Chen Kaile

In August this year, in a warehouse in Linping District, Hangzhou, boxes of boiled soy sauce and pickled fish packets were neatly stacked in a temperature-controlled assembly workshop, their fate hanging in the balance. "Qudian is no longer doing prepared dishes," the warehouse manager told Ebrun Power. This year, they built a low-temperature warehouse to pack and assemble Qudian's prepared dish kits and side dishes, which were then delivered to consumers by courier. But soon, this cooperation ended with Luo Min clearing his Douyin account. On the C-end prepared dishes table, another player has left the game, but more players are quickly filling the gap.

Tianyancha data shows that at the end of last year, more than 4,000 new prepared dish-related enterprises were registered, bringing the total number of players to nearly 70,000, including notable dark horses such as Dingding Lazy Dish with monthly sales of 50 million yuan, Maizima with monthly sales of 20 million yuan, and Zhenwei Xiaomeiyuan. As new players take their seats, this game, which was originally only among B-end catering suppliers, quickly spread, forming a four-player mixed battle:

  • Early professional players represented by Weizhixiang;
  • Catering players represented by Xibei and Tai Er;
  • Emerging online players represented by Dingding Lazy Dish;
  • Retail platform players represented by Hema and JD.com.

As cards come and go, they may win or lose against each other. Spectators around the table can easily see that this high-stakes game, ultimately focused on winning consumer mindshare, is currently competing on traffic and fulfillment costs. In the era of "Copy America to China" and finding investors for financing and refinancing, players might have had the confidence to spend lavishly backed by capital. But now the situation has changed; under the strategy of "whoever exhausts the opponent first wins," cost advantage has become their most important, even only, chip. Thus, the game is beginning to favor certain types of players. For example, Hema and JD.com, which bring their own traffic and replicate existing fulfillment and supply chain capabilities, have been profitable from the start. Over the past decade or more, super giants like Alibaba, Tencent, and Meituan unexpectedly entered e-commerce, social networking, and O2O, gradually building impenetrable walls in the barbaric era. Later, the rules began to change, and the wave of internet entrepreneurship from 0 to 1 gradually faded. With only passion or funds, success is hard to achieve, and failure is already doomed. Because nowadays, competition in certain fields sets thresholds from the start, such as prepared dishes.

Atypical Entrepreneurial Track

At the end of August this year, in a coffee shop on the first floor of a hotel in Suzhou, Pu Wenming, founder of prepared dish brand Zhenwei Xiaomeiyuan, mentioned his goal to Ebrun Power—"In the future, we want to open 10,000 prepared dish community stores." At that time, a prepared dish exchange meeting had just ended, and he had given a speech there. In the audience sat two to three hundred prepared dish distributors from various places, either taking out paper and pens to jot down notes on their knees, or mostly raising their phones to photograph the projection content. There were also twenty or thirty people carrying briefcases, blocking the backstage passage and the main entrance. Suzhou had just ended the last few light rains of summer, and the venue still smelled of pungent sweat. Since this year, Pu Wenming has recruited more than 180 offline salespeople, fully attacking offline community specialty stores. Not long ago, Pu Wenming just voluntarily ended nearly a year of rapid online expansion. In 2021, Xiaomeiyuan's overall sales were about 200 million yuan, with Tmall alone accounting for nearly 45% of sales. Adding JD.com, Douyin, and Kuaishou, online sales totaled about 80 million yuan. Among them, cooperation with top streamers made Pu Wenming exclaim, "I couldn't come to my senses." In September 2021, Xiaomeiyuan had just been founded for a year, with monthly sales of several million yuan, while streamers brought in sales six times that amount. Like a roller coaster finishing its sprint, Pu Wenming, coming to his senses, found that "the accounts didn't add up." He had cooperated with Li Jiaqi on a pickled fish dish, selling three boxes for 78 yuan. Although the streamer's slot fee was quoted at 50,000 yuan, by the time he used connections and found agencies to recommend it, he had already spent 200,000 yuan to get the product selected. He estimated that, including commissions and return rates, a single live stream would need to sell 3 million yuan worth of pickled fish to break even. "Besides, last year the traffic of top streamers declined, and big streamers couldn't bring in 2-3 million (in sales) anymore." Therefore, Pu Wenming, desperately seeking profits, transformed this year to focus on offline community stores.

Even if they bypass top streamers and choose to carefully cultivate online stores less aggressively, most players still find it hard to escape losses. Prepared dish brand Maizima once launched a 45-yuan old jar pickled fish (3 boxes for 135 yuan) and a 35-yuan golden soup pickled fish (3 boxes for 105 yuan), slightly higher than the industry's common 26-yuan bestseller price and the average gross margin of about 65%. But after deducting 13% VAT (ordinary consumer goods are subject to 13% VAT), over 50% of delivery and advertising costs, plus labor and warehousing expenses, profits have long disappeared. Last year, Maizima sold over 100 million yuan of prepared dishes, with nearly 70% from online. Even with efforts to optimize the ROI of store advertising, online still suffered slight losses. "Fortunately, our offline 2B business has a certain foundation, ensuring the normal operation of the company's overall channels," said Su Qing (pseudonym), a partner at Maizima.

A careful analysis reveals that the expensive point-to-point transportation cost is an insurmountable gap. Considering that prepared dish delivery has extremely strict temperature requirements, frozen products must be delivered at minus 18 degrees Celsius, and chilled products at 0 to 4 degrees Celsius. With dense networks and nearly a decade of accumulation in cold chain logistics, JD.com and SF Express can achieve full-process services from ordering, factory shipping to trunk and branch line delivery in first- and second-tier cities. In terms of delivery fees, Ebrun Power learned that SF starts at 20 yuan, and JD.com's threshold is two kilograms. Including packaging materials (ice packs), both companies' starting delivery prices approach 30 yuan. "For a three-box pickled fish, the refrigerant (dry ice, insulation bags, insulation boxes) costs 5-6 yuan," Su Qing said. After research, Ebrun Power found that the delivery fee ratio of several leading prepared dish brands is close to 30%. Can the cold chain transportation cost that devours most profits be reduced? A JD.com spokesperson told Ebrun Power that JD's cold chain transportation is still in investment and not yet profitable. Currently, cold chain transportation faces many issues such as unbalanced regional development and lack of systematic management, and scale effects have not yet emerged. From warehousing to transportation to delivery, cold chain investment is also substantial; for example, refrigerated trucks commonly used for urban distribution often cost between 120,000 and 220,000 yuan.

If we re-examine the prepared dish table, it is not difficult to find that most players who have persisted are not "accidental intruders" into this track. They have been working hard around this track for many years, and with early accumulation such as industry experience, supply chain capabilities, and profits from 2B business, they have been able to resist the losses caused by expensive logistics costs to some extent. In 2017, to provide semi-finished dishes to chain convenience stores in first-tier cities, Tang Wanli founded Dingding Fresh Food—the predecessor of Dingding Lazy Dish; in 2016, Maizima founder Weng Bocheng began delivering semi-finished ingredients to Green Tea and Nongtangli; and this year marks the tenth year since Weizhixiang opened franchising. But for others, their fate was sealed the moment they sat at the table. This track is not without fledgling but ambitious players, but they all ended up leaving the industry hastily. For example, most insiders agree that Qudian's popularity was more like a carefully planned marketing game, not stemming from the product. Luo Min only did combination of seasoning packs, not involving R&D, so it's hard to call it competitive; "failure was only a matter of time."

Another Fresh Food E-commerce?

A month before meeting Pu Wenming, at an industrial park in Shunyi District, Beijing, Ebrun Power met hundreds of fresh food suppliers who were physically and mentally exhausted, blocking the entrance. The debtor being protested for unpaid goods was the once-prominent startup dark horse—Miss Fresh. Miss Fresh burned through over 10 billion yuan in cash in four years, and no one would have thought it would end with laying off employees, owing suppliers, and the founding team collectively "going silent." The fall of Miss Fresh also signaled the failure of the front-warehouse model in fresh food e-commerce. The reason for the failure of the front-warehouse model is precisely its high fulfillment costs. Financial reports show that in the third quarter of 2021, Miss Fresh's fulfillment cost was 22.2 yuan, with an average order value of 88.4 yuan, and a fulfillment fee ratio of 25.1%. In the fourth quarter of last year, another typical front-warehouse player, Dingdong Maicai, had a fulfillment fee ratio as high as 29.5%. These two startups, both questioned for losses since their inception, one finally completely shut down its mall business in July this year, and the other recently withdrew from cities like Xiamen, further shrinking its regional presence. If analyzed by cost structure, the front-warehouse model of fresh food e-commerce and To C prepared dishes both need to overcome expensive fulfillment costs; they are so similar.

Those who came before stepped on pitfalls, and those who follow are vigilant. Five or six years ago, capital crazily poured into the new consumption track, but in the past two years, it has collectively braked, driving prepared dish players to become cautious and no longer hot-headed about scale. In fact, while many prepared dish brands struggle with scale and profitability, some behemoths have already shown their form and are growing wildly in the shadows. Zhang Qian, head of Hema Workshop, told Ebrun Power that Hema's prepared dish channel brand achieved profitability in its second year. Hema Workshop focuses on short-shelf-life chilled cooked food, pastries, and semi-finished products, and is one of Hema's key proprietary brands. After Hema established a new 3R (ready-to-cook, ready-to-heat, ready-to-eat) business unit, Hema Workshop was placed under it. JD.com's situation is very similar. Zhao Yu, head of JD's prepared dishes, also told Ebrun Power that JD began laying out prepared dishes from scratch in 2017 and was the first to include prepared dishes as a strategic support category, planning to cultivate 20 prepared dish brands with sales over 100 million yuan and 5 brands with sales over 500 million yuan in the next three years. Cold chain logistics is the most critical link. To date, the group's cold chain logistics business is not profitable, but self-operated prepared dishes have achieved profitability, with over 2,000 SKUs in JD's self-operated prepared dishes. The natural advantages of the two companies in cold chain delivery are not hard to guess. Currently, JD has built 19 cold chain warehouses nationwide, covering 288 cities with next-day delivery. In 2016, Hema opened its first store in Shanghai's Jinqiao. Now, it has over 300 stores nationwide, within 3 kilometers of C-end consumers. To some extent, the "last 3 kilometers delivery" only bears the branch line delivery cost, while the trunk line delivery cost is optimized through Hema's store warehousing. Hema's strategy of optimizing trunk line delivery costs in other ways has been noticed by astute players, who have adapted and applied it. Since last year, Maizima has set up six warehouses nationwide, mostly not far from JD or SF warehouses. Maizima first delivers prepared dishes from the factory to its own warehouses, and after users place orders, the products are handed to logistics companies for the final branch line delivery. Thanks to this, its overall fulfillment cost has dropped from an initial 30% to 20%. Similarly, Dingding Lazy Dish has built seven warehouses nationwide and told Ebrun Power that it will open ten large warehouses by the end of this year. But considering another natural advantage of platform companies, these brand players must work hard enough.

As To C prepared dishes and fresh food e-commerce that heavily rely on scale, both depend on massive orders to transform supply chains and improve efficiency. For example, once order volume is sufficient, players can either build their own prepared dish factories or directly reach the agricultural upstream to gain more profits. At the same time, as order density increases, fulfillment costs can also be reduced to profitable levels. Taking the front warehouse as an example, China Merchants Securities estimated that, under unchanged conditions, when the daily order count of a front warehouse (300-350 square meters) increases from 800 to 1,200, fulfillment costs will decrease by 8.6%; when it rises to 1,600 orders, fulfillment costs will decrease by 13.3%.

Prepared dishes, born in chain restaurants and initially used to solve the kitchen's "four highs (high labor costs, high rent, high ingredient costs, high energy costs) and one low (low profit)" problem and improve efficiency, are essentially about reducing restaurant costs through centralized procurement and pre-processing of ingredients in semi-finished form. It was only later that semi-finished products helped many people solve the problem of filling their stomachs during the pandemic. "Prepared dishes and central kitchens are essentially the same thing: centralized procurement and centralized processing, except that prepared dishes are pre-processed." An industry insider told Ebrun Power. Pei Chenghui, former head of brand marketing at Haidilao, told Ebrun Power that with the intensive procurement and standardized production brought by central kitchens, the net profit of chain restaurants has increased from the previous 5%-8% to 8%-10%. But Hema, with greater ambition, has already invested in two supply chain operation centers in Wuhan and Chengdu this year, each with an area of over 100,000 square meters. The central kitchens inside may become one of Hema's most powerful weapons for prepared dishes. They have already taken the lead in reaching into the supply chain.

New consumer brands are also striving to catch up. In 2017, Maizima founder Weng Bocheng built his first ingredient processing factory. Last year, Maizima, controlled by Genki Forest with a 51% stake, invested 250 million yuan to build a new processing factory, expanding the scale to 50 mu. After the new factory is completed, Maizima is expected to increase gross margin by about 10 percentage points over the industry average. But based on existing resources, super-head players only need to replicate their existing capabilities to turn prepared dishes into one of their competitive categories, which seems not difficult.

Full Category or Bestseller?

In May 2020, a brand specializing in pickled fish appeared on Tmall, later shifted to Douyin, started brand self-broadcasting, and successively found Luo Yonghao and Chen He to bring goods for it. At the end of last year, relying on brand self-broadcasting and mid-tier influencer live streaming (pure commission), the brand sold over 50 million yuan of prepared dishes in a month. Its name is now well known to the industry and some consumers—Dingding Lazy Dish. The emergence of Dingding Lazy Dish is widely regarded as an important proof that the "prepared dish bestseller logic" is feasible. About two years ago, players mostly formed a consensus that before C-end user mindshare is formed, they must diligently cultivate this "wasteland." They all astutely realized that they must first find categories with a high enough ceiling, such as pickled fish, which attracted Lu Zhengyao and Luo Min to enter successively, with a scale expected to reach over 20 billion by 2025. Zhang Zhenji, on the other hand, has set its sights on the 30 billion abalone farming market. Then, by making scale with low-priced bestsellers, they can qualify for the next stage of competition. The reason is not hard to trace: the fragmented upstream and downstream of the industry has shaped the highly fragmented landscape of prepared dishes. For example, broad prepared dishes include both seasoned and unseasoned foods, as well as clean vegetables and meal kits. From a delivery and storage perspective, they are divided into frozen, chilled, and room temperature categories.

In Hangzhou Hengsheng Science and Technology Park, Dingding Lazy Dish rents an entire floor of office space, but the available office area is very cramped. The founder and partners share the same small office, with their desks less than three meters apart. Most of the space here is occupied by compartments labeled with signs like "Pork Belly Chicken - Douyin" and "Grandma's Dish Store 1." Inside, a few live streaming lights and photography equipment form a professional live streaming room, where young streamers energetically promote pork belly chicken or pickled fish in front of the camera, while a floor director never takes his eyes off the computer screen showing the latest backend orders. This year, the company's goal is to "ensure 700 million (yuan) and strive for 800 million (yuan)" in sales. The bestseller model works because even if cold chain logistics and online advertising costs are hard to optimize, when order volume reaches a certain scale, the marginal costs of middle office and personnel projects will significantly decrease, giving enterprises the possibility of profitability.

Lin Zhenghuan, the youngest partner of Dingding Lazy Dish, is a post-90s with concise language and quick thinking. As the operator, he always seeks the maximum balance between business scale and profit. In 2020, the initial price of pickled fish was 99 yuan for 3 packs. To quickly capture the market, Lin Zhenghuan lowered the price to 79 yuan in the first half of 2021, which insiders described as "breaking through the industry's bottom price." But Lin Zhenghuan is not a "price war maniac" obsessed with cost performance. In fact, after selling nearly a million packs of pickled fish monthly, the marginal effect quickly emerged. Even if logistics and advertising costs are hard to optimize, the marginal costs of middle office such as personnel have significantly declined. Some insiders speculate that Dingding Lazy Dish's net profit is around 3%, to which Lin replied to Ebrun Power, "We are slightly profitable."

In all likelihood, combined with the platform's original advantages, the bestseller logic will further expand the profit space of JD and Hema. They already have natural advantages in supply chain and fulfillment. After truly creating bestsellers, they may further widen the gap with brand players. After all, after Dingding Lazy Dish, a large number of followers flooded into Douyin, trying to replicate the bestseller creation. Since last year, seventy or eighty people have found prepared dish manufacturer Du Zhigang, attracted by semi-finished products with factory prices under 10 yuan, and trying to turn them into bestsellers. Du Zhigang is used to this; he said: "There are more single products, all emphasizing 'short, flat, fast.'" This year, East Buy unexpectedly entered Douyin, bringing a new sales method beyond shouting, which also inspired astute businessmen. As a result, dishes with regional brand characteristics are seen by them as most likely to hit Douyin's algorithm and are widely introduced into live streaming rooms. "For example, Meizhou Dongpo pork has a certain story and geographical identity," Niu Fazhi, general manager of Qianwei Central Kitchen Yuzhi Cai, told Ebrun Power. With standardized production lines, Qianwei Central Kitchen has long supplied various products such as youtiao to major international and domestic chain restaurants. Qianwei Central Kitchen is therefore also known as the "first stock in the frozen supply chain." According to Niu Fazhi, about 7 or 8 brands also have intentions for prepared dish OEM. In contrast, the full-category route, opposite to the bestseller logic, is more likely to bring risks of inventory and raw material fluctuations, and its advantages are not as significant as the bestseller model. After multi-category expansion, Xiaomeiyuan's monthly inventory turnover frequency is now 3-4 times. "If I do 30 million a month, once the inventory value exceeds 7 million, it's very dangerous." Inventory is one of the data Pu Wenming pays most attention to. For Maizima, 15 days is its inventory safety line, meaning its monthly inventory turnover frequency is at least 2 times. Currently, both companies have over 40 SKUs. They are already excellent brands in the industry, but they still need to be careful. Large supermarkets are experienced in controlling goods turnover; they often set warning lines for prepared dish brands: if backlogged inventory exceeds half, the brand must replace with new goods or offer discount promotions. Even veteran players find it hard to completely avoid losses from raw material price fluctuations, which is another hidden danger of multi-category expansion. Always affected by factors such as origin, agricultural raw material prices fluctuate greatly. From chicken, duck, fish, shrimp, pork to beef, management difficulty gradually increases. Beef, heavily dependent on imports, with imports accounting for up to 25%, has the most significant price fluctuations. Weizhixiang's mid-year financial report shows that during the reporting period, operating costs rose 5% year-on-year, mainly due to rising beef prices.

Considering that there are very few tracks that can nurture super single products, with the entry of super-heads, competition in single categories will only become more intense. For example, the pickled fish track, which gave birth to Qudian and Dingding Lazy Dish, had a great deal of contingency in its domestic outbreak. Currently, the core raw material for domestic pickled fish, basa fish, mostly comes from Vietnam, and China consumes nearly 30% of its exports. But before 2017, Vietnamese basa fish was mainly exported to Europe and America. As the US began to impose anti-dumping duties on Vietnam (for example, last year the US imposed an anti-dumping duty of $2.39 per kilogram on basa fish from Vietnam) and basa fish became popular with Chinese restaurants due to its boneless and tender meat, China gradually became the largest export market for Vietnamese basa fish. Combined with tariff-free trade policies, the price of basa fish sold to China from Vietnam was even less than 27,000 Vietnamese dong (about 8 yuan) per kilogram, further increasing its potential to become a bestseller. But apart from pickled fish, similar contingencies have not yet occurred in other categories.

On the current table, the pace of playing cards is getting faster, and some players are already showing signs of decline. In the pickled vegetable track, where players are as numerous as crucian carp, the head players who enjoyed early benefits are facing impact. In the first half of last year, Tai Er, a chain restaurant known for pickled fish, maintained a table turnover rate of 3.7; this year, that number has become 2.9, a drop of 40%. When I learned that I would be talking with Hema and JD, a head brand leader was quite concerned, "Ask them how they view companies like us?" The influx of super-heads made him feel a crisis. Such worries are not unfounded; the super-heads holding the biggest chips may truly decide when to launch the prepared dish war again.