Recently, an article by Ren Zhengfei published internally at Huawei went viral online. The viewpoint in the article, "Don't tell stories, focus on reality," sparked widespread speculation. In fact, this speculation is not unfounded, and focusing on reality is not something only Huawei needs to do. In the fiercely competitive fresh food retail industry, we have heard many stories over the past few years: In 2020, which was called the final era of life-and-death competition in fresh food e-commerce, Yiguo Fresh, the first fresh food e-commerce platform in China, failed to survive despite seven rounds of financing; In 2021, the community group buying war reached a critical stage, and those players who started early and developed well locally were ultimately eliminated by capital encirclement; Recently, Miss Fresh, the "first fresh food stock" known for its front warehouse model, was exposed to a capital chain rupture, but Dingdong Maicai and Pumu Supermarket, also using the front warehouse model, reported good performance. Thus, a discussion about "front warehouse" has begun— So, taking off the "story" coat, what is the reality of the front warehouse model? Why do some front warehouse companies see growth in both orders and profits, while others face operational issues? In the future, will the front warehouse model still exist? Cover image source: TV drama "The Best of Times" 01 About Buying Groceries Chinese people firmly believe that "food is the first necessity of the people," so buying groceries becomes an important matter. Buying groceries is more of a belief than a habit—only vegetables bought fresh daily are considered fresh, nutritious, and tasty. Although those vegetables may have already been several days old by the time they travel from farmers' fields through wholesale markets to supermarkets and wet markets. With the changing times, the younger generation and their parents have shown significant differences in both beliefs and methods regarding buying groceries. Young people, busy with work, prefer to order online with a few clicks, while the older generation, with free time, enjoy going to physical markets to pick and choose. Photo by New Retail Business Review It's hard to say which channel provides the best vegetables, and it's also hard for any single channel to meet everyone's needs. Recently, New Retail Business Review conducted a small survey: over 70% of people like to use a "combination" approach when buying groceries, choosing to order from fresh food e-commerce platforms or go to offline supermarkets or nearby wet markets based on their needs; when choosing a channel, 60% of people prioritize cost-effectiveness, followed by convenience and trust. Because different people have different lifestyles and needs, this has ultimately given rise to new channels and models for buying groceries, and the fresh food retail industry has seen new players enter in recent years. Not only are there integrated online-offline platforms like Hema, Yonghui, and Qixian, but platforms like Ele.me, Meituan, and JD.com have also integrated local supermarkets such as RT-Mart, China Resources Vanguard, and Carrefour... Ordering through mini-programs or apps has become the mainstream way for young people to buy groceries. Among a series of fresh food delivery scenarios, the front warehouse model, known for its speed, stands out. With a 3-5 km radius and 30-minute delivery, it has become a favorite among many white-collar workers—order before leaving work, and you can calmly cook a meal after getting home. Even if you run out of something mid-cooking, the instant delivery service won't affect your cooking progress. "When Dingdong first entered Shanghai, I once found I had no ginger while cooking, so I quickly placed an order, and it arrived surprisingly fast." Beibei still remembers her early experience with Dingdong Maicai. She said, "In terms of speed, it's more reliable than my husband." Because Dingdong's overall experience was quite good, Beibei opened a membership at the beginning of the year. She orders on the subway after work, and the groceries almost arrive at home at the same time as she does. However, recent purchase experiences have made Beibei feel that Dingdong's quality stability has noticeably declined compared to before. "Several times, the vegetables I bought were not very fresh." Feifei, living in Shenzhen, is a loyal user of Pumu Supermarket. Besides product quality and delivery speed, Pumu's membership incentive mechanism also pleases her. "Membership points can be directly used as cash discounts, which is very cost-effective." Image source: Internet However, after a Qixian supermarket opened downstairs this year, Feifei rarely orders from Pumu. "Mainly because my mom prefers to pick and choose at offline supermarkets, and the kids also like to wander around the supermarket and buy some snacks," she said. Meanwhile, Miss Fresh, also using the front warehouse model, was exposed to operational anomalies in multiple companies due to financial problems. As a result, the competitive landscape of the front warehouse model in the fresh food retail industry has evolved into a "three kingdoms" battle among Dingdong, Pumu, and Meituan. "In the short term, the current landscape of front warehouse is unlikely to change significantly, unless some internet giants take active measures based on their fresh food strategies," said Zhu Jian, a partner at Shanghai Binfu Capital. He also noted that this period is actually a good time for related companies to focus on operations and strengthen their internal capabilities. 02 Expansion or Contraction As one of the fresh food retail models based on residential areas, the significant advantage of front warehouse is speed. Ordering on your phone and having it delivered within 30 minutes is the service feature that distinguished the front warehouse model from other fresh food e-commerce platforms at its inception. But once consumer habits were successfully changed, the high fulfillment costs behind the 30-minute delivery became a shackle that bound the companies themselves. Rent, utilities, packaging materials, labor, delivery, and spoilage—every seemingly insignificant operational detail has become a key factor in whether a fresh food e-commerce platform using the front warehouse model can survive. The most frightening thing is that in this model, losses are easily contagious, but profitability is hard to replicate. "Miss Fresh's failure is not the failure of the front warehouse model, but Miss Fresh's own failure." Industry insider Jian Xiaozhu believes that blindly expanding and using internet thinking to do fresh food retail, a business of "picking up steel coins," could see the ending from the start. Jian Xiaozhu has had several contacts with Miss Fresh's internal employees and found that Miss Fresh almost told different stories and strategies every year. "This is actually quite terrifying for a company," he said. In contrast to Miss Fresh's continuous aggressive expansion is Dingdong Maicai. Image source: Dingdong Maicai official website Dingdong also expanded rapidly, but since the second half of last year, Dingdong has been closing loss-making stations. This shift from expansion to contraction strategy ultimately resulted in a decent second-quarter report card for Dingdong. Data shows that the company achieved revenue of 6.63 billion yuan in the second quarter, a year-on-year increase of 42.8%; Non-GAAP net profit was over 20 million yuan, achieving phased profitability for the first time. In this regard, senior retail expert Wang Guoping analyzed: First, the epidemic in East China increased customer traffic and average order value. Whether it can continue to be profitable depends on the retention rate after the epidemic and the decline in average order value. The third-quarter performance will reflect a more realistic level; Second, by closing some severely loss-making stations and laying off employees, costs were reduced in various aspects. This approach seems effective so far, but it must also be noted that it may lead to a partial decline in service quality; Third, increasing efforts in private brand building. On the one hand, it can reduce procurement costs; on the other hand, it can enhance gross margin space. However, this approach tests the sell-through capability of self-operated products. In contrast, Pumu Supermarket has always adopted a "restrained model" in its development. This company, established six years ago, currently has fewer than 400 stores, mainly concentrated in Shenzhen, Guangzhou, and Fuzhou. Although it has set up sub-warehouses in Wuhan, Chengdu, and Xiamen, Pumu is very cautious about when to enter the hot battlegrounds of fresh food retail—Shanghai and Beijing. 03 The Final Ending The advantages of front warehouse are obvious, but the challenges come from operational details. It is no exaggeration to say that in the front warehouse model, improving the operational efficiency of a single station is far more important than increasing the number of stations. Zhu Jian believes that the business logic of the front warehouse model itself is not problematic, but this model has very high operational requirements for scaled profitability. Long-term and comprehensive profitability requires time to verify, and requires relatively clear calculations and planning for single warehouses and single cities from the beginning, including population structure, population density, fresh food consumption habits, and alternative supply. "The differences between cities in China are too significant. Even after achieving profitability in a single city, you cannot directly replicate the product assortment structure and other resources formed in that city to another city for cross-regional expansion," he said. Photo by New Retail Business Review In recent years, Miss Fresh, Dingdong Maicai, and others have relied on the "burning money model" to support rapid brand expansion. While quickly acquiring customers, risks have followed like a shadow. The fresh food industry itself has very low gross margins. "Using losses to conquer territories is very likely to result in self-destruction before defeating competitors. Miss Fresh's collapse is proof of that," Jian Xiaozhu said. Dingdong Maicai founder Liang Changlin is also well aware of this. Not long ago, he said that the key to judging the merits of a model is whether it truly meets user needs. Wang Guoping analyzed that Dingdong's early burning of money was partly to reduce fulfillment costs through scale and partly to cater to the capital market's demands. But these two are essentially the company's own needs, not consumer needs. For Dingdong to sustain profitability in the future, it needs to do two things well: First, through cooperation with supply chain enterprises, remove brand premiums, deeply develop private label products through OEM, and continue to increase gross margin space; Second, through better product selection, improve the match between products and target customers, ultimately increasing customer volume and average order value, thereby diluting backend, infrastructure, traffic acquisition, and management costs. Jian Xiaozhu offered his perspective from another angle. He believes that there is no immutable business model in the world. Any business model must go through a gradual process before it truly matures. "The current front warehouse model is far from its final form." From Pumu Supermarket's current financial situation, its large warehouse model is basically a relatively healthy model. On the other hand, it can also be seen that the large warehouse model can accommodate more SKUs and can also provide consumers with more choices after "store-warehouse integration." "Based on the dual demands of efficiency and cost, the front warehouse model will definitely continue to iterate and evolve in the future, forming a more comprehensive business format to meet the needs of different fresh food consumption scenarios. Store-warehouse integration, O2O, and others may be among the future formats," Zhu Jian believes that the ultimate form of front warehouse will definitely not be a pure front warehouse model. 04 Buying groceries itself is not complicated. Why are there so many fresh food retail companies that have "failed in the market" in recent years? Even companies that seem to be doing well this year may fall into crisis next year. "I think the key issue is that people with internet genes lack basic reverence for fresh food retail," Jian Xiaozhu said. The exit of some fresh food retail companies can be seen as the clearing of ineffective supply in the industry, which is good for the healthy and long-term development of the industry. Surviving companies, on the one hand, can reflect on why they survived, and on the other hand, they should think about how to go further in the future. Obviously, surviving and moving forward is the ultimate goal for every company. Note: Except for Wang Guoping and Zhu Jian, all other interviewees in this article are pseudonyms. Source: New Retail Business Review (ID: xinlingshou1001) Author: Tian Qiaoyun