Andy Feng
The recent woes of Missfresh Ltd. (MF) have cast an uneasy spotlight on the capital-intensive business model used by some of China’s leading online grocers, who promise quick deliveries to residents of major cities with millions of residents.
Those struggles have turned attention to its larger rival Dingdong Cayman Ltd. (NYSE:DDL), which is trying to convince investors its similarly modeled business shopping cart is heading down a different aisle. To emphasize that point, the company reported its first-ever non-GAAP profit in its latest quarterly results released last week, helped by a business boom in its hometown of Shanghai where residents were confined to their homes in April and May to control a Covid outbreak.
Dingdong’s leaders used the positive development to underscore the case for their business, saying the company’s “frontline fulfillment grid” model is sustainable over the longer term. The company could also get a boost as Missfresh retrenches and pulls back from the mass-delivery market, potentially reducing competition from at least one major rival.
We’ll explain Dingdong’s business model in more detail shortly, and break out some of its strategies to achieve long-term profitability. But first, we’ll take a closer look at its latest quarterly report released last Thursday, including the non-GAAP profit.
That report shows Dingdong pocketed 20.6 million yuan ($3.1 million) in non-GAAP net income, a measure that excludes share-based compensation expenses, for the three months through June, marking a major milestone in the company’s five-year history.
The second-quarter profit piggybacked on strong 43% revenue growth to a record 6.6 billion yuan, fueled by the citywide lockdown in Shanghai and other similar smaller-scale efforts across China to control the spread of the Covid Omicron variant. Dingdong benefited hugely by participating in a government-organized effort to supply groceries to citizens in Shanghai, which is both its hometown and largest market.
The breakthrough profit may sound impressive, given that very few other big players like Meituan (MEIT) (3690.HK) and Pinduoduo (PDD) are believed to have achieved such status in the notoriously competitive industry. But investors weren’t too excited, and actually dumped Dingdong’s shares to the tune of a 1.8% decline after its results came out. Over the longer haul, the company’s Friday close of $4.53 represents an 80% decline from its $28 peak last October.
Sustainable profits?
Founded in 2017 and 2014, respectively, Dingdong and Missfresh are China’s highest-profile online grocers, known for their pioneering frontline fulfillment grid business model. Such a model relies on networks of warehouses located near residential areas, allowing for rapid delivery of groceries to consumers’ homes – usually within 30 minutes.
Such a model sees companies handle nearly all tasks along the supply chain, from product sourcing to fulfillment and delivery. That contrasts sharply with a more asset-light model used by Meituan, Pinduoduo and JD.com (JD; 9618.HK), which rely on online marketplaces to match offline grocers like supermarkets with consumers.
Companies using the frontline fulfillment grid model say they can offer more reliable and faster service due to their strong control over their supply chains. But such control comes at a price since the model requires ownership of everything from product sourcing networks to warehouses and delivery fleets.
Despite its efforts to control costs while still expanding its business, Missfresh has never made it to profitability, though it has managed to trim its losses from 2.2 billion yuan in 2018 to 1.6 billion yuan in 2020. The company has yet to release its 2021 annual results.
Missfresh relied largely on investor money to fund its rapid expansion, raising a combined 12 billion yuan in four years since 2018, according to calculations by local financial media Caixin. As its losses mounted, the company found a new investor in a Shanxi-based mining conglomerate earlier this year. But it revealed late last month that it has yet to receive an agreed 200 million yuan equity investment from the company.
Dingdong has lost even more money than Missfresh in the last few years, reporting a staggering net loss of 6.4 billion yuan last year, doubling from the 3.2 billion yuan loss in 2020. Dingdong also experienced its own cash crunch early this year. At the end of March, the company had cash and cash equivalents of 4.8 billion yuan. But it also had 5 billion yuan in short-term borrowings, meaning it was under huge pressure to pay its debts.
But Dingdong has been luckier in obtaining new funds. In early March, the company received an immediate 500 million yuan from the Bank of Shanghai as part of a larger loan package worth up to 8 billion yuan in support.
Dingdong’s second-quarter profit may have been an unusual event resulting from Shanghai’s unprecedented Covid lockdown. But executives want investors to believe that its profit status won’t be just a one-time occurrence. “We will achieve full and sustained profitability by end of this year,” founder and CEO Liang Changlin told investors on Dingdong’s second-quarter earnings call, adding the company is a firm believer in its business model.
To achieve the goal, Liang said, the company will continue its shift to a “quality growth” strategy it began rolling out a year ago. Part of that includes a push into higher-margin product categories like prepared foods, something Missfresh is also trying. The company is also increasing its product offerings with more expensive private labels.
Only time will tell if such strategies can eventually put Dingdong on a sustained profitability track. But in the meantime, Dingdong’s executives are putting a positive spin on their industry and business model.
“Some people think that the whole industry is doomed when they see one company in trouble,” said Liang. “We strongly disagree with such a simple linear way of thinking. …We are committed to developing product development capabilities, which has gained us love and trust from our users. Any company loved by users is a promising company.”
In terms of valuation, Dingdong currently trades at a lowly price-to-sales ratio (P/S) of just 0.29 times. That’s significantly lower than Meituan and JD.com-backed Dada Nexus (DADA), which had P/S ratios of 5.12 and 1.49 times, respectively. That could mean that investors might prefer the more asset-light business model, which puts far less strain on a company’s finances than the frontline fulfillment grid used by Dingdong.
Disclosure: None
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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