Click to read the original article for details Source: Phoenix WEEKLY Finance (ID: fhzkzk) "Miss Fresh needs to transform." As early as a year ago, wholesalers at Beijing's Xinfadi market had already recognized the crux of the fresh food e-commerce industry. They no longer regarded e-commerce platforms like Miss Fresh and Hema as key clients to focus on, and some wholesalers even wanted to refuse orders from such platforms. This marks the end of the 1.0 era of fresh food e-commerce, characterized by high order values, high gross margins, and high costs. However, as a series of small and medium-sized fresh food e-commerce platforms such as Dailuobo and Yiguo Fresh faced funding chain difficulties, successively collapsing and closing down, platforms that failed to control costs have undergone rounds of reshuffling. Beyond Xinfadi, Miss Fresh and Dingdong Maicai submitted their IPO prospectuses on the same day, intensifying the battle for the "first stock in grocery shopping." More importantly, both are seeking new changes to escape the dilemma of burning cash. According to the prospectuses, from 2019 to 2020, Miss Fresh's net loss decreased from 2.9094 billion yuan to 1.6492 billion yuan, while Dingdong Maicai's net loss increased from 1.8734 billion yuan to 3.1769 billion yuan. Correspondingly, Miss Fresh's front warehouses were reduced from 1,500 to 631; Dingdong Maicai's front warehouses nearly doubled to 950. In 2020, Dingdong Maicai's transaction scale was almost twice that of Miss Fresh. Front warehouses require heavy investment and lead to greater net losses. Despite the same front warehouse model and losses, the two tell completely different stories in their prospectuses. Miss Fresh attempts to focus on the supply chain and renovate traditional wet markets; Dingdong Maicai sets its sights on the kitchen, trying to open fresh food stores. A competition resembling that between JD and Hema is once again unfolding in the fresh food e-commerce sector. The game has just begun, and the fastest runner may not necessarily be the one to finish last. The "Pseudo Proposition" of Front Warehouses In Wangjing Yuan, Chaoyang District, Beijing, on the main road near the office area, a Miss Fresh front warehouse with a rose-colored sign several meters long connects both sides of the corner. Even from the main road dozens of meters away, it can be seen at a glance. Following the store sign to the northwest are several agencies, newsstands, and pet hospitals. People pass by the huge store sign every day, but many say they have never downloaded the Miss Fresh app and are not curious about it. A fruit store is only 200 meters away from this front warehouse and has been open for four or five years. But in the eyes of the store clerk, the other has never been a competitor. Regular customers would joke when checking out that fresh food platforms are very cheap, so the fruit store should also lower prices. But based on reasons such as freshness, these customers still come back again and again. "If it's the cheapest on the platform, I'll buy it there; for the rest, I'll come to the store. " Owners of convenience fruit and vegetable stores in nearby residential areas also say they haven't felt significant changes in orders. Those customers often disappear for a month or two and then return to the store, telling them that they bought a lot online recently because it was cheap. Front warehouses were once the biggest feature of Miss Fresh and Dingdong Maicai's business models. They were also the weapon both used to "encircle" Hema Fresh. In 2019, Hema even tried to launch its own front warehouse—Hema Xiaozhan—under such siege, but just a year later, it announced abandonment. Hema CEO Hou Yi once stated publicly that theoretically, the front warehouse model cannot succeed. After trying it, Hema found that all the concerns were real. From a business model perspective, the front warehouse is a pseudo proposition and cannot be profitable. However, its traffic is valuable. The best outcome for front warehouses in the future is to be sold to companies that need localized traffic. Miss Fresh's steps are also very realistic. When money runs out, the front warehouses naturally cannot continue to burn cash. After completing its Series E financing, from October 2018 to April 2020, a period of one and a half years, Miss Fresh had no new financing activities. Correspondingly, the number of front warehouses decreased during this period. In 2019, Miss Fresh operated over 1,500 front warehouses in 20 cities across the country. It wasn't until the IPO prospectus was filed that the public discovered it had only 631 front warehouses left—a reduction of more than half. In 2020, Miss Fresh's annual revenue was 6.1304 billion yuan, a year-on-year decrease of 9.47%. The company's revenue growth also stalled. Dingdong Maicai is still increasing its front warehouses. The number of 950 front warehouses not only surpasses Miss Fresh's 631 but also represents a significant increase compared to its own level a year ago. The price paid for this is that Dingdong Maicai's operating costs rose from 1.741 billion yuan in 2019 to 3.162 billion yuan in 2020. Institutions and media have calculated the operating returns of Dingdong Maicai's front warehouses, showing that when the average daily orders of a front warehouse reach 1,250, it can basically break even. However, Dingdong Maicai's current average daily orders per front warehouse are less than half of that forecast. Zhu Danpeng, a researcher at the China Brand Research Institute, analyzed that many front warehouse model platforms are prone to supply chain problems, and this model has extremely high capital requirements. Kitchen vs. Wet Market: A Copy of Hema vs. JD? While still operating the front warehouse business, Miss Fresh and Dingdong Maicai are also trying to tell new stories. Since then, Dingdong Maicai has been telling a story of increasing order value and gross margin for the C-end. Starting in 2021, Dingdong Maicai launched its "quick-cook dishes" business, increased the proportion of cooked food, and invested in building fresh food factories and offline fresh food stores. This model, integrated with offline store formats, is moving closer to Hema Fresh. This is a manifestation of "catering retailization" after the pandemic. For fresh food e-commerce, cold chains meet the needs for producing and storing semi-finished dishes and cooked food. For partner catering companies, semi-finished dishes meet their needs to expand business during the pandemic. A recruitment post by Dingdong Maicai on Boss Zhipin shows that it is recruiting fresh food kitchen staff and chefs in Shanghai, with job responsibilities including completing the acceptance of various raw materials and consumables, and processing food according to standard procedures. The recruitment information shows that the company currently has over 200 front stores in Shanghai and plans to open 50 more fresh food stores. Miss Fresh has also tried similar stories. Jia Guolong, founder of Xibei, sparked heated discussions during the pandemic in 2020 with "Xibei Kung Fu Dishes," which was a collaboration with Miss Fresh. Now, Miss Fresh is taking a different path, focusing on wet markets. It aims not just to sell vegetables but to launch smart wet markets, build a smart cloud, become a digital platform for community retailization, and achieve four "hundred billion" goals involving the ecosystem chain, finance, and technology. This reminds one of Liu Qiangdong's repositioning of JD: "We are not an e-commerce company, but a technology supply chain service company." According to Miss Fresh's IPO fundraising plan, 50% will be used for upgrading the front warehouse retail business, 20% for expanding the smart wet market business, and 20% for developing the retail cloud business. According to Miss Fresh's prospectus, on the one hand, after obtaining the operating rights of wet markets, it will renovate them, promote standardized transformation and digital upgrades, including renovating scenes, providing merchants with tools such as electronic payment and online marketing, and helping merchants complete the online conversion of customers. On the other hand, it will absorb small and medium-sized supermarkets through the retail cloud to complete its platform transformation. In March this year, at Anshan Second Road in Qingdao, Miss Fresh cooperated with the Qingdao government to complete the first local wet market renovation, named Youxuan Wet Market. This market was originally a government project, and during the upgrade, nearby vendors were integrated. According to nearby young residents, this upgraded market, which Miss Fresh describes as "integrating multiple business formats, standardized hardware, and intelligent operation," after completing hardware upgrades, the most obvious visible change is an easel banner with the Miss Fresh logo at the entrance. On it are two QR codes: one for a discount WeChat group, and the other for a community group buying mini-program developed by Miss Fresh. In addition, the space is larger, cleaner, and there are more types of aquatic products. In the mini-program, there are discounted kitchen supplies and some cooked food, but no fruits, vegetables, or fresh produce. The recommended merchants section on the payment page shows that only 9 merchants have been activated. In addition, Miss Fresh has a puzzling operation: after customers place orders online, they need to pick up their orders at the entrance of the wet market. But if they have already walked to the entrance, why not just go in and buy directly? This is not unique to Miss Fresh. Meituan's upgrade of wet markets began as early as 2019. JD completed the renovation of 40 wet markets in Shanghai in April this year and plans to complete the renovation of 300 traditional wet markets by June. Miss Fresh lacks Meituan's experience and technology in connecting with merchants, and in its wet market renovation plan, it has not yet involved first-tier cities like JD, only landing in Shandong, Jiangsu, Anhui, Chongqing, Guangdong, and other places. Even Dingdong Maicai is testing the waters. Its prospectus shows that of the funds raised in this IPO, approximately 10% is expected to be used for technology and supply chain system investment; 30% for upstream procurement capacity investment; and 50% for increasing penetration in existing markets and expanding to new markets. Burning Cash Cannot Stop Stories can be told, but whether it's Miss Fresh or Dingdong Maicai, what they are doing now is still a product business. Among them, Dingdong Maicai's product revenue (revenue from selling fresh products) accounts for over 98% of total revenue. Miss Fresh's revenue from 2018 to March 2021 mainly came from online direct sales and service revenue, accounting for over 90%. In Q1 2021, other income including retail cloud accounted for 2.4% of total revenue, an increase from the same period last year, but the proportion is still small. The high purchase prices of fresh food e-commerce platforms like Miss Fresh once astonished wholesalers. Fu Lianshuo, a fruit wholesaler at Beijing's Xinfadi, told Phoenix WEEKLY Finance that the wholesale prices of e-commerce platforms are much higher than traditional wholesale prices. Traditional fruit wholesale is priced per kilogram. For fruits costing a few yuan per jin, the gross margin is at most 10%. In contrast, e-commerce platforms wholesale by box, with each box containing 250g or 500g, and the gross margin is about one yuan per box. The higher cost price stems from the platforms' more complex requirements for product and packaging precision screening. Wholesalers at Xinfadi often need to complete the entire process of sorting, bagging, outbound transportation, and more. In addition, platforms require precise screening of fruits, with the same size and appearance, and no substandard products. Once fruits enter the fresh food e-commerce warehouse, if they are found not to meet requirements, they will be returned entirely. ▲ Miss Fresh employees packing orders in the warehouse. Wholesalers set high prices based on labor and losses, and these costs are ultimately passed on to e-commerce platforms. For wholesalers, they only need to pay more costs during early trial and error. Once they become proficient, they can obtain higher sales and profits than traditional wholesale. This has led many wholesalers to actively seek e-commerce supply channels. Wholesaler Pu Zhou even once considered supplying exclusively to e-commerce platforms. But the outbreak of COVID-19 in early 2020 quickly made her abandon this idea. After the pandemic, fresh food e-commerce platforms reduced their orders at Xinfadi, procurement personnel aggressively cut prices, and profit margins were sharply compressed. After all, fresh food e-commerce platforms not only have high procurement costs but also suffer significant loss rates from secondary screening when fruits enter the warehouse. In addition, the widely distributed front warehouses incur rental, utilities, cooperation shares, technology development and upgrades, and labor costs including warehouse management, sorting, and delivery, which are difficult to reduce. On 58.com, both Miss Fresh and Dingdong Maicai set the salary range for delivery riders at 8,000+ yuan. Among them, some Dingdong Maicai delivery positions are marked as monthly income exceeding 10,000 yuan, while Miss Fresh's highest delivery salary is marked as 15,000 yuan. A Miss Fresh delivery rider revealed that at his station, each order pays 5 yuan, and he can take 50 to 60 orders a day. Although there is no base salary, as long as he knows the routes well, earning over 10,000 yuan a month is not a problem. Dingdong Maicai's prospectus also mentions this. The prospectus shows that the company's main costs are cost of goods sold, delivery expenses, sales and marketing expenses, product development expenses, and management expenses. Among them, the cost of goods sold reached 9.105 billion yuan in 2020, accounting for 62.8% of total costs. Delivery expenses accounted for 27.9% of total costs. Despite high costs, e-commerce platforms still sell at prices similar to street-side fruit and vegetable stores, and some popular seasonal categories are even cheaper. Take lychees as an example. In fruit stores near Beijing business districts, Feizixiao lychees are priced at 12.8 yuan per 500g, Dingdong Maicai sells them at 10.2 yuan per 500g, and Miss Fresh sells them at 9.9 yuan per 500g, as low as prices at nearby farmers' markets. High costs, low sales prices, and no innovation in revenue structure directly lead to a huge gap in profitability between fresh food e-commerce and the traditional fresh food industry. The prospectus shows that Miss Fresh's gross margin increased from 8.7% in 2019 to 19.4% in 2020. Dingdong Maicai's gross margin increased from 17.1% in 2019 to 19.7% in 2020. According to research data from CITIC Construction Investment Securities, the gross margin of fresh produce in general farmers' markets can reach about 50%. According to Miss Fresh's prospectus, its gross margins from 2018 to 2020 were 8.6%, 8.7%, and 19.4%, respectively. Among them, the gross margin in Q1 2020 was as high as 30.2%. But as the pandemic improved, Miss Fresh's gross margin fell to 12.3% in Q1 2021, while Dingdong Maicai did not change much, only declining from 19.7% for the full year 2020 to 18.9% in Q1 2021. Even so, e-commerce platforms still use subsidies and coupons to maintain price advantages. Miss Fresh initially offered free delivery, but now charges 6 yuan for delivery, with free delivery for orders over 39 yuan. Dingdong Maicai not only insists on 0 yuan delivery but also launched a free green onion and garlic activity during its push into the Beijing market, which has lasted for half a year. Chen Hudong, a special researcher at NetEase Economic, also stated that fresh food is essentially a money-burning industry. Although competition is fierce, an efficient business model has not yet been formed. From 2019 to 2020, Miss Fresh accumulated losses of 4.56 billion yuan over two years. Dingdong Maicai accumulated losses of 5.05 billion yuan over the same period. Specifically, Miss Fresh's average order value is about 94.6 yuan, with a loss rate of 27%. This means that for an average order of 95 yuan, Miss Fresh loses 27 yuan per order. In the entire fresh food e-commerce sector, losses are the current state. Data from the China Electronic Commerce Research Center shows that among more than 4,000 players in fresh food e-commerce, 4% break even, 88% are loss-making, 7% are heavily loss-making, and only 1% are profitable. Many wholesalers, including Fu Lianshuo, hold similar views. In their cooperation, they can clearly feel that platforms have high costs and high quality control requirements. If they always offer relatively low prices, they need to rely on subsidies. In the eyes of wholesalers, fresh food e-commerce is just a big customer that suddenly appears for a period of time. The past big customers have left, and new group buying leaders will swarm in. Sales are actually better. Buying groceries is always a rigid demand in China, but e-commerce is not necessarily so. PS: The 2021 (4th) China FMCG Conference, hosted by "New Distribution," is about to open in Shanghai. Focusing on industry trends + practical cases + growth through connections as the core, 3,000 FMCG practitioners will gather for the event. 10 themed forums cover new retail O2O, community group buying, short video and live streaming e-commerce, distributor transformation, rise of new consumer brands, new alcoholic beverage interpretation, distribution B2B supply chain, omni-channel marketing, B2B2C new technology applications, etc. Operators from various segments will bring the latest case studies for interpretation. Some of the confirmed heavyweight guests so far include: 1. Tao Shiquan, founder of Jiangxiaobai; 2. Yao Xuhong, general manager of Meiyijia Holdings Co., Ltd.; 3. Lu Xiuqiong, global expert partner at Bain & Company and former vice president of marketing for Coca-Cola China; 4. Chen Xiaodong, senior vice president of Nestlé Greater China; 5. Zhang Fujun, president of Lee Kum Kee Sauce Group China; 6. Bi Chaojiao, general manager of China Resources Snow Breweries (China) Marketing Center; 7. Yang Hongbin, vice president of Junlebao Dairy Group; 8. Yang Shun, COO of Lipton Greater China; 9. Zhang Yipeng, general manager of Kuaishou E-commerce SKA Brand Operations Center; 10. Li De, general manager of e-commerce at Gold Hong Ye Paper Group... A grand gathering for FMCG professionals—you must be there! Are you "watching" me?