---
title: "MissFresh's Predicament and the 'Substitution Hypothesis' for the Front-Warehouse Model"
description: "MissFresh's decline does not signify the failure of the front-warehouse model, which has been validated as successful but faces challenges in becoming mainstream due to high asset intensity and operational demands. The model may find future viability by integrating with O2O platforms rather than operating independently."
author: "我是庄帅"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2022-08-05"
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# MissFresh's Predicament and the 'Substitution Hypothesis' for the Front-Warehouse Model

> MissFresh's decline does not signify the failure of the front-warehouse model, which has been validated as successful but faces challenges in becoming mainstream due to high asset intensity and operational demands. The model may find future viability by integrating with O2O platforms rather than operating independently.

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**New Distribution Commentary**
For MissFresh, the front-warehouse model is too asset-heavy, requiring continuous capital infusion to sustain operations. This model places high demands on order density and supply chain, especially for fresh e-commerce. However, MissFresh's decline does not represent a retreat of the front-warehouse model.
As the article states, whether it's Dingdong Maicai or MissFresh, their former glory days validated the success of the front-warehouse model. It's just that due to various factors, it has not yet become a mainstream format. But as an important supporting model for fresh e-commerce, efforts must be made to improve efficiency and reduce costs. In the future, whether the front-warehouse model can become part of O2O platforms will require more attempts and exploration by various platforms.
To explore MissFresh's current predicament, we can find reasons from both external and internal perspectives.
Externally, on one hand, domestic macro-policy environment has tightened regulation on internet companies, coupled with pressure from U.S. capital markets on Chinese stocks, making it difficult for MissFresh to secure financing in the U.S. capital market.
On the other hand, competition in domestic fresh retail has intensified. Traditional supermarkets, warehouse clubs, B2C fresh e-commerce, community group buying, store-warehouse integration, and O2O home delivery platforms have all increased their transformation efforts and investments. The accelerated competition has exposed MissFresh to more powerful competitors, making it difficult to compete with limited funds.
**Internally, MissFresh has been overly optimistic in recent years, leading to mistakes in strategic layout, competitive strategy, and organizational culture.**
In 2019, MissFresh announced cooperation with Tencent Retail, upgrading its strategy to (A+B)*N, supplementing A (front-warehouse) with breadth B (smart wet market) and depth N (retail cloud).
As early as June 2017, due to capital favor towards unmanned shelves/cabinets, MissFresh recruited a team of over 2,000 people to establish "Bianligou" and aggressively entered that field. Earlier this year (2022), despite a net loss of 960 million yuan in Q3 2021, it acquired the unmanned vending machine company Zailouxia.
Given the severe losses in the front-warehouse business (7.6 billion yuan from 2019 to Q3 2021) and the unsettled competitive landscape (with three major competitors: Meituan Maicai, Dingdong Maicai, and Pumu Supermarket), MissFresh did not focus on its core front-warehouse business. Instead, it dispersed its limited funds, team, and technical capabilities across four business segments: **front-warehouse, smart wet market, unmanned retail, and retail cloud**, making an operational crisis almost inevitable.
Additionally, due to business dispersion and overly rapid expansion, MissFresh failed to build strong organizational culture support. Problems exposed during actual operations were not well resolved, and a culture of "fleecing the company" formed from top to bottom...
As an e-commerce company, MissFresh believed it was technologically advanced. However, when facing serious issues like fake orders and inflated budgets, it failed to use internet methods, systems, and data to effectively curb them, leading to worsening losses and preventing any of the four businesses from establishing true core competitiveness.
**So the question arises: Does the abandonment of the front-warehouse model, pioneered by MissFresh after seven years of development, mean that the model is unsustainable?**
Next, the "Zhuangshuai Retail E-commerce Channel" will analyze whether the front-warehouse model can be replaced by other fresh retail formats through a comparison of various parameters across multiple formats.
**01 Multi-format Landscape of Fresh Retail**
Currently, China's fresh retail is divided into offline and online, with different retail models corresponding to different consumption scenarios. Offline main formats include wet markets, traditional supermarkets, warehouse clubs, community fresh stores, and unmanned cabinets; online formats include B2C fresh e-commerce, front-warehouse model, O2O home delivery platforms, store-warehouse integration, and community group buying.
**The "ten formats" of fresh retail correspond to the consumption needs of different user groups in different scenarios and at different frequencies.**
_Offline wet markets and traditional supermarkets target mainly middle-aged and elderly people, meeting the needs of "family shopping" and "free selection" once a day or once or twice a week, as well as "one-stop shopping" for fresh and daily necessities._
_Warehouse clubs generally target users with limited shopping time or large families, meeting family needs through weekly or monthly bulk purchases of high-cost-performance large-pack products._
_Community fresh stores and unmanned cabinets meet the daily immediate/impromptu purchase of small quantities of fresh products by community users._
_Online B2C fresh e-commerce platforms mainly target young people and some middle-aged and elderly, purchasing once or twice a month products that are less perishable, have longer shelf life, offer price advantages over offline formats, and can be delivered to the door._
_The front-warehouse, O2O home delivery, and store-warehouse integration models all meet the needs of young users in terms of timeliness and quality._
_Community group buying targets middle-aged and elderly groups in lower-tier cities, mainly meeting social shopping needs through fresh categories._
According to third-party data from iResearch, wet markets still account for over 50% of fresh retail, making them the largest format in China. In first- and second-tier cities, due to more diverse lifestyles, fresh retail formats are richer, and wet markets are gradually being transformed into supermarkets or warehouse clubs, with their share dropping to 38.4%.
_In 2020, China's total online retail sales reached 11.8 trillion yuan, with an online penetration rate of 27.9%, but fresh retail online penetration was only 14.6%._
**After more than a decade of development, fresh e-commerce still has a lower penetration rate than the average. There are three core reasons:**
_First, there are many online and offline formats, with competition dispersed and sufficient._
_Second, consumers are still in a "dynamic consumption habit" stage for fresh categories, failing to form long-term stable consumption habits with one or two formats._
_Third, the high loss rate in warehousing and distribution of fresh products leads to high costs, reducing gross margins._
Of course, with the emergence of the pandemic and normalized epidemic prevention, the online penetration of fresh products has further accelerated.
During the initial outbreak in early 2020, the frequency of consumers using fresh e-commerce apps increased significantly. During the normalized prevention period, although the frequency slightly declined, it remained much higher than before the pandemic; purchase frequency was also significantly higher than before.
This shows that the pandemic cultivated users' habit of using fresh e-commerce platforms, further accelerating online penetration in the fresh market.
**02 Which Format Can Replace the Front-Warehouse?**
From a substitution perspective, we need to break down consumer needs into "more, faster, better, cheaper" and map them to the operational characteristics of different formats.
Due to shortcomings in transportation, door-to-door services, shopping convenience, and price advantages, offline formats cannot meet the "fast and cheap" needs, so they cannot replace the front-warehouse model. However, the diversity of offline formats can meet "better and more" needs, so they remain the mainstream.
Among online formats, O2O home delivery platforms and store-warehouse integration have accelerated integration with offline formats. As offline physical stores enhance their online operational capabilities and digital management levels, they have increasingly competitive pressure on B2C fresh e-commerce, front-warehouse, and community group buying.
In terms of product prices, front-warehouse is in the middle; product quality is second only to store-warehouse integration, better than traditional fresh e-commerce, O2O platforms, and community group buying; SKU count is higher than community group buying but has no advantage compared to other models; the 30-minute delivery speed is the biggest advantage of front-warehouse, but the one-hour delivery speed of O2O platforms and store-warehouse integration is also within acceptable range for consumers.
In terms of coverage and city layout, the front-warehouse model has advantages only over community group buying, but not significant advantages over the other three models.
That is to say, **front-warehouse has differentiated advantages in "fast and good."**
**O2O platforms and store-warehouse integration will become the biggest competitors to the front-warehouse model. However, due to serving both online and offline user groups, when the two operating systems conflict on the platform, physical stores will prioritize serving offline users, making it impossible for online platforms to compete with front-warehouse in product quality, delivery efficiency, and experience.**
This contradiction between O2O platforms and store-warehouse integration is likely to persist long-term and cannot be reconciled.
_Overall, traditional e-commerce channels rely on courier delivery, with poor timeliness, focusing on planned demand, limited fresh categories, low SKU count, but deep inventory, high loss rates, and unstable product quality._
_Community group buying uses group leaders to consolidate orders and deliver, usually next-day, mainly meeting planned and social shopping needs, with limited fresh categories, low SKU count, medium inventory, and has built a new operation and fulfillment system with low fulfillment costs, low loss rates, and average product quality._
_The front-warehouse model relies on riders for home delivery, arriving within about 30 minutes, with strong timeliness, large fresh category share, but low SKU count, shallow inventory, focusing on immediate needs, but high loss rates and medium product quality._
_O2O platforms and store-warehouse integration rely on riders for home delivery, arriving within about an hour, with strong timeliness, large fresh category share, focusing on immediate needs, low loss rates, best product quality, but low SKU count and shallowest inventory._
Conclusion: **After six or seven years of development, the front-warehouse model has been validated as successful and has become one of the irreplaceable formats in fresh retail. However, due to factors such as small operating area, limited shelves and SKU count, shallow inventory requiring high replenishment frequency, and high delivery costs, it has not yet become a mainstream format.**
**In the next five to ten years, the front-warehouse model will remain a supplementary format in fresh retail.**
**03 The Future of Front-Warehouse: Becoming Part of O2O Platforms?**
According to Dingdong Maicai's publicly stated profitability indicators in Shanghai, average order value and fulfillment expense ratio are key indicators for front-warehouse profitability.
From financial data, Dingdong Maicai's main costs include four parts: **fulfillment expenses (front-warehouse, picking personnel, delivery costs), sales and marketing expenses, management costs, and technology costs.**
In Q3 2021, Dingdong Maicai's gross margin was 18.2%, fulfillment expense ratio was 37.3%, sales expense ratio was 6.9%, and loss rate was 32.6%.
According to Huatai Securities research, regarding warehousing-related costs: assuming utilities and depreciation total 19,000 yuan/month, with a rate of 1.2%; rent calculated based on average front-warehouse area of 300 square meters at 5 yuan/sq m/day, the front-warehouse rent rate is 2.7%;
In Q3 2021, the company's fulfillment expense ratio was 37.3%, of which central warehouse and front-warehouse rent and utilities depreciation accounted for 40.3% in Q1 (assuming Q3 remains 40.3%), representing 15.0% of revenue, so central warehouse rent allocation accounted for 11.1% of revenue.
For delivery-related costs: assuming 20 delivery personnel per front-warehouse at 8,000 yuan/month/person, the delivery rate is 9.8%, equivalent to 5.2 yuan/order; 10 pickers at 7,500 yuan/month/person, 1 supervisor at 10,000 yuan/month/person, the front-warehouse personnel rate is 5.2%.
That is, Dingdong Maicai's Q3 2021 front-warehouse warehousing and delivery expense rate was 22.3%. Excluding delivery, picking, and warehouse management, there is still 7.4% central warehouse picking/logistics costs.
_If the front-warehouse model is to achieve full profitability, the efficiency improvement part is to increase order volume and order density, and the cost reduction part is to reduce warehousing (large warehouse 11.1% + front-warehouse 2.7%) and fulfillment costs (picking 12.6% + delivery 9.8%) and sales expenses (6.9%), totaling 43.1% of costs!_ 
Excluding R&D and management expenses, Dingdong Maicai's Q3 2021 operating loss rate was 26.0%. To achieve profitability at the sales level, it needs to optimize 26.0% of costs and expenses.
_Then, if the front-warehouse model abandons the independent APP development model and fully integrates with O2O platforms such as Meituan Flash Shopping, JD Daojia/Hourly Shopping, Taoxianda/Ele.me, and Duodian, with platforms providing traffic and rider delivery, then the 9.8% delivery cost and 6.9% sales expense, totaling 16.7% of costs, could be reduced in the short term._
The reduction in picking costs depends on the application of unmanned technology. As early as 2019, at the Smart Warehousing Development Summit Forum, Mo Xinglong, chief architect of Meituan Flash Shopping's unmanned micro-warehouse, delivered a speech titled "New Starting Point for Retail Efficiency - Meituan Flash Shopping Unmanned Micro-Warehouse," briefly introducing the "unmanned front-warehouse" project.
Meituan Flash Shopping's unmanned micro-warehouse provides intelligent scheduling systems and automated equipment to complete the entire process of automatic order receiving, picking, consolidation, packing, and handover, offering a software and hardware integrated solution for front-warehouses.
If front-warehouses can be transformed into "unmanned front-warehouses," not only can picking efficiency be improved, but the 5.2% labor cost of pickers can also be saved.
Secondly, improve management levels and work standards at each stage to reduce the loss rate of fresh products at each stage, continuously reducing the product cost which accounts for as high as 81.8% of total costs.
The "Zhuangshuai Retail E-commerce Channel" believes that **the front-warehouse model actually still falls under the category of "vertical e-commerce." Due to the high-frequency repurchase characteristics of fresh categories, it has gained some advantage over traditional comprehensive e-commerce, but it lags far behind food delivery platforms in terms of high-frequency repurchase and user scale.**
As high-frequency repurchase O2O platforms like Meituan Flash Shopping, Ele.me, and JD Daojia/Hourly Shopping continue to increase investment, and with deep cooperation and innovation with traditional supermarkets, community fresh stores, and store-warehouse integration models, such as the "Meituan Lightning Warehouse" project, there will inevitably be greater competitive pressure on front-warehouse platforms.
Rather than competing, it's better to cooperate. The front-warehouse model, as a strong "supply side" in fresh categories superior to traditional supermarkets and community fresh stores, could become part of O2O platforms, which might be the only way to sustainable development in the future.
Source: Zhuangshuai Retail E-commerce Channel (ID: zhuangshuaiec) Author: I am Zhuangshuai
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