Chinese grocery delivery company MissFresh is again in the news. The pioneer of dark stores (or mini warehouses) and on demand delivery of fresh produce, which at its peak had more than 5000 dark stores in 20 cities, has slashed its operations to just four cities as of earlier this month.
As the first Chinese online grocer to list on the US public market, MissFresh’s share price has dropped more than 96% since IPO in 2021:
The company last week issued 300 million shares to Shanxi’s Donghui Group – a coal mining conglomerate for CNY200 million (US$30 million) – essentially handing more than 30% of the company to Donghui.
Is the business model valid?
However, the fundamental question remains: does Missfresh have a valid business model?
First, nobody so far has cracked the online grocery game – but the vast TAM of the market attracts players after players. MissFresh estimated the grocery market in China to be CNY3 trillion (US$445 billion), with low single digit online penetration.
The mini warehouse model, according to MissFresh, ensures good customer experience (delivery in 30 minutes) and high repeat rate.
That is the exact pitch all the 15 minutes grocery delivery companies that mushroomed across the world during the pandemic were telling their investors.
However, others were sceptical. In 2019, Hou Yi, CEO of Alibaba-owned Hema Fresh (which itself struggles to make a profit), voiced his doubts about the mini warehouse model after trying 80+ such warehouses within his own company. His main reasons:
- Difficulty to raise average order value / basket size: the model is built on frequency, which naturally pushes down basket size;
- Difficulty to lower the wastage: the demand for groceries usually centres around lunch and dinner hours, and it was very difficult to plan inventory adequately – ensuring good customer experience means redundancies, and wastage
- No guarantee of gross margins: the supply chain of fresh produce is quite transparent in China, with so many different channels for consumers to get supplied.
Dingdong Maicai, MissFresh’s Shanghai-based main competitor, is faring slightly better in the public market, and that is partially because they controlled the percentage of shares actually floating:
Beware of the giants
In China, giants like Meituan, JD.com, and Pinduoduo have all looked at and/or experimented with online grocery extensively. They have all scaled back community group buying operations in the recent quarter because of the difficulties to make economics work. Meituan has scaled back its focus in fulfilling 3rd party orders, hence not taking any of the inventory/wastage risks.
However, it is reasonable to assume that once someone – anyone – has cracked the game to make online grocery profitable, giants will quickly move in and replicate. Not a position that MissFresh, with a market cap of less than US$100 million, is able to defend against.
The same can be said about on demand grocery in other markets. In Southeast Asia, Grab has put its eyes firmly on the grocery markets, but has been experimenting rather than aggressively pushing.
Its acquisition of Jaya Grocer, a grocery chain in Malaysia, demonstrates the model of using offline traffic for visibility, profitability and anchor for online expansion. Shopee, who also has eyes on groceries, is also watching closely on the side.
If that is the case, even if the likes of MissFresh did not focus too much on relentless growth, but on making the single city/district operating model profitable first, there isn’t much moat to defend the businesses.