How is dingdong's pre-warehouse model profitable?

Image source @ Visual China

Wen | Zhuang Shuai

Founded in 2015, Daily Fresh is the pioneer of the pre-warehouse fresh e-commerce. Dingdong buys vegetables in 2017 from the O2O model to the front warehouse model.

At present, dingdong has a cumulative net loss of 11.4 billion yuan in three years, and daily excellent fresh has lost 9.8 billion yuan in three years and three quarters.

At the call for fourth quarter 2021 results, Liang Changlin announced,

In other words, the unit price and performance expense ratio have become the key indicators of whether the front position can be profitable.

In the prospectus, Daily Excellent Fresh put forward a new (A + B) ×N (that is, (pre-position + smart vegetable farm) × retail cloud) development strategy, gradually reducing the heavy asset layout of pre-positions after listing, and continuously reducing the number of pre-positions, which has now been reduced from 1500 in the peak period to 625 at the end of the second quarter of 2021.

According to the financial report data, as of September 30, 2021, the daily excellent fresh speed business has entered 17 first- and second-tier cities across the country, with more than 5,000 SKUs and an average delivery time of 36 minutes.

Signed 73 vegetable farms in 18 cities, of which 52 are already in operation, and signed retail cloud business cooperation agreements with 11 customers.

According to the financial report of Q3 2021, Dingdong's revenue from buying vegetables reached nearly 6.2 billion yuan, while the daily excellent fresh food was only 2.12 billion yuan.

Dingdong buy vegetables

Defining itself as an "advanced real-time demand e-commerce infrastructure" with "quality products + first-class service + efficient supply chain", "Chuang Shuai Retail E-commerce Channel" will next conduct further analysis based on the financial report data of Dingdong Grocery shopping and the data calculated by Huatai Securities Research.

Judging from the financial report data, the main cost of Dingdong to buy vegetables mainly includes four parts: performance costs (pre-warehouse, picking personnel, distribution costs), sales and marketing costs, management costs and technical costs.

The gross profit margin of 21Q3 Dingdong Grocery shopping reached 18.2%, the performance expense ratio reached 37.3%, the sales expense ratio reached 6.9%, and the loss rate reached 32.6%.

The higher performance expense rate is mainly due to the high cost of terminal performance, and the higher sales expense rate is mainly due to the large-scale advertising and subsidies of the platform.

Regardless of R&D expenses and management expenses, Dingdong Buy 21Q3 has an operating loss rate of 26.0%, and if it wants to achieve profitability at the sales level, it is necessary to optimize 26.0% of the cost.

The financial report data shows that the customer unit price of Dingdong buy menu front position is 60 yuan, assuming that 21Q3 averages 1256 front positions (as of 21Q2, 21Q3 are 1136 and 1375 respectively), according to the 7.02 billion yuan GMV of Q3, the single warehouse order is 1035 single / day.

According to the calculation of Huatai Securities Research, the warehousing-related costs of Dingdong to buy vegetables: assuming that the total cost of water and electricity and depreciation is 19,000 yuan / month, the total rate is 1.2%; the rental cost is calculated according to the average front warehouse area of 300 square meters, 5 yuan / flat / day, and the rent rate of the front warehouse is 2.7%;

The performance expense ratio of 21Q3 was 37.3%, of which the rent and utility depreciation data of the central warehouse and the front warehouse accounted for 40.3% (assuming that Q3 was still 40.3%), accounting for 15.0% of the revenue, so the rent of the central warehouse accounted for 11.1% of the income.

Delivery-related costs: Suppose a single front warehouse 20 delivery personnel, 8000 yuan / month / person, the delivery rate is 9.8%, equivalent to 5.2 yuan / single; sorter 10, 7500 yuan / month / person, supervisor 1, 10000 yuan / month / person, the front warehouse personnel rate is 5.2%.

That is to say, dingdong buy vegetable 2021 Q3 pre-warehouse warehouse allocation cost rate is 22.3%, removing distribution, sorting and warehouse management, there are still 7.4% of the central warehouse sorting/logistics costs.

According to the pessimistic/neutral/optimistic data model, the daily order volume of a single front position is increased to 1200/1500/1800, and the unit price is increased to 70/75/80 yuan, then the gross profit margin can be increased by 7.5pct to 25.7%.

The rent apportioned by the central warehouse decreased by 1/3, the rent of the front warehouse/ the depreciation of the water and electricity remained unchanged, the sorting expense rate of the central warehouse was optimized to 5.9%/5.1%/4.4%, the pre-warehouse sorter could handle 100 single/day, the distribution fee was reduced from 5.2 yuan / single to 5 yuan / single, and the sales cost was reduced by 4.9pct to 2.0%.

Under the assumption of neutral optimization, if a single pre-position order reaches 1500 single / day, the customer unit price reaches 75 yuan, and it is expected to achieve an operating profit margin of 0.4% without considering management and research and development expenses.

According to the optimized UE model, dingdong to buy vegetables to achieve profitability, on the one hand, need to increase the order volume of a single warehouse, on the other hand, need to increase the unit price of customers.

The key to increasing the order volume of a single warehouse is the continuous growth of the market scale, which requires Dingdong to buy vegetables, daily excellent fresh and Meituan to buy vegetables in the marketing and marketing expenses to continue to invest, while continuing to improve the construction of supply chain system, distribution efficiency and shopping experience.

Since the main categories of pre-warehouse operation are very close to traditional supermarkets, from the perspective of substitution, the penetration rate of instant retail (including pre-warehouse, warehouse store integration and home platform) is expected to increase to 10.6% in 2023, and the market size is expected to reach 385.4 billion yuan.

According to the financial report data, Dingdong buys vegetables in 2021 annual revenue of 20.12 billion yuan, accounting for less than 14% of the entire instant retail market, and there is still a lot of room for improvement.

Assuming that in 2023, the share of Dingdong Grocery in the instant retail market will increase to 30%, and the GMV will reach 115.6 billion yuan, according to the customer unit price of 70 yuan and 3000 pre-positions, the single warehouse order is 1508 single / day.

If measured according to the penetration rate of instant retail in online shopping, in 2020, the total retail sales of physical goods in the mainland will reach 9.8 trillion yuan, according to the Meituan Research Institute, of which the instant retail penetration rate reached 1.5%, and the instant retail market size reached 146.3 billion yuan.

According to the data of the National Bureau of Statistics, the growth rate of online retail sales of physical goods in the mainland in 18-21 years was 25.4%, 19.5%, 14.8% and 12.0%, assuming that the total retail sales of physical goods in the mainland in 21-23 years CAGR reached 8.5% to 10.5%, and the instant retail penetration rate reached 3.5% to 5.5%, and it is expected that the size of the mainland instant retail market in 2023 will be about 4363 to 7242 billion yuan.

In addition, due to the factors of the epidemic, the scale of the instant retail market has increased or exceeded expectations, and the front-end warehouse model, as the beneficiary of the epidemic period, has accelerated its natural growth while the sales and marketing costs of related enterprises have declined.

With the maturity of the front warehouse model, the improvement of management capabilities, and the stability of consumer demand, according to the consumption data of the service scope of the front warehouse, combined with the changes in consumer lifestyle and consumption habits, category and inventory optimization are carried out, and the management ability of the front warehouse is continuously improved with the help of digital means to further reduce the loss;

In addition, new categories with high unit prices and high gross profits such as "prepared dishes and flowers" can be added, and the research and development of private brands and the expansion of FMCG categories can be strengthened, which are expected to further increase the unit price of customers.

And with the growth of users and the increase of consumption frequency, stickiness is enhanced, and sales and marketing costs are expected to further decline.

According to the financial report data, the GMV of 21Q3 Dingdong to buy vegetables accounts for 5.8%, if it is increased to 30%, the gross profit margin has an increase of 4pct; the cargo loss rate is assumed to be 3% at present, and if it is optimized to 1% in the future, the gross profit margin will be improved by 2pct; other optimization measures such as increasing non-fresh products and increasing the proportion of direct procurement in the place of origin, assuming that there is space for 1-2pct, the gross profit margin will increase by 7-8pct.

Of course, if the front warehouse can be changed into an "unmanned front warehouse", it can not only improve the picking efficiency, but also save 5.2% of the labor cost of the sorter. Then in the case of the same order volume and customer unit price, there is also a chance to achieve profitability.

Mo Xinglong, chief architect of Meituan Flash Sale Unmanned Micro Warehouse, delivered a speech on "New Starting Point for Retail Efficiency - Meituan Flash Purchase Unmanned Micro Warehouse" at the 2019 Smart Warehousing Development Summit Forum, briefly introducing the "Unmanned Front Warehouse" project.

Meituan Flash Sale unmanned micro-warehouse provides intelligent scheduling system and automation equipment to complete the whole process of automatic order receiving, sorting, collection order, packaging and handover, and provides a software and hardware integration solution for the front warehouse.

In the next three or five years, with the continuous maturity of unmanned software and hardware technology and the decline in costs, Dingdong buying vegetables, Meituan buying vegetables and daily excellent freshness should be gradually landed "unmanned front warehouse".

In summary, from the perspective of scale expansion and operation optimization, the breakthrough point of the profitability of the front position model is mainly concentrated in the following four aspects:

First, the formation of user habits and the growth of scale, the increase in consumption frequency has brought about a further increase in the scale of orders;

Second, product structure adjustment, the introduction of high gross profit margin of commodity categories /brands, such as prepared dishes, flowers, private brand goods, while increasing the proportion of direct procurement from the source, reducing the overall cost of goods, improving profit margins and customer unit prices;

Third, the improvement of regional order density and the decline in performance costs brought about by the application of unmanned technology are mainly reflected in the dilution of storage costs, the improvement of sorting and distribution personnel efficiency;

Fourth, the increase in consumption frequency and the paid membership system make users sticky, and the government recommends (guarantees that enterprises) and social sharing to acquire new users at low cost, so that enterprises can reduce advertising investment and subsidies, and sales and marketing expenses can be further optimized.