The Chinese startup leading the pack in grocery delivery

After a tough 2019, China’s online grocery delivery platforms received an unexpected boost from the Covid-19 pandemic, as hundreds of millions of Chinese were placed under lockdown. While all the players have seen some degree of business spike, Dingdong Maicai emerged as a dark horse, claiming the first spot on Quest Mobile’s top-10 list of fast-growing shopping apps with over 500,000 daily active users.

The backstory: Dingdong Maicai is a fresh produce and grocery e-commerce platform where users can place orders online and then have their purchases delivered to their doorstep. The platform’s most popular product categories include vegetables, fruits, seafood.

• Dingdong Maicai was born out of Nextdoor-like neighbor social networking platform Dingdong Community, a flash-in-the-pan startup that failed to maintain traction and commercialize its services after a brief vogue in 2014.  
• The Dingdong team has tried out a raft of O2O sectors from laundry, breakfast delivery, house cleaning to flower delivery to revive the project during the two years following the collapse of Dingdong Community, before landing on grocery delivery in 2017.
• Liang Changlin, CEO and founder of the company, is a serial entrepreneur. He started a video editing tool startup in 2002 and then in 2003 Mmbang, a pregnancy and parenting experience sharing community that merged with education group TAL Education in 2016.

The landscape: Fresh produce e-commerce platforms nearly doubled DAU to 10.1 million during this Spring Festival holiday from 5.3 million during the holiday a year ago, according to data from a Quest Mobile report published Feb. 12.

• Dingdong is facing fierce competition from deep-pocketed rivals like Alibaba-backed Hema, Meituan Maicai, Tencent-backed Missfresh, and JD Daojia.
• Fresh produce e-commerce is reputed to be a difficult business due to the high attrition rate of perishable goods, and significant logistics requirements, which weigh heavily on margins. 
• The sector first boomed a few years ago and has seen multiple casualties from Amazon-backed Yummy 77 and Xianpinhui to more recent ones like Dailuobo.

Unique selling point: China’s grocery delivery market has flirted with a variety of business models. Dingdong is one of the leaders of the asset-heavy self-operated format, in which the company runs hundreds of self-built “front warehouses,” and its own logistics.

• Instead of shipping every order from one or a few warehouses around a city, the model increases delivery speed by distributing goods to hundreds of local front warehouses.  
• Direct shipment from nearby warehouses allows the company to guarantee delivery within 30 minutes to families within one kilometer.
• Higher delivery efficiency allows the platform to lower delivery costs and thus offering more competitive prices for users. Dingdong does not have a minimum price per order for free delivery or a delivery fee. Also, the platform has achieved a loss rate as low as 1%, well below the industry average of 3-10%, founder Liang said in the 2019 annual meeting of the company.
• Dingdong is adopting a big data-driven approach, predicting future orders through self-developed data models and multi-dimensional predictions based on historical sales data to reduce the loss rate.

The investors: Dingdong has received lots of attention from venture capitalists over the past two years. It secured a B round in October 2018 and then four follow-up tranches within nine months.

• Investors in the B round and following tranches include big names like Tiger Fund, Sequoia Capital China, Qiming Venture Partners, Bertelsmann Asia Investments, and Capital Today.
• After receiving Pre-A round from Gaorong Capital in May 2018, the company secured A from Fortune Capital and Red Star Macalline in July 2018 and an A Plus round from returning investor Gaorong Capital two months later.
• The company has disclosed neither the size of each round nor a valuation. But local media wrote in March 2019 that the company has exceeded RMB 10 billion valuation.

Present condition: Dingdong nearly doubled its daily active users during the Chinese New Year holiday (Jan. 24 to Feb. 2) compared with regular days in early January  (Jan. 2 to Jan. 8), according to Quest Mobile data.

• During the first few weeks after the outbreak, the company’s price per order nearly doubled from RMB 60 ($8.45) to over RMB 100, Liang told local media. He added that the app gained over 40,000 new customers every day during the CNY holiday. However, it is not clear whether users have remained as the offline economy re-opens.
• Dingdong’s annual gross merchandise volume exceeded RMB 5 billion in 2019, founder Liang Changlin revealed on Jan. 6 at the company’s annual meeting. 
• Dongdong is selling more than 1,800 SKUs through 550 front end warehouses as of December. It processes 500,000 orders per day, which means around 900 orders per day per warehouse.
• For now, the company has most of its operations in Southern China. Of the total front warehouses, over 250 are located in Shanghai, home of the company, while the rest are scattered around other Yangtze River Delta cities of Hangzhou, Suzhou, Ningbo, Wuxi, and Guangdong’s Shenzhen.

Liftoff? Dingdong’s asset-heavy approach has raised investor concerns for the sustainability of the model; like the WeWorks of the world, it is counting on intense utilization to avoid becoming a money pit. 

• Dingdong’s grocery delivery model is dependent on scale. The warehouse system would be really efficient if it is really heavily used, but is very expensive to maintain if it’s not used intensively.
• Haitong Securities suggested in a February 2019 report that the platform is still short of break-even on warehouses. It says the company should process 1,250 orders in order to break even under the condition of RMB 3 rental fee per square meter for 300 square meter warehouse, RMB 50 per order, gross profit rate 30%, and 30 staff per warehouse. 
• Haitong suggested that Dingdong could also raise revenue by rising price per order and increasing the number of orders.
• Gross profits for vegetables are low and loss costs are high compared with seafood and fruits. The company was operating under thin margin/ loss previously. Industry experts have estimated a RMB 70 sales per order break-even point for e-commerce platforms using the costly front warehouses approach.

Prospects: After the spike triggered by the coronavirus, Dingdong plans to extend to Northern China markets, with its first stop in Beijing.

• Sudden demand in grocery delivery as a result of the coronavirus outbreak has eased some investor concerns. But the company may still face the challenge of retaining the new users when the epidemic ends. 
• At the company’s annual conference held in early January, company founder Liang emphasized the theme for Dingdong in the year is not growth but to increase the number of orders from existing users from an average of four orders per month to 6.5.