Daily freshness, expanding in the cold winter?

Image source @ Visual China

Wen 丨 BT Finance, author 丨 Miki Hai

The whole fresh track in 2021 is not very peaceful, and the accompanying keywords are "burning money", "dilemma" and "bankruptcy".

The U.S. stock market recently listed daily excellent fresh, in the three quarters of 2021 lost 3.017 billion yuan, Yiguo fresh, Tongcheng life and carrot and other non-head players have been declared bankrupt out, 2022 fresh track will usher in what new changes?

It is reported that the fresh food e-commerce company Daily Excellent Fresh has wholly owned the acquisition of a community unmanned retail operator, Beijing Downstairs Technology Co., Ltd. (hereinafter referred to as "downstairs").

Why is Daily Fresh expanding in the face of industry cold? With the fading of the Dividend of the Internet industry, it has triggered turmoil in the related industries that have developed and grown due to the Internet, from shared bicycles, takeaway and e-commerce platforms to today's fresh e-commerce, facing the cold winter of the industry under the smoke of war.

This paper attempts to analyze the plight of fresh e-commerce through three aspects: the overview of China's fresh e-commerce market, the back of the daily excellent fresh acquisition and the outlook of China's fresh e-commerce industry.

The fresh e-commerce industry is iterating

The development of fresh e-commerce has entered the fourth stage

The definition of fresh e-commerce in this article refers to a format of community e-commerce that has risen and grown with the Internet industry, and this article mainly observes the instant fresh e-commerce platform represented by daily excellent fresh. After the emergence of the fresh e-commerce market, its business model has been iteratively updated, and the market generally divides its development process into four stages:

Initial: Mainly to reproduce the traditional e-commerce B2C model. Household department stores and daily necessities have become the main commodities at this stage, but the overall upstream and downstream needs of this business model were not considered in the early stage, and the upstream supply chain construction and downstream product characteristics were insufficiently considered, the investment attention and funds were less, and the market growth space was small. Representative participants Fu Tian Net, Vegetable Steward, Tuotuo Gong Society, etc.

Early: 2012 to 2014. E-commerce platforms represented by JD.com and Taobao, and supermarket giants represented by Wal-Mart and RT-Mart have gone down separately. Through e-commerce and supermarkets, capital is also exploring the business model of asset-heavy operation, establishing a set of still relatively traditional industry standards, and also sounding the clarion call for capital to enter.

Development period: From 2015 to 2017, the o2o model and the box horse became the protagonists. During this period, new forces such as Rice and Dmall began to test the o2o model, and the capital forces behind it were eyeing this track. By April 2015, JD.com was launched, and the cooperation model between e-commerce giants and supermarkets was formally formed, and e-commerce operated in an asset-light mode, and provided end customers with "online ordering + offline delivery/self-pickup" services. In the same period, due to the lack of supply chain and offline store resources, the new forces in the early stage have withdrawn. In 2017, Hema Fresh opened online business, focusing on high-quality fresh food, which is a composite functional body of "supermarket + catering + logistics + APP". Compared with the more mainstream asset-light o2o model in 2015, the integrated assets of Hema fresh warehouse stores are heavier, and the cost of opening a store is larger, although the quality of fresh food is guaranteed, but the cost side is under pressure.

Boom period: The pre-warehouse model pioneered by Daily Excellent Fresh came into being, and the community group purchase model represented by Meituan Preferred also flourished. The front warehouse model is currently represented by daily excellent freshness, and the front warehouse cancels the "store" in the "warehouse store integration" model represented by Hema fresh, and emphasizes the importance of "warehouse". By clarifying the concept of instant delivery, the quality and user experience of fresh products are improved, but they are characterized by high operating costs and high marketing costs.

Overall, the current business models such as "warehouse-store integration" of asset-heavy operation, 020 of asset-light operation, community group purchase and pre-warehouse have obvious advantages and disadvantages, and the self-repair and adjustment of the overall business model of the track are still continuing.

The penetration rate of fresh e-commerce continues to rise

According to market data, the total scale of China's fresh e-commerce market reached 11.9 trillion yuan in 2020, a year-on-year growth rate of 5%, far higher than the total retail sales of social consumer goods in the same year - 4%. Among them, the scale of the online fresh e-commerce market has increased from 0.7 trillion yuan in 2016 to 2.4 trillion yuan in 2020, with a compound annual growth rate of more than 36% in 4 years; some market institutions expect that the online fresh e-commerce market will grow to 7.16 trillion yuan in 2025, with a five-year compound annual growth rate of more than 23%.

According to market data, the size of China's fresh and daily necessities market reached 11.1 trillion yuan in 2020, and the e-commerce penetration rate was low, 8.1% and 27.5% respectively. Among them, China Insight Consulting predicts that the scale of the mainland fresh and daily necessities market is expected to exceed 11.9 trillion yuan in 2021, and the e-commerce penetration rate will continue to rise, which is expected to reach 10.6% and 32% respectively.

According to market data, the scale of China's fresh market has reached 5 trillion yuan in 2020. The size of China's pre-position market reached 33.7 billion yuan, an increase of 84% year-on-year. By comparing with the fresh market size data, it is estimated that the proportion of the front-end warehouse model market in China's fresh retail market in 2020 is less than 1%, accounting for 7.4% of the scale of China's fresh e-commerce market; and the proportion of China's fresh e-commerce market to the fresh retail market is not more than 10%.

Risks from policy

On December 9, 2020, the Nanjing Municipal Bureau of Market Supervision and Administration announced the "Notice of Compliance Operation of E-commerce "Community Group Buying of Dishes"", which met with the relevant responsible persons of fruits and vegetables on e-commerce platforms such as Alibaba and Meituan, and required relevant platform operators to compete in an orderly manner and operate in good faith.

On December 22, 2020, the State Administration for Market Regulation and the Ministry of Commerce jointly held an administrative guidance meeting aimed at regulating the order of community group buying, which was attended by six Internet platform enterprises, including Alibaba and Meituan. The meeting stressed that Internet platform enterprises should strictly regulate the community group buying business behavior, and strictly abide by the "nine no's" including not abusing their own pricing power through low-price dumping, price collusion, price gouging, price fraud, etc.

On March 3, 2021, the State Administration for Market Regulation imposed an administrative penalty of 1.5 million yuan on Orange Heart Preferred, Duoduo Buy, Meituan Preferred, and Shihuituan, and 500,000 yuan on Food Enjoyment.

On November 15, 2021, the State Administration for Market Regulation issued a reply to the proposal of "preventing large Internet companies from using online group buying to form a market monopoly to enter the grass-roots areas of cities and counties, seriously affecting the interests of the masses", holding on to strengthen the supervision and law enforcement of the platform economy and improve the platform economic supervision system.

Behind the daily excellent fresh acquisition

There is market news that the fresh e-commerce company Daily Excellent Fresh has wholly acquired a community unmanned retail operator, Beijing Downstairs Technology Co., Ltd.

Subsequently, Daily Excellent Fresh confirmed to the media that the acquisition content was true, and in 2021, the wholly-owned acquisition was downstairs, and the two parties completed the acquisition procedures. After the completion of the acquisition, Daily Excellent Fresh has completed the unmanned retail business layout of more than 10,000 high-quality points in nine cities across the country.

According to market information, downstairs was established in 2017, is a community unmanned convenience store operator, its sales form is mainly in groups of unmanned vending machines, mainly set up in hospitals, schools and smaller communities, selling a variety of goods including dairy products, bread and fresh food, brine cooked food, beverages, snacks and so on.

Is the daily fresh pre-position ok?

Operating data

According to market data, in the third quarter of 2021, Daily Excellent Fresh has pre-position warehouses in 17 cities across the country, and the number of front-end warehouses in the country exceeds 631, as of May 31, 2021, Daily Excellent Fresh has signed operating agreements with 73 vegetable markets in 18 cities, and has carried out operations in 52 vegetable markets in more than 10 cities.

According to market data, from 2018 to 2020, the total daily trading volume of excellent fresh commodities was 4.73 billion yuan, 7.60 billion yuan and 7.61 billion yuan respectively, and the total amount of commodity transactions as of the first quarter of 2021 was 7.41 billion yuan. The compound growth rate of total commodity transactions from 2018 to 2020 was 26.9%. The total volume of commodity transactions ranks second in the national front-loading model. In the Q1 2021 Q1 2021, the annual active number and core user segments were 7.9 million and 1.56 million, supplemented by more than 4,300 speed-up SKUs, supplemented by more than 20,000 next-day SKUs. It has quality control centers in 11 cities and more than 10,000 riders nationwide. Source procurement of products accounted for 80%.

Net profit is still falling

According to the financial report of the third quarter of 2021, the operating income of the third quarter of the daily excellent fresh was 2.12 billion yuan, an increase of 47.2% year-on-year; the gross profit was 260.6 million, an increase of 8.89% year-on-year; and the cumulative operating income in the third quarter of 2021 was 5.547 billion yuan, with a loss of 3.017 billion yuan. Along with the growth of operating income and gross profit, net profit continued to decline. The financial report for the same period shows that the net profit of daily excellent fresh in the third quarter of 2021 was -973.7 million yuan, down more than 101% year-on-year.

Compared with the financial data of previous years, the operating income of Daily Excellent Fresh from 2019 to 2020 increased by 2.15% year-on-year, with 6.001 billion yuan and 6.13 billion yuan respectively. Net profit increased by 43.32% year-on-year to -2.909 billion yuan and -1.649 billion yuan, respectively.

At the same time, as of the third quarter of 2021, the operating cost and operating expenses of Daily Excellent Fresh increased by 44.04% and 78.39% year-on-year, at 4.955 billion yuan and 3.656 billion yuan respectively.

Choice under pressure to profit

In the face of continuous losses, daily fresh and Dingdong groceries, which are also in the front-end warehouse model, seem to have made different choices. The front-loading warehouse model is through a large number of and intensive construction of storage bases, requiring each storage base to cover a radius of not less than 3 kilometers, and each city requires a corresponding number of storage bases according to factors such as urban area and population. And the rider algorithm is required to achieve 40 minutes of instant delivery.

As the two major platforms of the front warehouse model, Daily Fresh and Dingdong buy vegetables, one claims to be delivered in 30 minutes and the other claims to be home in 29 minutes. The core reason for the loss of the front warehouse model is the high performance cost caused by fast and convenient delivery, and the performance cost is mainly composed of factors such as warehouse rent and delivery staff wages.

According to market data, as of the second quarter of 2021, Daily Fresh and Dingdong are still increasing the construction of warehousing. In the third quarter of 2021, the two seem to have begun to make different choices. The number of daily fresh front positions nationwide has exceeded 1500 in 2019, but as of the end of June 2021, the number of daily excellent fresh front positions is 625. In the third quarter of 2021, Dingdong Buy Food had pre-warehouses in 37 cities across the country, and the number of pre-warehouses nationwide exceeded 1375, covering more than 185% of cities compared with the same period last year.

It should be clear that although Daily Fresh makes a choice, its profit pressure does not seem to have changed significantly. In the third quarter of 2021, the cumulative operating income of Daily Excellent Fresh exceeded 5.5 billion yuan, and the cumulative net profit was -3.018 billion yuan.

While facing the pressure of profitability, it cannot be denied that the relative advantages and disadvantages of the front-loading model are undeniable. The front warehouse has the characteristics of high fulfillment cost and high marketing cost, but it can provide a high-quality service experience, strong stickiness of core users, and high loyalty.

Is the direct procurement model the optimal solution for fresh e-commerce?

The direct procurement model liberates the supply chain and accelerates the layout of cold chain construction

In the long run, the core logic of the fresh food industry is still the substitution of farmers' markets. Due to the inefficiency of traditional fresh logistics methods, the dirty and chaotic shopping environment, and the difficulty of tracing the source of product quality, other channels in the industry have a wide space for substitution of farmers' markets. According to market data, fresh e-commerce currently accounts for only 2.5% of the terminal channel share, accounting for a relatively small proportion. Therefore, supply chain capabilities will become a key element of industry competition. In the face of many intermediate links, high losses and high terminal price increases in the traditional fresh logistics model, the market currently generally believes that the direct procurement model is one of the effective ways to solve the pain points of the industry. How to solve the contradiction between the high operating cost of the platform and the low gross profit of fresh food will become the top priority of the competition in the fresh e-commerce industry.

Therefore, for fresh e-commerce platforms, especially in the field of instant freshness, in addition to continuously bundling upstream suppliers and improving the right to speak to upstream suppliers, the cold chain, as the basis for ensuring the high quality of products, will also become the core competitiveness of fresh e-commerce platforms. At the same time, we will further develop scarce resources such as high-quality production bases, and superimpose experienced buyer teams to efficiently build their core barriers.

Prepared dishes could be a new breakthrough

At present, the prefabricated vegetable track is becoming another popular pursuit of capital, and the prefabricated vegetable track has a large imagination space, market competition has not yet formed, and the industry giants have not gone all out. With the rapid innovation and development of new formats in the catering field, the demand for low cost and high efficiency in the ToB field is gradually being amplified. Due to the economic downturn and the decline in consumption, the demand in the ToC field has gradually opened, according to market expectations, it is expected that the scale of prefabricated dishes will exceed 400 billion yuan in 2026, with a compound growth rate of 15%.

The instant fresh platform represented by daily excellent fresh, its target customers and the end-user portraits in the field of prefabricated dish ToC are similar, with the massive data that the platform already has, through the accurate portrait of existing end users, can effectively reduce marketing costs, and the pre-warehouse model also lays a better logistics foundation for prefabricated dishes.

brief summary

The fading of the Internet industry dividend has made news of its industry layoffs appear from time to time, but the subsequent rebuttal seems to make the layoffs seem to be nothing. But it cannot be denied that there is still a lot worth exploring behind the fading of the industry dividend. In the future, how to grasp the construction of the supply chain may become the winner and loser of the front-end warehouse model represented by daily excellent fresh.

Note: This article is for reference only and does not constitute investment advice. Investors should not use this report as the sole reference factor in making investment decisions, nor should they believe that this report can replace their own judgment.