Key takeaways:
• Missfresh has launched a series of value-added initiatives in its bid to achieve profitability by selling more higher-margin products outside its core online grocery business
• Company’s stock is down more than 70% since its debut in the U.S. last June
By Trevor Mo
We may be losing money, but we’re working hard to find a recipe for success.
That’s a key message in the latest series of announcements from online grocer Missfresh Ltd. (NASDAQ:MF), as it looks to prop up its stock that is down by more than 70% since its U.S. IPO last June. The company has relied heavily for most of its life on the basic grocery business, which carries impressive revenue but little or no profits due to razor-thin margins and intense competition.
In its quest to lessen its reliance on that rat race, the company is trying its hand in the higher-margin product category known as “3R” – ready-to-cook, ready-to-heat, and ready-to-eat, Missfresh said on Monday. Sales of 3R products on the company’s platform more than quadrupled last year from 2020, according to the statement, adding that the gross margin for these products is at least 15% above the platform’s average.
Companies globally are salivating at such higher-margin products, including the likes of U.S.-based Blue Apron(NYSE:APRN). Restaurant giant Yum China (NYSE:YUMC, 9987.HK)), operator of KFC and Pizza Hut restaurants in China, has also joined the trend, showing the space is rapidly heating up.
The focus on products with higher margins is a key part of Missfresh’s recent multi-pronged strategy to achieve profits that have eluded nearly everyone in China’s online grocery business. Other efforts include boosting its direct-buying network and going upmarket by launching more private label brands. The company is also trying to diversify beyond consumer-facing services by providing enterprise software targeting businesses.
We’ll take a closer look at the company’s myriad recent initiatives shortly. But first let’s step back and look at the company’s current business, including its very-red bottom line.
Missfresh falls into one camp of companies in China’s fiercely competitive online grocery market that use a very centralized business model. Such a model involves heavy investment throughout the whole supply chain of the grocery business, from product procurement and warehousing to delivery. Rather than rely on third-party suppliers, the company handles most of the tasks by itself.
Since its founding in 2014, the company has developed rapidly by tapping China’s love of buying anything and everything online, a trend that has accelerated over the past two years with the Covid pandemic. That’s helped the company’s revenue to soar over the years, even as it remains deeply in the red, partly due to the centralized business model that requires huge investment.
In the three months through September, Missfresh reported a net loss of 974 million yuan ($153 million), widening from a 616.2 million yuan loss for the same period of 2020, according to its latest quarterly earnings report.
Unimpressed investors
Investors have generally balked at the company’s loss-making status, sending Missfresh’s stock steadily downward since its IPO last June. The company’s shares closed Thursday at $2.93, representing about a quarter of their $13 IPO price.
Accordingly, Missfresh hopes its recent string of initiatives may ease concerns of those increasingly impatient investors. Its Monday “3R” announcement came just a week after it disclosed a similar extended partnership with a leading Chinese seasoning brand called Totole, again looking for higher-margin value-added offerings.
In that development, Missfresh, which began sourcing Totole products last July, said it will jointly launch promotions on its platform for prepacked seasoning blends this year, according to the statement. Like other “3R” products, such blends represent yet another example of Missfresh’s strategy of focusing on more profitable, higher value-added goods.
For Missfresh, such diversified product offerings will not only provide a stable, new revenue streams, but will also cater to the needs of its users, ultimately improving their “stickiness.”
In announcing the new Totole initiative, Missfresh took the opportunity to once again emphasize its direct sourcing capabilities. As of September, the company had directly procured products from 200 more farms, as well as 350 factories and processing facilities across the country, according to a previous announcement.
While costly to operate, such a large direct sourcing network provides Missfresh with stable product supplies while eliminating costly middlemen. More importantly, the network has allowed the company to incrementally go upstream by nurturing its own private label brands.
The company now has several such in-house brands, such as Fresh Joy Xiang An Xin, which covers categories including meat, eggs, vegetables, and bakery items. Sales of Fresh Joy Xiang An Xin products on the Missfresh platform more than tripled in last year’s third quarter, according to founder and CEO Xu Zheng.
Apart from its consumer-facing grocery business, Missfresh has also tried targeting business clients. The company’s “retail cloud services” – which target offline retailers such as supermarkets and mom-and-pop stores – is now used by more than 20 regional supermarket chains, according to another announcement on Jan. 6.
Despite that flurry of new initiatives, investors remain largely unimpressed. The company’s shares edged up 2.8% after its Monday announcement on its 3R expansion. But they gave back all the gains and more the following days, including a 7.6% plunge on Thursday that sent it to an all-time low.
Investors may be less impressed in part because the new initiatives are largely still in their early days. For example, the enterprise-facing retail cloud services currently generate negligible revenue, and the company has yet to announce any specific figures for that category.
Meantime, competition is only getting more intense in China’s online grocery market, as Missfresh faces internet behemoths like Meituan (3690.HK) and Pinduoduo (NASDAQ:PDD) that were later arrivals to the game but are moving aggressively into the space.
Missfresh’s centralized business model, while capital-intensive, gives it a relative advantage by letting it maintain more control over its supply chain to ensure timely service and quality control. By comparison, Meituan and Pinduoduo use a decentralized model that is less capital-intensive but relies on third-party suppliers and warehouse operators to perform most of their tasks.
Missfresh’s closest competitor is the larger Dingdong (NYSE:DDL), which uses a similar centralized business model and was listed in the U.S. around the same time last year. Since then, Dingdong has overtaken Missfresh as the leader in their space, and is consolidating that position.
Over the past months, Dingdong’s shares have also dropped sharply. After peaking at more than $36 in early November, its shares now trade at just a fraction of that, closing Thursday at $4.13, largely tracking a general selloff for Chinese tech stocks.
Dingdong’s share collapse has given it a price-to-book (P/B) ratio of 10.6, below Missfresh’s 12.4, indicating investors may like Missfresh’s approach of more conservative expansion combined with a build-up of value-added offerings. By comparison, Blue Apron, which is also losing money, trades at an even lower P/B of 8.7.
At the end of the day, investors are still most worried about profit. That means Missfresh still has lots of work before it can truly prove itself as a worthy investment.
