Miss Fresh and the Fresh Product Industry Chain
Fresh product e-commerce industry witnessed startup booming and the golden time of O2O, experienced the plateau, and endured the capital winter. Long-lived company Miss Fresh is the survivor and leader of the industry now.
Miss Fresh (每日优鲜) is a company founded in 2014 and isolated the brand Mr. Fresh (每日优鲜便利购) in 2017. Miss Fresh focuses on providing fresh products through to-door delivery and the line of Mr. Fresh offers in-office shelf services, which sells food, snacks, and drinks on shelves but is different from the vending machine. Currently, Miss Fresh has covered 20 cities in China and has set over 1,000 front-end warehouses and it plans to build over 10,000 front-end warehouses to support the expanssion to 100+ cities.
Background of the Emerging Market
Approaching to the third decade of the 21st century, the demographic distribution in China has changed, and the main force of consumption has been shifting from previous Post-60s and Post-70s to Post-80s and Post-90s. Besides, the millennium babies have begun to take over the lead in consumption. Post-80s and Post-90s compose 23.62% (328.32 million according to 2010’s census data) of the total population 1.39 billion (2017’s census data), but these two groups are the main participants in e-commerce economy. Miss Fresh was founded in 2014 in which e-commerce giant Alibaba went public in New York Stock Exchange and made the IPO record.
The development of e-commerce has urged and pushed the construction of China’s logistics network that enables all other industries relied on logistics to grow. For fresh product e-commerce, logistics is a critical ring and the growth of the fresh product e-commerce should thank e-commerce for making the business easier as it pushed the construction of logistics network.
Economy Growth and Change in Consumption Behavior
Except for the logistics, the growth of e-commerce in China impacts the population’s consumption behavior intensively, especially for Post-80s and following generations. Post-80s and the after-gen (born later than the 1980s) were born in the age that China’s economy started to boom. According to World Bank’s data, in 2000, China’s GDP (Growth Domestic Production) was only USD 1,211.35 billion and USD 959.4 per capita calculated in current value, while the U.S’ GDP was USD 10,284.78 billion and USD 36,449.9 per capita; in 2017 China’s GDP was USD 12,237.7 billion and USD 8,827.0 per capita, while the U.S.’ GDP was USD 19,390.60 billion and USD 59,531.7 per capita. In the first 17 years, China’s GDP increased tenfold and citizen purchasing power also increased nearly 10 times.
Comparing to Post-60s and Post-70s, Post-80s and the after-gen’s consumption behaviors present a drastic change. Since they were born in a good age, the younger generation is less sensitive to price and willing to pay for better quality, while the Post-60s tends to cling on price, though they have the best affordability in consumption, and Post-70s are in the middle of the two generations. The pursuit for goods quality extends the market including the fresh product industry, and Miss Fresh is one of those startups founded under the trend.
Industry Chain and Miss Fresh’s Supply Chain
In traditional fresh product industry, the industry chain is divided into three major chains: the upper, the middle, and the lower chains. The upper chain includes all participants and resources in fresh food production, including water product, meat, vegetables, etc.; the middle chain is fresh product sellers and involvers are wholesalers, supermarkets, farmers market, e-commerce sellers like Miss Fresh, etc.; the lower chain involvers partly overlap with the middle chain’s participants like wholesale, but other involvers are restaurants, families, processed food factories, etc.
Other assistive but important roles also join the industry chain to complete the circulation, like logistics is responsible for the product’s circulation in the industry just like veins in plants. In China, agriculture is still in the standardizing progress since most are family-run and lacks unified and systematic management, which leads to the scattered supply origins and increases the costs in the upper chain. By far, China does not have a Sysco-alike company role in the middle chain to distribute fresh product effectively, and sometimes the middle chain may contain excessive players that add up the final price of fresh products to the lower chain. Beyond, the fresh product industry has higher requirements for logistics because of the rotting issue and quality control.
The cold chain logistics situation in China is hindering the development of the fresh product industry. The cold chain circulation rates in China for meat, vegetables and fruits, and water products in 2015 were 34%, 22%, and 41% respectively, while developed countries’ average was above 90%. Beyond, the rotting rates of meat, vegetables and fruits, and water products were 8%, 15%, and 10% respectively in 2015 when developed countries controlled the rotting rate at around 5%. The low circulation rate restricts the sale map of the fresh product and limits the market size of the industry; the high rotting rate generates more costs and harms the benefits of participants in the following chains.
Miss Fresh’s Supply Chain
Miss Fresh’s supply chain is simpler and more effective than China’s traditional fresh product industry. Miss Fresh is the only connector between origin and dining table because it eliminates all redundant parts existing in the traditional way. Miss Fresh’s selected SKU has only approximately 3,000 kinds and the fine selection allows Miss Fresh to have a better position in the bargain – fewer varieties but more in quantity. The fewer varieties could satisfy customers’ need and with a larger quantity, it could lower the costs – the same reason why wholesale’s unit price is cheaper than fine grocery’s.
The fewer varieties result in better quality control and costs control in the transition process. Different kinds of fresh products have varied requirements for the storage environment and transition conditions. For instance, apple’ quality is sensitive at cold temperatures, heat, and collision, while durian must be frozen in transition, so these two kinds of fruits are not likely to be transited by the same van. Products with different storage and transition requirements will require different refrigerated vans for each kind. The fewer varieties with more quantity can guarantee the full use of a refrigerated van and optimize the cost-efficiency per van per transition. Besides the transition process, the front-end warehouse is one of the core competencies of Miss Fresh.
Front-end warehouse is the second last destination of fresh products before it is delivered to the customer. As mentioned at the beginning, Miss Fresh covered 20 cities by 2018 and built over 1,000 front-end warehouses to support the last 2-hour delivery range. Front-end warehouse is a small transition point with the storage function located close to communities and neighborhoods. The traditional fresh product providers suffer from loss generated in the transition from the regional transition center to the final destination since they do not have front-end warehouses and refrigerated vans are not frequently used due to the budget consideration. Comparing to the traditional mode, Miss Fresh can keep the rotting rate at around 5% resulting from the simplified purchase process – from origin to door. Plus, the front-end warehouse eliminates the time that fresh products spend in transition and avoids further damage. Each front-end warehouse can radiate regions constrained in the radius of 3 km (2 miles). Within the range, Miss Fresh is able to keep the delivery time less than two hours.
Selected SKUs and front-end warehouses increase the efficiency and lower the cost for Miss Fresh. The content generated by Miss Fresh in its app could stimulus the purchasing need and invoke the long-tail effect. Miss Fresh promotes fresh products and pushes the updates to its customers. The effect of marketing or advertising resulted in more consumptions and increased the revenues accordingly. In 2017, Miss Fresh’s revenue generated in August was approximately CNY 280 million (USD 41.4 million) and it claimed that the company reached the break-even point at the average level in Tier-1 cities. The total revenue recognized in 2017 was over CNY 3 billion (USD 443.1 million) and in 2018 was over CNY 10 billion (USD 1.5 billion), which is threefold the number in the previous year. While most players in the industry are not even at their break-even point, Miss Fresh is the leading player in the market.
The Fresh Product Industry and the Competition
The fresh product consumption in China is more frequent than the world’s average – every family shops 3 times in a week while the world average is 2.5. The online product consumption penetration rate was around 1% in 2017 in China. The transaction volume of fresh products increased from 2011 to 2017 at a CAGR of 6.3% and that of online fresh products increased from 2013 to 2017 at a CAGR of 107.9%. Hence the room of online fresh product consumption is huge.
Competitors in the fresh product industry came in bundles and diminished in groups but Miss Fresh is one of the few that stayed in the market. If categorizing the fresh product providers according to the scenarios, there are To-Home, To-Store, and To-Home&Store fresh product providers. 73% of fresh products was distributed through the farmers market, 22% was distributed by supermarkets, 3% was distributed by e-commerce bodies, and the remaining 2% was distributed by other channels. Miss Fresh is under To-Home category since it provides to-door delivery and doesn’t have physical grocery stores. To-Store, which is also the largest distribution channel, is the traditional fresh product providers like supermarkets and groceries and the newly-emerged community grocery stores. The To-Home&Store providers like Fresh Hippo (盒马生鲜), 7Fresh, Super Species (超级物种), and others provide both to-door delivery and in-store shopping.
Fresh Hippo and Yiguo
However, the To-Home&Store style, also considered as a category under new retail, has a preference in siting selection, which drives up the costs and limits the range that it can radiate. To-Home fresh product providers have little financial pressure from store rent and maintenance. The siting restricts To-Home&Store’s expansion, but each site has higher average sales per unit area (ASPUA) per month adding the online sales than traditional To-Store fresh product providers. Fresh Hippo’s ASPUA is claimed to be CNY 50,000 (USD 7,386) while the traditional peers’ number is averagely around CNY 10,000 (USD 1,477).
According to TrustData, Miss Fresh took approximately 50% of the online fresh product market consumers, while Fresh Hippo took approximately 26%. Fresh Hippo might be considered the biggest competitor for Miss Fresh, though their business models differ from each other. Fresh Hippo’s parent company Alibaba invested an online fresh product provider named Yiguo (易果生鲜), which was founded in 2005. Yiguo was originally a To-Home fresh product provider, but it started to transform itself to provide 2B (to-business) and expand the cold chain supply chain logistics network ExFresh (安鲜达) in 2013. From an outsider’s perspective, it seems that Yiguo’s To-Home business was handed to Fresh Hippo.
Besides Fresh Hippo, community grocery chains are strong competitors for Miss Fresh. Fresh Legend (生鲜传奇), Qian Dama (钱大妈), and other community grocery chains are growing at a surprising speed. Community groceries solved the last one-mile problem for fresh product consumers and most of them locate the community or neighborhood. Community grocery chains have similar supply chain like To-Home fresh product providers, but the difference lies in the last one mile. Fresh Legend raised CNY 300 million (USD 44.3 million) in 2018 and Miss Fresh received USD 450 million. The frequency of investment activity in fresh product industry drops since 2015 and the total financing amount declined to less than 1/3 of the amount in 2017. Startups that received investments in a capital winter presents exceptional attraction to investors that indirectly acknowledged the progress they had made.
The Weakness of the Business
To-home fresh product business can be regarded as a unilateral business because the size of consumers is not dependent on the improvements made by the product providers. The more or better products provided have no direct influence on the increase of customer base. Moreover, the switching barrier within the industry is low and the costs that customer switches to different fresh product providers, whether the same type or different, is near to zero. Based on this judgment, even under a different category, Miss Fresh is substitutable by Fresh Legend or other community grocery chains.
The logistics and switching barrier are two most critical limitations for the growth of the fresh product industry. For Miss Fresh, its business model is outstanding, and this will attract followers and introduce intensive competitions. People chase after good things and so do investors and business founders. How to elevate the switching barrier to increase customer loyalty and deepen and broaden the moat is the question left for the industry and each player in the market.