Chinese online grocery delivery startup MissFresh (Meiri Youxian) met a cool reception in US markets Friday. It raised $273 million in a Nasdaq IPO after pricing its shares at $13, the lower end of the expected range. The Tencent-backed company’s shares plunged 26% to close at $9.6.

It’s the latest sign of investor concerns about China’s competitive grocery delivery market.

The rise of “community group buy” has attracted a stampede of players backed by deep-pocketed tech giants like Pinduoduo and Alibaba, triggering a costly price war at the discount end of the market. Stricter regulatory control also casts a shadow. MissFresh, which offers on-demand delivery in more upscale markets, is not a community group buy platform.

MissFresh’s on-demand rival Dingdong Maicai reportedly also trimmed the price of its offering in the face of negative market sentiments. It doesn’t help that both MissFresh and Dingdong are still in the red. 

MissFresh CEO Xu Zheng told TechNode that the company has plans to defend its turf and expand into the “sinking market” in an exclusive interview after the company’s US stock debut.

China’s neighborhood retail market is “massive,” with market value forecast to reach nearly RMB 15.7 trillion by 2025, Xu said. “The market of this size is big enough to accommodate diversified user demands and different business models,” he said.

Watching costs

MissFresh is cutting back on delivery infrastructure in a bid to achieve profits. The company’s core grocery delivery businesses is built on “distributed mini warehouses” (DMW), which the firm claims to have invented.

Grocery delivery operated under the DWM model will continue to be the company’s main source of revenue, Xu said, but it will focus on what Xu describes as “high-quality” growth. 

The DWM model, in which products are picked from warehouses placed in residential neighborhood for quick delivery, delivers quick order fulfillment and lower attrition rate, but it’s expensive. Pre-pandemic, these costs threatened to sink the industry.

The DMW model saw a resurgence in 2020, when China’s online grocery delivery market received an unexpected boost from the pandemic, as locked-down consumers went online.

READ MORE: Covid-19, an opportunity for e-commerce

The model is used by many companies including MissFresh, Dingdong Maicai, and Meituan Maicai. But the market boom created an increasingly competitive field that offers few opportunities other than cash-fueled growth.

While its rivals have poured money into aggressive expansion plans, MissFresh has gradually downsized its physical operations over the past two years. The company’s prospectus showed that it was operating only 631 mini-warehouses in 16 cities as of March, less than half its 2019 count of over 1,500.

The company has focused on high-yield buyers: Xu said he’s targeting young mothers, aged between 26 to 45. The company booked a high per order sales of RMB 94.6 (about $14.5) for its on-demand retail business in 2020, the highest among its peers, according to iResearch.

The strategy has paid off with a narrowed net loss. MissFresh’s net loss dropped to RMB 1.7 billion in 2020, from RMB 2.9 billion one year before. By contrast, Dingdong’s net loss widened to RMB 3.2 billion in 2020 from RMB 1.9 billion in 2019 as the company pushed harder for expansion.

But there’s also downsides. Cutbacks in operations have meant slowed growth. The company booked RMB 6.1 billion revenue in 2020, slightly higher than its RMB 6.0 billion in 2019. Meanwhile, Dingdong Maicai recorded RMB 11.3 billion in revenue in 2020.

Cheaper community group buy services, which bundle deliveries for a whole neighborhood into a once-a-day drop-off, have done better in lower-tier markets.”

Digitizing the wet market

Facing intensified competition in its core business, Xu said MissFresh is poised to break into lower-tier markets with an approach that works together with the wet markets that currently rule the roost.

“Fresh markets remain the go-to place for fresh produce shopping. In big cities, offline wet markets represent 30% to 40% of fresh produce shopping, and they represent 70% to 80% of the shoppings in small cities or towns,” said Xu (our translation).

MissFresh plans to use its IPO proceeds to fund efforts to digitize China’s offline wet markets and enhance AI-driven retail cloud services. The company plans to invest a combined 40% of funds raised in the two initiatives, on par with the 50% proceeds budgeted for sales, marketing, and technology for the on-demand retail business. The rest will be used for general corporate purposes, according to the company’s prospectus.

Both of the new businesses are quite young. The company launched its intelligent fresh market business in the second half of 2020. It promises to help wet markets to optimize their merchant mix, while providing electronic payments, online marketing, and customer management tools. The company’s retail cloud business initiative, launched in 2021, offers AI-based smart supply chain, smart logistics, and smart marketing solutions to enhance automation level and efficiency.

The two businesses are targeting emerging markets in lower tier cities, where upcoming community group-buy rivals like Pinduoduo’s Duoduo Maicai and Xingsheng Youxuan first took off.

Xu sums up the team’s innovation philosophy as “respecting the underlying market laws and breaking the rules”. “While respecting the underlying laws of different market, we should be prepared to break outdated rules,” said Xu.

Emma Lee (Li Xin) was TechNode's e-commerce and new retail reporter until June 2022, when she moved to Sixth Tone to cover technology and consumption. Get in touch with her via or Twitter.