategy from "scale first, efficiency also considered" to "efficiency first, scale also considered." It established an independent supply chain, increased direct sourcing from fields, with the direct sourcing ratio of fresh products reaching 79.1%; on the other hand, it built its own brands. Dingdong Maicai has incubated nearly 20 sub-brands such as "Cai Changqing," "Liangxin Jiangren," and "Baoluo Gongfang," which currently account for 11.4% of total GMV. In the future, Dingdong Maicai hopes to increase the proportion of its own brands to over 50%, which means Dingdong is preparing to give up aquatic products and turn to vegetables with higher fault tolerance.
Recently, Meituan officially launched the "Bidian Bang" (Must-Order List) to compete with its own Dianping's "Bichi Bang" (Must-Eat List), with full-channel coverage. High-quality prepared dishes have huge warehousing needs, and the front warehouse attributes can provide good support for prepared dishes, without wasting existing storage space.
The fresh e-commerce industry has broken out of the traditional fresh model, with new models such as front warehouses, store-warehouse integration, and community group buying emerging. It is originally a good thing to have multiple business models coexist, but due to high costs, fresh e-commerce development has been hindered. In 2018, when Miss Fresh announced it had achieved break-even in Beijing and maintained positive cash flow growth for nearly a year, JD Fresh began to lay out front warehouses. At that time, JD Fresh's front warehouses ranged from 80 to 200 square meters, with SKU numbers between 300 and 600. Its investment was relatively small... But no one expected that five years later, fresh e-commerce would face a contraction.
What Difficulties Are Faced?
The author believes one of the reasons Dingdong withdrew from Sichuan-Chongqing is the eating habits of the two regions. The real profit point of the fresh front warehouse model lies in seafood and live fish; the price fluctuation of seafood can serve as an anchor to set profit points. Regions like Sichuan and Chongqing do not have a habit of frequent seafood consumption, but the front warehouse model requires aquaculture to ensure freshness, and daily maintenance has always been the largest expense for front warehouses. As the pioneer of the front warehouse model, Miss Fresh had set up 631 front warehouses in 16 cities nationwide, covering many first- and second-tier cities, with over 4,300 product SKUs. In the same year, Dingdong Maicai established over 950 front warehouses in 29 first- and second-tier cities, with an alarming growth rate, which also planted hidden dangers.
The most core hidden danger is the huge cost of fresh preservation. Nine out of ten fresh e-commerce companies are dragged down by preservation. Hema and Fresh Legend both tried front warehouses, but they subsequently upgraded them. Hema implemented store-warehouse integration, while Fresh Legend mainly distributes pre-packaged meat and prepared dishes from processing centers, and this year added some cooked food categories. Hema believes that the core advantage of front warehouses is reaching communities, but limited warehouse space leads to limited product categories and quantities. In simple terms, SKUs are restricted. Secondly, if front warehouses stock too much, the loss rate after 18:00 is huge. If stock is insufficient, the out-of-stock rate before 18:00 is huge. Hema's commander Hou Yi once said that fresh platforms with the front warehouse model push product and logistics losses to third-party logistics companies, resulting in a low loss rate on the books, but this does not fundamentally solve the problem.
Some believe that such transparent price comparisons across channels mean procurement costs and gross margins are mutually disclosed, and the competition then becomes about capital strength. Whoever raises more money can laugh last. But in fact, this is also closely related to the model. Having money is one thing, but scale must be controlled. Rapid scaling is not suitable for the front warehouse track; this is a bloody lesson for everyone. An obvious truth is that if you have enough front warehouses and still provide aquatic fresh services, you need enough costs for preservation. Whether it's personnel costs or equipment and electricity costs, it's also a loss for fresh e-commerce with average gross margins not high. In addition, insurance, cold chain logistics, product quality control, procurement and inventory management, consumer habits and trust, etc., are all mountains pressing on fresh e-commerce. The huge investment in front warehouses directly changes the profitability difficulty for Dingdong Maicai and others. According to professional model calculations, the order fulfillment cost of the front warehouse model is as high as 10-13 yuan per order, far exceeding all fresh e-commerce models. High fulfillment costs invisibly raise the entry barrier. Fresh Legend's first store opened in Hefei Xiangzhang Yayuan, positioned as a vegetable market at the entrance of the community, becoming a leader in the community fresh track, and now has 80 stores in Hefei. The current landscape of the front warehouse track may also indicate some problems: Dingdong Maicai holds East China, Meituan Maicai is rooted in North China and Guangdong; Pupu Supermarket is based in Fujian and is rapidly growing in the Southwest market. Opening the Pupu Maicai mini-program, you can observe that pre-sale seafood is placed at the lowest position, while live fresh and affordable fish markets are far ahead. The fact that seafood and aquatic products are placed in the first four buttons also indicates the business direction. What supports Pupu Supermarket in completing this action is actually the large warehouse model and extremely rich SKUs. Large warehouses shorten the loss in the aquatic supply chain and provide huge capacity; centralized preservation is better than separate efforts. After all, Miss Fresh once announced a new strategy based on the front warehouse model: (front warehouse instant sales + smart vegetable market) x retail cloud, aiming for multi-dimensional layout in the community retail market to form business complementarity. The idea was beautiful, but it never came to fruition.
Seeing this, many readers may worry about whether the front warehouse has a future.
How Can Front Warehouses Break Through?
Local media in Ningbo found that Dingdong is doing well in Ningbo. It delivers about 30,000 orders per day, making it the largest "instant delivery" company in Ningbo's fresh e-commerce. In eight cities in Zhejiang, including Hangzhou, Dingdong Maicai's operations are unaffected. This actually proves a point: if front warehouses had no future, order volumes in places like Ningbo would not be so high. It shows that front warehouses are a regional business format adapted to local conditions, and there is no need to worry about the sustainability of the format. Facing Dingdong Maicai's withdrawal, even local consumers in Fujian do not want to see a monopoly. Some people complained on social media: "Any platform that directly competes with Pupu in Fujian has no good outcome. Last year, it drove away Hema, and this year it's Dingdong's turn. At first, it was relatively fresh, but after stabilizing in Xiamen, delivery efficiency and products became increasingly perfunctory."
The above two points are enough to prove that the front warehouse business will have a market in the future. But it is not easy to continue leading in the field, unless the head brands always stay clear-headed, which is difficult. The larger the organization, the more generalized the SOP standards become, and the differences between stations can be significant. Another way to break through might be to upgrade front warehouses like Hema and Fresh Legend, like playing a game, adding external equipment, and continuously enriching the functionality of a single warehouse. For example, community fresh chain supplier Qian Dama grew from the first small store to over 3,000 stores. "In 11 years, Qian Dama has focused on community fresh stores with the 'no overnight meat' daily clearance model." Qian Dama founder Feng Jisheng said that in the future, Qian Dama's direction is not only to deepen its presence in key first- and second-tier cities nationwide but also to gradually expand offline stores to third- and fourth-tier cities and county-level towns. The philosophy is "headquarters strong, products refined, warehousing heavy, operations light."
In 2020, China's fresh retail market size exceeded 5 trillion yuan, and it is expected to reach 6.8 trillion yuan by 2025. In 2022, the fresh e-commerce transaction scale was 560.14 billion yuan, a year-on-year increase of 20.25%. Fresh Legend benchmarks against Poland's Ladybug supermarket, positioning itself as a fresh soft discount store. Different from community supermarkets and fresh specialty stores, Fresh Legend is based on fresh products and kitchen-related items, using precise shelf management and the lowest prices in the city, focusing on the core categories of family kitchens, meeting the three-meal needs of family consumers aged 25-65. In 2019, the total number of stores exceeded 100, with sales reaching 570 million yuan. These are all rich application forms of the entire front warehouse category. Whether it's "heavy warehousing and distribution" or Fresh Legend's small fresh stores, as long as they obey customer choices and provide convenience, they can achieve good performance. Adopting different tactics around different markets will be the mainstream in the future, that is, refined operations.
The breakthrough strategy for front warehouses can be summarized in nine words: regional focus, heavy warehousing, refined operations.
Extended Reading