Chinese E-Grocer Missfresh Bolsters Upstream Supply Chains Through Private Brands and Direct Sourcing

Private-label brands in focus

How long could it take to turn a live pig raised on a farm in rural Hebei province into a pork dish on a Beijing resident’s dinner table? The answer given by China’s leading online grocery retailer Missfresh is 48 hours.

In partnership with Huadu Yangguang Factory, the only factory in Beijing to boast a production line extending from slaughtering live pigs to processing them into pork products, Missfresh has developed the ability to deliver fresh pork, a staple of the Chinese diet, to thousands of households in the capital at astonishing speed.

On a recent sunny afternoon in Yanqing, a suburban district in northwest Beijing which will host alpine skiing and bobsledding events at the upcoming 2022 Winter Olympics, a truckload of pigs coming from the neighbouring Hebei province arrived at this modern, well-equipped pork plant. Staffers at Huadu Yangguang Factory disinfected the vehicle and tested these animals for possible diseases before corralling them into the slaughterhouse, where they would enter the end stage of their lives on the factory’s 132-meter production line. The plant operated methodically, with roughly 400 pigs butchered into cuts in a day. According to a representative for Huadu Yangguang, during the 12th lunar month when millions of Chinese families are stocking up for the lunar New Year feast, the factory will hum into full swing and process 800 to 1,000 pigs daily.

Liu Ming, senior meat purchasing manager at Missfresh, told Pandaily that he contacted the head of Huadu Yangguang as soon as he heard the news that the factory obtained a slaughter license this March. Afterwards, the two sides signed a contract that made Missfresh the only e-grocer to which it supplied fresh butchers’ cuts. The fresh pork will be hauled to Missfresh’s quality centre in Beijing, where it will be sorted and shipped to the company’s so-called ‘distributed mini warehouses’ (DMWs) placed in locations closer to dense populations of potential customers. The DMW model, invented by Missfresh in 2015, integrates storage and distribution functions to streamline the retail distribution chain. At the mini warehouses, delivery workers pick up the pork from refrigerators and ship it to the doorsteps of users’ homes within a one- to three-kilometer radius, in 36 minutes on average.

Liu said that the cooperation with Huadu Yangguang, “a top-class supplier,” was part of Missfresh’s efforts to develop its private brand Fresh Joy, which is a label stuck on products ranging from meat and eggs to vegetables and pastries. All the pork products supplied by Huadu Yangguang to Missfresh will bear the green-and-pink Fresh Joy stickers.

In contrast to purchasing goods from legacy brands, building in-house labels can help retailers bypass those profit-thirsty distributors and prune all the unnecessary links in the supply chain. According to a report by consulting firm iResearch, prices of fresh produce seen at China’s grocery stores could be 100% higher than those at which the food was sold by farmers to local bulk buyers at first.

Peng Cheng, a partner at venture capital firm Youzi Fund, said in a recent interview with Pandaily that private brands can offer retailers increased profit by dissolving those big name brands’ premium equity. “Apart from lowering costs, in-house brands enable retailers to improve quality control and remove those functions and packages consumers don’t necessarily need,” Peng remarked. “Retailers can also raise consumers’ levels of trust in their products by leveraging their own reputation.”

According to Liu, the purchasing manager at Missfresh, private brands have given the company flexibility in innovation, allowing the e-grocer to customize goods based on market trends analysis. A striking example is Missfresh introducing pork ribs with cartilage under the Fresh Joy brand after discovering customers’ preference for the alternative cut in reliance on its self-developed algorithm and front-line market analysts. The product quickly became one of the platform’s top 10 best-selling pork products in the third quarter of 2021.

During the three-month period, sales of Fresh Joy-branded goods rose 250% compared with a year ago. Sales of Fresh Joy-branded meat products accounted for 35% of Missfresh’s overall sales of fresh meat for the quarter ended September 30.

The benefits of private brands have also been enjoyed by other major retailers. Walmart, a global bellwether of consumer spending,has developed its in-house labels since the 1980s. Currently, Walmart’s own brand products contribute 30% to the retailer’s revenue, while their contribution to the company’s profits almost hits 50%. Freshippo, the community retail business of Chinese e-commerce giant Alibaba, said that sales of its private label products accounted for 20% of its total sales in 2020. Last year, Freshippo stocked its shelves with more than 20,000 new items, of which 6,000 were under the firm’s in-house brands.

A white paper published by consulting company Daymon International showed that in 2020, China’s private brand market jumped by 22.7%, with e-commerce companies, especially those focused on fresh produce delivery, fuelling the growth. Building their own brands has become an effective strategy for Chinese e-commerce platforms to differentiate themselves from rivals, helping them boost competitiveness and increase profit margins, the report suggested.

“Their ultimate goal is to inspire loyalty from customers,” remarked venture capitalist Peng.

A shorter supply chain

Similar to in-house brands, Missfresh’s expansion of the scale of direct sourcing has also shortened the company’s supply chain and reduced its procurement costs.

As of November, the company has expanded its network to include 200 farms and 350 factories across China to directly source fresh, high-quality goods from the place of origin. In a written response to Pandaily’s questions, a representative from Missfresh said that the 200 farms in China’s 30 provincial-level regions offer a stunning range of agricultural products – from hairy crabs caught in the waters of Changdang Lake in Jiangsu province to “flush strawberries” from Dandong in Liaoning province.

Currently, more than 80% of Missfresh’s products are sourced directly from their origin, well above the industry average of 55%. In 2020, the company worked with more than 2,300 suppliers, bringing the direct sourcing rate for fresh foods to 93%. What’s more, 100% of its fresh produce is subject to strict quality inspection, a move prioritizing the health and safety of consumers.

The combination of a shortened supply chain and Missfresh’s signature DMW network often prompts groceries to need less transport, less handling, less refrigeration and less time in storage, making fresher foods and faster delivery services accessible to residents living in first- and second-tier Chinese cities – the e-grocer’s target market.

Jazmin Li, who works for a foreign company in the eastern Chinese city of Nanjing, said in a recent interview with Pandaily that she has grown used to placing an order for groceries on Missfresh’s app before leaving her office every afternoon so that she can start cooking dinner right after she commutes from the company’s office to her apartment. Li told Pandaily that she could barely find time to go to supermarkets or street markets to shop for fresh food on workdays, but online grocery apps provide her with a perfect solution. When asked why she doesn’t simply order food via dedicated delivery apps such as Meituan and Ele.me, the 23-year-old young professional replied, “Homemade food is more healthy and sanitary. And I really enjoy cooking by myself, which helps me relieve work pressure.”

Consumers from urban areas who are able and willing to pay for quality and convenience, like Li, have constituted a significant portion of Missfresh’s users. As of September 30, Missfresh set up mini warehouses in 17 first- and second-tier cities including Beijing, Shenzhen and Ningbo. In this farm-to-table era, direct acquisition from producers meets shoppers’ demand for food freshness and safety.

Users’ purchasing behaviors have also optimized Missfresh’s algorithm, the platform’s core competency predicting local buying patterns and assigning inventory to individual mini warehouses to lower the attrition rate for fresh produce. Additionally, direct sourcing, which involves Missfresh – the buyer – specifying the quantity required based on its predictions of demands, with the farmer agreeing to deliver at a future date, reduces the amount of food waste. In 2020, the company’s Retail AI Network automated 98% of the decisions in inventory replenishment, 97% of the decisions in procurement and 85% of the decisions in promotional pricing. The e-grocer’s overall inventory loss rate was only 2.5% and the turnover of fresh product at its mini warehouses was 1.8 days on average last year. It also successfully ensured that 94% of its stock keeping units were available at 5 p.m., the evening peak hour for grocery shopping.

Less waste means less fulfillment costs. Missfresh’s fulfillment expense as percentage of total net revenues decreased from from 34.9% in 2018 to 30.5% in 2019 and further down to 25.7% in 2020.

Missfresh’s focus on direct sourcing is also finding favor with the government. In a statement released in November, China’s ministry of agriculture called for efforts to secure food supplies, urging fresh food e-commerce companies to expand the scale of farmed goods purchasing to better match local supply with local demand.

SEE ALSO: Community-Focused Retailer Missfresh Speeds up Efforts to Digitalize China’s Wet Markets

China’s shift to online grocery shopping

Missfresh’s efforts in optimizing supply chains have borne fruits. On November 12, the first Chinese publicly-traded e-grocer announced its financial results for the third quarter of 2021. The earnings report showed that net income increased 47.2% year-on-year to 2.12 billion yuan ($329.3 million); gross merchandise value rose 41% year-on-year to 2.57 billion yuan; gross margin jumped 480 basis points from the second quarter to 12.3%. Both the total revenue and the gross margin exceeded the top-end of the guidance range. The total number of orders fulfilled as well as the average order value grew year-on-year, with the average order value swelling to an industry-leading 88.4 yuan, representing a 5.2% increase from 84.0 yuan for the third quarter of 2020.

Besides a sharp increase in key indices, the Nasdaq-listed company’s loss determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP) from operations as percentage of revenue narrowed by 39% quarter-on-quarter, while non-GAAP adjusted net loss as percentage of revenue narrowed by 5.2% quarter-on-quarter.

For the fourth quarter, Missfresh said that the company expects net revenue to fall in the range of 2.232 billion yuan to 2.315 billion yuan, representing a year-on-year increase of approximately 35% to 40%, gross margin to improve by 10% to 15% on a quarter-on-quarter basis, and non-GAAP operating margin to improve by 8% to 10% on a quarter-on-quarter basis.

The investor frenzy around China’s retail grocery sector has arisen for multiple reasons, according to a report by professional services firm PwC. Consumer demand for groceries is relatively inelastic, which results in a high conversion rate among grocery shoppers. In China, e-commerce penetration for grocery products is lower than other merchandise categories, and the sector is highly fragmented, inviting competition for a larger share of the potential-bearing market. Data from iResearch showed that in 2020, e-commerce penetration for groceries in China increased to 9.1% from 5.8% in 2019.

The COVID-19 pandemic has propelled the rise of China’s “stay-at-home economy” as millions of people turn to online platforms to shop, work, study, socialize and entertain due to lockdown measures and public health concerns. The country’s grocery e-commerce market has gained momentum from changes in shoppers’ food purchasing and consumption habits. However, market analysis firm Daxue Consulting warned that the benefits brought by the coronavirus may not last long. “If the existing challenges are not solved, it is very likely that a part of the traffic will return to the offline,” a report by the firm read. Analysts from iResearch remarked that even though consumers are growing accustomed to shopping for groceries online, how to maintain user trust and how to ensure supply chain stability would be the top two issues on e-grocers’ agenda.

In April 2020, Missfresh’s founder and CEO Xu Zheng said in an internal letter to employees that the main problem China’s online grocery sector needs to combat has changed from the last-mile logistics to the first-mile supply chain. “Missfresh should utilize our team’s genes for the supply chain and our advantage,” Xu expressed. “Just like how we built the DWM model in the past, we now need to develop supply chains even more quickly, accurately and ruthlessly.”

According to data compiled by iResearch, China’s online grocery market is expected to nearly double to about 820 billion yuan by 2023 from 458.5 billion yuan last year. Credit Suisse forecasts that Chinese consumers’ virtual grocery spending will reach 4.2 trillion yuan in 2025, up from 0.9 trillion yuan in 2019.