Failure to deliver? Missfresh and Dingdong Maicai IPOs flop

Missfresh and Dingdong Maicai, China’s two leading online grocery companies, got a frosty reception on their stock market debuts, another reminder of the many ills that beset the online grocery market.

Dingdong Maicai's deliverymen waiting for orders outside a mini warehouse in Beijing. Photo from CFP

Dingdong Maicai's deliverymen waiting for orders outside a mini warehouse in Beijing. Photo from CFP

By LIN Beichen


The pandemic was very good to China’s online grocery business, but the stock market is showing little appetite for the trillion-dollar market. In June, Missfresh fell 25 percent on its first day trading on Nasdaq. Rival Dingdong Maicai slashed its expectations by 70 percent and closed roughly flat on its debut a few days later.

In hindsight, it is are hardly surprising. Both companies are losing hundreds of millions fighting their corners of the market and the end price war is still nowhere in sight. Online groceries went through ten years of meandering stop-start growth before the pandemic. everyone expected a difficult winter in 2019. Just before the first outbreak, investors were pulling out of struggling startups. Tech giants shut down their projects. A year later, the landscape is barely recognizable.

Missfresh and Dingdong Maicai deliver in big cities in 30 minutes thanks to their hugely expensive warehousing systems. The tech giants turned lower-tier cities into group-buying battlegrounds.

Fresh money

It seems like a boom, except that everyone is losing money. Sales are up, as are costs. The IPO flops are a sad reflection of the turf wars and logistical nightmares. Whoever wins groceries wins the consumer market, the saying goes. Whoever gets its costs under control wins the grocery war.

In theory, grocery deliveries are a brilliant idea. People will always need to buy groceries, and traditional grocery stores with their convoluted distribution channels are inefficient. By streamlining the supply chain, online grocery companies aim to deliver fresher food at a lower cost. At least until recently, the model pioneered by Missfresh was the way to achieve it.

The idea is to open grocery stores in densely populated areas that also serve as small fulfillment centers and mini warehouses. A central warehouse supplies the stores, where orders are prepared. In this way, the last mile can be easily and cheaply covered.

Missfresh set up the model around 2015. Dingdong Maicai copied it almost immediately. And the rest is history. After two early fundraising rounds totaling 200 million yuan (US$30 million) led by Tencent in 2015, Missfresh raised another 10 billion yuan (US$1.5 billion) in the next three years. Dingdong Maicai completed ten fundraising rounds in four years, each larger than the previous. This year, only 36 days after a US$700-million D-round, it closed another US$300-million D-plus round led by SoftBank Vision Fund II.

Expansion by any means

It is a trillion-dollar market, as they love to say, for very good reason. The hard truth is that running an online grocery business is extremely expensive. Missfresh and Dingdong Maicai have spent a fortune building their supply chains from scratch, and worn heavy losses year after year. Dingdong lost 3 billion yuan last year. Missfresh lost only half that, much better than 5 billion lost over the previous two years.

Labor continues to be astronomical. Both run their own delivery fleets with tens of thousands of delivery staff. There is no sign of any dialing back in promotions, freebies, or ads. Missfresh lost 610 million yuan in Q1. Dingdong Maicai lost 1.3 billion yuan.

To turn a profit, at least try to, the two companies have adopted different strategies. Missfresh’s intelligent fresh markets are essentially farmers’ markets powered by tech. Dingdong Maicai CEO Liang Changlin still prioritizes scale over profitability and wants to expand Dingdong Maicai to expand into small towns.

Lower-tier cities, however, are already divvied up by group buying startups, many directly controlled by tech giants. The business model is more about efficiency than speed. Customers place orders during presale windows, enabling tight inventories. Local people coordinate pickups, saving marketing and delivery costs. Most importantly, prices are low, which holds great appeal in smaller and poorer cities. Meituan and Pinduoduo each reached 10 million orders a day in a year.

But none of these advantages stops them from losing money. Meituan’s new lines of business lost 6 billion yuan in Q4 last year, half of that from group buying. The figure was 8 billion in Q1 this year. Tight-lipped Pinduoduo is reported to have spent 7 billion yuan on marketing, generating a 3-billion-yuan loss in Q1.

A jungle out there

The industry is in danger of becoming a jungle of fake reviews, misleading ads and predatory contracts. To turn a profit, group-buying companies must upgrade their supply chains, fix recurring bugs, and improve the quality and consistency of both goods and services. This will be challenging in underdeveloped areas.

In the end, it may come down to cost control. Regardless of the model, 15 - 20 percent of each order goes on warehousing, fulfillment, and shipment. Lower costs require better distribution and higher volumes. Summer will be brutal due to higher inventory losses. Whoever wins the costly summer game will be in pole position to win the rest of the year.