Click to read the original article for details Source: Whale Business Last week, Dingdong Maicai completed its IPO on the New York Stock Exchange, and the next day its stock price soared 70%, with market value approaching $10 billion. Although the current stock price has pulled back, it still has a market value of $6.8 billion without breaking its issue price. It must be admitted that in the capital market, Dingdong Maicai has won some respect for fresh food e-commerce. Looking back at the day Miss Fresh went public, its stock price fell 25% below the issue price. During that period, many people worried about Dingdong Maicai, which was listed in the US a few days later, thinking it would also face the embarrassment of a "bleeding" IPO. The opposite was true. "From this moment on, forget the stock price and be a friend of time." This was the statement made by Liang Changlin, founder and CEO of Dingdong Maicai, in his speech on the night of the IPO. Looking back at his experience, after retiring from the military in 2002, he went to Shanghai alone to start a business, experiencing ups and downs; in 2014, during the O2O boom, he founded Dingdong Community; in 2017, he set out again to found Dingdong Maicai, taking 4 years to go public. When Pinduoduo founder Huang Zheng was doing Pinhaohuo, the fresh food business he wanted to do was successfully run through by Liang using the front warehouse model. But other fresh food e-commerce companies in China were not so lucky. In the early years, from fresh food B2C e-commerce models like Yiguo and Fruit Day, to fresh food O2O community models like Dailuobo and Miaoshenghuo, to C2B group buying models like Pinhaohuo and Yimixian, and fresh food B2B wholesale models like Songxiaocai and Youcai, many of them had BAT backing or received large financing, but their endings were either closure or selling out and transforming. One general's success comes at the cost of thousands of fallen soldiers. Fresh food e-commerce, as the hardest "bone" to crack after books, electronics, clothing, and mother and baby products, is also the "fat meat" of high-frequency and rigid demand in mass consumption, always attracting e-commerce giants, traditional supermarkets, and new entrepreneurs to rush in one after another. Even Dingdong Maicai and Miss Fresh, which have already "landed" in the capital market, will move forward amid doubts. Loss is not the fatal flaw The "burning money" problem of fresh food e-commerce is the first to bear the brunt. According to the prospectuses of the two companies, in 2020, Miss Fresh's revenue was 6.13 billion yuan, with growth nearly stagnant, and net loss was 1.65 billion yuan, a significant narrowing compared to the previous year's loss of 2.91 billion yuan. In 2020, Dingdong Maicai achieved revenue of 11.336 billion yuan, a year-on-year surge of 192.15%, with a net loss of 3.177 billion yuan and a net profit margin of 28.03%, narrowing compared to 2019. Whale Business believes that loss is not the fatal flaw of fresh food e-commerce, just like JD.com and Pinduoduo before their IPOs. The key is that after strategic losses, they must form "economies of scale," and behind this, efficiency improvement and repeat purchase improvement are the key. If we break it down, we need to study dimensions such as loss rate, cost and expenses, fulfillment costs, turnover rate, conversion rate, and retention rate. Before answering this series of questions, we must first affirm that the "front warehouse model" of fresh food e-commerce has been verified as feasible by Dingdong Maicai and others: Market feedback proves that there is a huge group of "to-home" instant demand. Among them, Dingdong Maicai has reached 6.9 million monthly transaction users; from a financial perspective, in Q1 2021, Dingdong Maicai and Miss Fresh have respectively achieved fresh food gross margins of 18.92% and 12.35%, while in offline retail formats, Yonghui Superstores, known for fresh food, has a fresh food gross margin of 13.84%, and has hovered around 15% for many years. Objectively, companies like Meituan, Alibaba, and PUPU Supermarket are all exploring the "front warehouse" fresh food model, but these companies focus on warehouses larger than 300 square meters or integrate warehouses with stores. The direction of capital market and business case research mainly compares and analyzes Miss Fresh and Dingdong Maicai, which focus on small warehouses. The former was established in Beijing in October 2014, and the latter was born in Shanghai in May 2017. As of the end of 2020, Dingdong Maicai's annual GMV was about 13 billion yuan, while Miss Fresh's was about 7.6 billion yuan; total orders were about 200 million and 80 million respectively; operating revenue was 11.34 billion and 6.13 billion respectively. Image from: Dongwu Securities Research Institute Both went public one after another, both started with the "front warehouse" fresh food e-commerce model, but Dingdong Maicai, which did not have first-mover advantage and had fewer financing rounds before the IPO, why did it catch up and surpass Miss Fresh on the same track? The main reason for the scale gap is that Dingdong Maicai expanded faster than Miss Fresh in terms of development speed and city and regional layout, and there are obvious differences in their main markets. As of Q1 2021, Dingdong Maicai's business covers 29 cities including Shanghai, Beijing, Shenzhen, Hangzhou, Suzhou, and Chengdu. In terms of fulfillment facilities, the company currently has 40 city sorting centers in 14 different cities and 950 front warehouses in 29 cities. Among them, the fulfillment department has 991 people. Miss Fresh's business covers 16 cities including Beijing, Shanghai, Nanjing, and Shenzhen. In terms of fulfillment facilities, the company has 11 quality control centers nationwide and 631 front warehouses in 16 cities. Among them, the front warehouse business has 649 people, and delivery and other personnel are outsourced. In terms of expansion strategy, Dingdong Maicai's main market is 66% based in Shanghai, thoroughly penetrating the regional market with stronger online consumption habits in "Jiangsu, Zhejiang, and Shanghai," while radiating to core provincial capitals in South China, North China, and Southwest China. Although Miss Fresh also focuses on the Yangtze River Delta as its key market, its home base is in the North China market. In addition to differences in market strategy, subjectively, Dingdong Maicai founder Liang Changlin has a technical background and military experience, so in his team leadership style, after quickly validating the model, strong execution may be a potential factor for faster expansion, and their past experience in community resources when starting Dingdong Community also reflects an advantage. In addition to precise community placement and ground promotion, high-density placement in places like subway stations, combined with the distribution of promotional coupons, has obvious effects. What is invisible at the backend is the competition in multi-dimensional aspects such as product cost (supply chain) capability, fulfillment capability, and management capability, as shown in the figure below (statistics from Changjiang Securities Research Institute): According to the breakdown of the two companies' GMV average order value and cost composition in Q1 2021, Miss Fresh's order value is about 94 yuan/order, which is 37 yuan/order higher than Dingdong Maicai's about 57 yuan/order, but after averaging all costs, the loss per order is also 9 yuan higher. Therefore, in the future, the two will inevitably compete in supply chain, fulfillment efficiency, management efficiency, etc., to pursue economic benefits under scale effects. According to information revealed by Liang Changlin in previous external interviews, Dingdong Maicai's current loss rate can be controlled at the level of 1%. The key to victory: forming "tap water" Whether it is the "first stock of community retail" or the "first stock of front warehouse e-commerce," the concept is not the goal of the two companies' listing. Listing to raise funds is to reserve "ammunition" for the next stage, pushing the platform of the fresh food vertical track to become a channel brand for mass consumption. Returning to Dingdong Maicai, in its practice of the front warehouse model, Liang Changlin has summarized a spiral growth model, that is, Dingdong Maicai's dual "flywheel" model, the essence of which is - "2 transformations", "3 certainties", and "2 lines". At the source, make 2 transformations: add front warehouses and improve upstream supply chain capabilities. Provide consumers with 3 certainties: quality certainty, time certainty, and category certainty. Throughout the process, firmly control the "2 lines": quality control line and data line. In Liang Changlin's vision, once the front warehouse model enters a positive cycle, business performance will not be limited by time and space like physical stores. Once the fresh food consumption experience of delivery within half an hour is formed, "tap water" repeat purchases will come in waves, and the self-operated warehouse and distribution integration within a 3-kilometer living radius will develop a dandelion-like spherical retail format from point to surface. Whale Business believes that Dingdong Maicai's front warehouse model needs to go through three stages to form the "tap water" effect, and must run through refined operations, strong supply chain, efficient fulfillment, low loss rate, and good experience throughout -
Stage 1: Small-scale validation, adjust front warehouse density, run scale, and seize the market high ground in first-tier and new first-tier cities.
Stage 2: Regional market sinking and penetration, category expansion, increase repeat purchases while gradually raising order value.
Stage 3: Channel brand maturity, enhanced trust endorsement, strengthened source supply chain, and seek profits from differentiated private label products. Currently, Dingdong Maicai has entered the transition from stage 2 to stage 3. The prospectus shows that in Q1 2021, Dingdong Maicai achieved GMV of 4.3 billion yuan and 69.7 million total orders. It is worth noting that among the 6.9 million average monthly transaction users, the number of members reached 1.5 million, accounting for about 22%, of which each member placed an average of 6.7 orders per month, and all members contributed 47% of GMV. Since the membership business started in 2018, its quarterly member retention rate has reached 48.8%. With repeat purchases, scale, and efficiency in place, to what extent must the front warehouse model be achieved to make money? According to Debon Securities' UE (unit economic model) analysis, the conclusion drawn is: Dingdong Maicai's current losses are mainly due to high fulfillment costs. If an intelligent sorting system is introduced, while optimizing computing power to improve delivery efficiency and reduce delivery costs, when the order density of a single warehouse exceeds 1000 orders/day, the average fulfillment cost per order is expected to drop to 5.29 yuan/order, and the fulfillment cost rate drops to 9%, achieving profitability for a single warehouse. According to 36kr reports, Dingdong Maicai achieved profitability in the Shanghai region in 2021. The front warehouse model is not a traffic selling model. In the links where the "2 lines" of quality control and data are firmly controlled, investment in technology research and development is particularly critical. Currently, among Dingdong Maicai's 3,098 formal employees, there are 1,320 product developers, accounting for 43%, mainly for underlying systems and technology development. "Speculation" on the future of front warehouses Data shows that in 2020, China's community retail market size reached 11.9 trillion yuan, fresh food retail reached 5 trillion yuan, and FMCG reached 6.9 trillion yuan. The e-commerce penetration rate for categories such as beauty, books, 3C electronics, and clothing all exceeded 20%, and food delivery also accounted for 15%, but the online penetration rate of fresh food was only about 3%. It is precisely because of the low e-commerce penetration rate of fresh food non-standard products that e-commerce giants such as Alibaba, Meituan, JD.com, and Pinduoduo have been attracted to spare no effort in trying various models to seize this market. From the current mainstream players' chosen mainstream strategies, community group buying and the front warehouse model have the highest attention. In 2020, the market size of the domestic front warehouse model retail industry was about 33.7 billion yuan; the compound growth rate from 2016 to 2020 was 114.4%, and it is expected that the compound annual growth rate from 2020 to 2023 will be 59.5%. It is expected to become a key driver of community retail in the future and make increasingly greater contributions to the overall market size. It is expected that the market size will reach 306.8 billion yuan by 2025. Based on this, Whale Business judges that the front warehouse model will not remain unchanged in the future, and there may be a combination of high-density community brand flagship stores (franchise stores) with front warehouses, or a combination of single-product special price clearance (naturally suitable for near-expiry food) and brand hot-selling group buying. Because we believe that the early front warehouse model is still a "density business" concentrated in first-tier and new first-tier cities, or particularly large city clusters, with the consumer group mainly young people; when encountering regional ceilings, it will inevitably need to sink to lower-tier markets and transform into a "breadth business." User group breakthrough and mainstream habits of consumer attributes will force platforms to innovate in embracing a broader consumer group and shortening transaction paths. The business field is like a battlefield, and some major strategic moves will change with time and the evolution of competitors. In the fresh food field, two years ago, Hou Yi, founder of Hema Fresh, scoffed at community group buying, thinking it was just a "routine operational means," but now isn't he using "Hema Market" to go all in on community group buying? In addition to innovation in the front-end transaction path, product innovation in the upstream supply chain at the back end will also be the "second growth curve" of front warehouse e-commerce, and this is beyond doubt. A typical example of product selection in retail is Walmart's "diapers + beer" logic. In the fresh food field, the conventional thinking is to use fresh food to attract traffic and bring about long-tail conversion of other high-margin categories. The logic holds, but in reality, fresh food itself still has depth to explore. Take Yonghui as an example again. Although its fresh food category has low gross margin, it still accounts for 48% of annual regular sales, only 2 percentage points less than the "food and supplies + clothing" category. Under the front warehouse model, Dingdong Maicai's mainstream users are younger, white-collar, and urban residents, and there is room to increase their spending on food. Root vegetables, leafy vegetables, meat, poultry, eggs, aquatic products, seafood, fruits, and flowers constitute the basic categories of fresh food. This category has strong origin brand consumption attributes, so the upstream supply chain should seek direct supply from origins and shorten intermediate links to achieve the inclusive value of basic fresh food. Close cooperation with upstream suppliers can reduce procurement costs while maintaining a stable supply of high-quality products. In Q1 2021, Dingdong Maicai purchased more than 12,500 SKUs from more than 1,600 suppliers, including fresh agricultural products, meat and seafood, and other daily necessities. On the other hand, Dingdong Maicai has significantly accelerated the development of private label products this year, launching semi-finished food categories such as quick-fix dishes and Dingdong Ace Dishes. For example, in April, it launched the "Boxing Shrimp" series, claiming "48-hour cold chain direct delivery" and "all-scenario crayfish feast," setting the standard for semi-finished crayfish dishes; on June 1, it launched a children's food zone, targeting ingredients suitable for children aged 3-12, with more than 60 SKUs launched. While adjusting its product strategy, Dingdong Maicai is also accelerating platformization, incubating new brands among production enterprises through methods such as prepayment, equity investment, technology empowerment, and order cooperation. Similarly, Hema Fresh is also doing channel brand incubation. The common point of the two is to distinguish themselves from traditional procurement and product selection, taking a boutique route in private label products. Therefore, through the study of the Dingdong Maicai case, Whale Business believes that the future "momentum" of front warehouses mainly comes from three aspects: First, investment in technology and marketing brings about an increase in order density, improvement in fulfillment efficiency, conversion, and repeat purchases, thereby achieving scale and economy.
Second, not sticking to the existing front warehouse model, but iterating and innovating in small steps, refined operations, and penetrating and reaching a broader consumer group.
Third, strengthening source supply chain capabilities, differentiated operation of channel products, and integrating into the growth trajectory of the front warehouse "exponential model." In short, the space in the fresh food e-commerce market may far exceed people's imagination, provided that someone can pass through the noise and countercurrents and finally land. PS: From August 24-26, 2021, the 2021 (4th) China FMCG Conference hosted by New Distribution will be held in Shanghai. Centered on "Industry Frontier Hub" + "Practical Exploration New Cases" + "Industry Connection New Growth" as the core, 100+ big-name guests, 10 thematic forums, will bring a thought feast about industry trends for FMCG practitioners! 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. Joanna Lu, global expert partner at Bain and former vice president of marketing at Coca-Cola China; 4. Bi Chaojiao, general manager of China Resources Snow Breweries (China) Marketing Center; 5. Yang Hongbin, vice president of Junlebao Dairy Group; 6. Guo Xulin, assistant to the president of Hema Fresh; 7. Li Zhihong, senior vice president and director of Xibei Catering; 8. Zhang Yipeng, general manager of Kuaishou E-commerce SKA Brand Operations Center ..... 3000+ industry audience, 1500+ first-line brand executives, 1000+ new e-commerce platforms & regional head distributors, 3 full days, the latest industry trends, changes, models, and business you want to know are all here! Are you "watching" me?