In August, various e-commerce companies released their financial reports, with mixed results—the first half of 2022 may have already determined the landscape of fresh food e-commerce. However, among the players in the fresh food front warehouse model, there seems to be a different story to tell. Front warehouse player Miss Fresh 'exploded', Dingdong Maicai achieved its first quarterly profit, and latecomer Pupu Supermarket overtook the pack, showing more momentum than Meituan. Among fresh food players focusing on lower-tier markets, those using front warehouse and warehouse-store integrated models are at a disadvantage, but no one is willing to cede the market. For asset-heavy front warehouse players, the moment they are provoked by competitors into a land-grab mindset, they may have already fallen into a strategic trap in lower-tier markets. An industry insider said that based on consumer profiles in different cities, the front warehouse model is currently difficult to develop in third-tier and below cities. This is because it requires a process of consumer education. Consumers need time to shift from traditional consumption patterns to a new model and complete the habit change. For asset-light players like community group buying, expanding into lower-tier markets does not require excessive cost investment, and they have time to cultivate consumer habits. But for front warehouse players, the upfront investment is too large, requiring strong financial reserves as backing. "Rather than competing with many players for uncertain market share, it is better to intensively cultivate first- and second-tier cities, firmly grasping these high-spending consumers." 01

Front Warehouse Player Landscape Reversal

The current fresh food models are mainly divided into front warehouse, community group buying, warehouse-store integrated, and platform-to-home models. Compared with other models, the fresh food front warehouse model has not shown convincing performance. As is well known, front warehouse is an asset-heavy, high-investment model, including warehousing, logistics, operations, and delivery costs, leading to high fulfillment costs. Since the front warehouse model lacks offline platform traffic, customer acquisition is more difficult. Only by increasing subsidies to attract new users can more users be obtained, but this also drives up marketing costs. It is understood that the fulfillment cost of front warehouse is twice that of the platform-to-home model, three times that of traditional central warehouses, and six times that of community group buying. In addition, the front warehouse model is difficult to penetrate into third- and fourth-tier cities, and this money-burning, low-margin business is hard to make profitable. However, Miss Fresh's 'explosion' has sparked heated discussion in the industry about the fresh food front warehouse model. For a long time, Miss Fresh and Dingdong Maicai have been representatives of the front warehouse model. In June 2021, both companies went public after burning cash. In just one year, Miss Fresh, once hailed as the 'first stock of fresh food e-commerce', gradually declined. Other surviving front warehouse players have attracted attention, and some even wonder whether Dingdong Maicai will follow in Miss Fresh's footsteps. However, Dingdong Maicai's financial report shows that in the second quarter of 2022, revenue was 6.6 billion yuan, a year-on-year increase of over 40%, and net profit (non-GAAP) was 20.6 million yuan, achieving profitability for the first time, temporarily dispelling external doubts. This may be due to the impact of the pandemic, which forced some people to adjust their lifestyles, temporarily avoiding its collapse. Why did Dingdong Maicai and Miss Fresh end up in such opposite situations? Previously, Dingdong Maicai's cash burn and losses were no less than Miss Fresh's. Within less than a year of listing, it began to shrink its scale. In the first half of this year, it closed dozens of front warehouses in second- and third-tier cities, focusing on super first-tier and some first-tier cities. This strategy of cutting losses to survive has to some extent secured a way out. However, some industry insiders believe that the current situation is influenced by environmental factors such as the pandemic and other uncertainties, and Dingdong Maicai's financial turnaround in the second quarter was not due to improvements in internal management. In the long run, whether Dingdong Maicai can get on the right track remains unknown. However, Miss Fresh did not have such luck. In the second half of 2020, Miss Fresh launched its smart wet market business, gradually entering lower-tier markets. At that time, the industry was in a state of blind expansion, with each player carving out its own territory. To successfully enter lower-tier markets, subsidies and low-price strategies were the optimal solutions. As a result, major fresh food e-commerce companies burned cash to grab market share and expand scale, creating a brief false prosperity in the fresh food market. In lower-tier markets, front warehouse players not only cannot reduce fulfillment costs but also find it difficult to increase profits. Take community group buying, for example: 'next-day delivery' alleviates warehousing pressure and costs to some extent; while the warehouse-store integrated model only needs to complete delivery. Therefore, the front warehouse model with high fulfillment costs does not have a competitive advantage compared with other models. Unordered expansion and low-price subsidies only increase corporate cost burdens. Companies need to tell a good fresh food e-commerce story to attract investors, but only profitability can sustain investment. However, 'bubbles' eventually burst, and continuous losses lower investor expectations, as no one has the patience to listen to stories forever. Facts have proven that exchanging speed for scale effects is not applicable in the current environment, and Miss Fresh, backed by a luxurious capital lineup, was not spared. The final practice also proved that frenzied expansion does not bring good results; instead, companies either shrink scale to reduce losses or end in failure. Not long ago, the first-half data of various fresh food e-commerce platforms was released. It is worth noting that Pupu Supermarket, a late entrant to the front warehouse fresh food e-commerce, emerged like a dark horse, with all metrics surpassing fresh food giants such as Meituan, Dingdong Maicai, and Hema Fresh. According to an institution's statistics on daily order data for fresh food platforms in July this year, Meituan Maicai had an average daily order volume of 800,000, Dingdong Maicai 1 million, Hema Fresh 900,000, while Pupu Supermarket exceeded 1.1 million, successfully overtaking them. In addition, its published data shows that Pupu Supermarket's revenue in the last month exceeded 2 billion yuan, with a year-on-year increase in average order value of 10%, and a comprehensive gross margin of around 22% in 2022. Currently, the fresh food front warehouse landscape has basically taken shape. The top three front warehouse players, such as Meituan occupying the North China market, Dingdong Maicai having an advantage in East China, and Pupu Supermarket holding an absolute position in South China, each penetrate and take root in different regions, forming a tripartite balance. 02

Is Pupu's Counterattack Just a Coincidence?

A person close to Pupu Supermarket said that Pupu's development to its current state may not be due to making many correct decisions, but rather relatively fewer mistakes. In the midst of the pandemic, we face unexpected situations at any time. Companies should hold their ground and survive smoothly. Only then can they talk about development, efficiency, and stories. This is the safest approach. "In fact, by reverse reasoning from Miss Fresh's failure, we might find the answer." For example, last year everyone was expanding aggressively, but Pupu chose the latter between expanding scale and intensively cultivating local markets. "Actually, it's not that Pupu was far-sighted; there was an element of chance. Mainly, Pupu lacked sufficient expansion funds. With no money to expand, it could only adopt a conservative approach and was forced to intensively cultivate key cities in South China." As is well known, the advantages of fresh food front warehouses lie in short delivery distances, ensuring timeliness, safety, and scale effects. Its disadvantages are also clear: high order damage rates, high restocking costs, a single profit model, difficulty in penetrating second- and third-tier cities, and more importantly, the need for continuous capital infusion to maintain operations. Once front warehouses expand scale, not only warehousing and delivery capabilities are tested, but also continuous capital investment is required. So, rather than saying Pupu chose to intensively cultivate a few important cities, it is more accurate to say its own strength only allowed it to take this path. Pupu does not need to burn cash to expand scale and add front warehouses, greatly reducing operating costs. Regarding timeliness and delivery capabilities, Pupu's packers and delivery personnel have the most say. Zhou Wei, a former part-time packer at Pupu, said that his hourly wage was between 18 and 28 yuan. If he failed to meet time standards, he couldn't even get the minimum 18 yuan per hour. Once he met the standard, he would receive a reward of about 0.15 yuan per order, and each month the top three employees would receive rewards ranging from 100 to 300 yuan. Packing errors also incurred corresponding fines. Driven by competitiveness and bonuses, Zhou Wei was blinded. For a period, in pursuit of speed and order volume, he kept making mistakes, either taking the wrong items or missing items. But some fines he felt were particularly unfair. For example, once a customer complained about moldy food, and the blame was shifted to him. In the end, he didn't get the bonus that month and was fined quite a bit. "Every day I packed until my hands went weak, carrying dozens of kilograms of goods around the warehouse. When eating, my hands shook so much I couldn't hold chopsticks. By the end of the day, I felt my hands and feet weren't mine, and I could fall asleep instantly as soon as I hit the bed. At the end of the month, I could only earn a salary of over 3,000 yuan," Zhou Wei recalled. This was the most tiring job he had ever done. Later, he had a conflict with the manager and quit. Another person who worked as a Pupu delivery person for three months said that at the time he was very short on money and urgently needed a job. He chose not to deliver food delivery because Pupu delivery personnel did not need to provide their own vehicle, and there were no fines for being late, so he didn't need to invest much upfront. Regarding delivery, Pupu specifically requires delivery personnel to proactively ask customers if they want their garbage taken away when delivering orders to their homes. Perhaps this small, inconspicuous detail has brought many repeat customers and a good service reputation. Zhou Wei said, "As someone with experience, Pupu employees have many tasks and low pay, while Pupu customers save time and effort. So, you can choose to be a Pupu customer, but if you want to be an employee, think twice." While these rules have won consumer favor, they may have overlooked the feelings of some frontline employees. In addition, in terms of supply chain, Pupu indeed holds an absolute advantage. For suppliers, Pupu waives entry fees and does not require them to bear responsibility for product returns and exchanges, only charging a service fee of 3%-5%, greatly reducing supplier costs and saving expenses. Stable suppliers not only ensure stable supply for Pupu but also create conditions for improving gross margins in the future. Among these, the traffic dilemma must be mentioned, which has always been an urgent problem for front warehouse players. How to market, acquire customers, and educate consumers is an important part. Pupu's advertising investment is related to the founder's style. A former Pupu employee said, "From Pupu's base in Fuzhou, you can see that the overwhelming brainwashing-style ads swept the entire city, making it hard not to be impressed, transforming people from passive 'education' to active acceptance." Fresh food e-commerce is inherently an asset-heavy, low-margin, high-fulfillment-cost market, making profitability truly difficult. By adopting a full-coverage penetration model to squeeze competitors' space and capture absolute regional market share, it is highly possible to raise gross margins and move closer to profits. After Pupu established a firm foothold in Fuzhou, it radiated outward from this center to its current state, becoming a dominant force in South China. Of course, this 'arrogant' marketing model, whether in terms of capital or regional characteristics, cannot be replicated on a large scale in other cities. Where there is a market, there is competition. Regarding competitor poaching and encirclement, "Actually, small-scale competition is inevitable, but Pupu hasn't encountered too many tricky situations because competitors currently dare not rashly attack Fuzhou. Correspondingly, Pupu also doesn't dare to expand into Beijing, Shanghai, and other places." Time and the current environment have also proven that as long as Pupu takes one fewer wrong step along the way, it is one step ahead of its competitors. 03

Conclusion

For a long time, many have been bearish on fresh food front warehouses. Some believe that the current outbreak of fresh food e-commerce models is a special product of the pandemic. In the long run, it does not have development potential and will eventually be a flash in the pan. But others believe that if consumers have been successfully educated by the market during this period, once people get used to a convenient lifestyle, it is difficult to return to the past. This is similar to the principle that 'it is easy to go from frugality to extravagance, but difficult to go from extravagance to frugality.' Finally, the outside world may wonder whether Pupu Supermarket will consider financing and listing in the near future, or perhaps prepare to expand outward. Of course, there is another possibility: Pupu may choose to stay in one corner, guarding its current peaceful territory. At least, after the tide of fresh food e-commerce recedes, Pupu still nests in South China, with no signs of outward expansion or inward contraction. Note: All individuals mentioned in the article are pseudonyms. -END- Live Topic: "Discussion: Is 'RFID + Digitalization' the Evolution Direction of FMCG Supply Chain?" Time: September 29 (Tonight) 20:00-22:00 Host: New Distribution CEO Chen Siting Guests: Cainiao Logistics Technology IoT General Manager Xu Ming, Uni-President Enterprises China Digital Center Technical Director Weng Zhangxian, China Resources Snow Breweries National Operations Center General Manager Cao Zhimin, Cainiao Logistics Technology Digital Supply Chain Senior Expert Zhao Haoyu With the digitization of products brought by RFID, how can we build a supply chain digitalization system for FMCG manufacturers on this basis? How can we solve the many deep-rooted problems of the traditional supply chain we mentioned earlier? New Distribution has invited multiple brand managers, marketing experts, and professional service providers to connect to the live studio to discuss the evolution of the FMCG supply chain in the new era and new market environment.