Consumer Staples Author：Yue Liu Editor：Luke Sheehan Jul 08, 2020 05:40 PM (GMT+8)

Striving to ‘never selling overnight meat,’ is Qdama worth CNY 10 billion valuations?

An employee is checking vegetables in the morning. Image credit: Qdama's offcial website

► Stationed in communities, Qdama applies streamlined SKUs to improve efficiency.
► A zero inventory model and direct purchasing from production profits drive up the margin to 20%-25%, higher than traditional supermarkets.
► Short-term expansion boosts the brand – but may sacrifice the future's probability.
► Offsite expansion can be challenging, thanks to different regional preferences and competition.
► Attempts at the online model bring new opportunities – but raises high competition as well.

The fresh food industry, a highly competitive market, never gives players a chance to slack off. This was especially true in 2019. Failing to gain capital investors' recognition, the market saw enterprises terminate operations of many stores in 2019 and lay off employees such as Dailuobo (呆萝卜) and Jijixian (吉及鲜). Some platforms shut down businesses, including Miaoshenghuo (妙生活) and Wochushengxian (我厨生鲜).

Founded in 2013, Qdama managed to close Series D financing of CNY 1 billion in December 2019 under the downturn in the VC market. After five rounds of funding, the company enjoyed a valuation of around CNY 10 billion. How has Qdama continuously caught investors' eyes? 

Business overview

Headquartered in Guangdong, Qdama operates close to its consumers, avoiding the fierce competition from grocers and supermarkets. Through the rapid expansion of the franchise, there are nearly 1,000 stores in Guangdong province, with the shortest distance of 250 meters between stores. Different from supermarkets, Qdama involves four significant categories, including pork, vegetables, fish and fruits.

Most products are from production places to reduce waste caused by the intermediate process. Through the self-operated distribution centers, the franchisees can receive the goods on time. Moreover, to accelerate commodity turnover, the rising star clears daily inventory with discounts, coinciding with its slogan ''We never sell overnight meat.''

Success may not last

'Costco for pork:' selected SKUs drive margins. Unlike traditional supermarkets where there might be more than 1,000 products, Qdama controls SKUs at around 380. Concentrated on a smaller commodity range provides a simple, efficient, and reproducible strategy, one that helped Qdama open more than 600 stores in 2018, almost the sum of the previous five years. Among all products, pork accounts for 40% of sales, a figure mirroring the Cantonese appetite for pork.

The 'Zero inventory model' and direct purchasing from production profit drive up the profit margin. The fresh food industry is often a money-burning game due to the high waste, the significant investment in the cold chain and unstable quality standards affecting transportation and storage. These issues make it hard to turn a profit.

Qdama claimed that its gross profit margin reached 20% to 25%, while Yonghui Superstores (601933:SH), regarded as a giant in the fresh food industry, only achieved 15%. In terms of waste rates, the 'meat seller' controlled it at 5% to 10%, which is better than the 20% to 30% of traditional supermarkets – although it is lower than the 4% of Yonghui Superstores and 10% of Fresh Hema.

"The essential for retail enterprises is inventory; in other words, profits depend on managing inventory," Yang Kang, Qdama's Supply Chain Director, said. Thus, products that cannot be sold that day will be promoted through discounts, staring at 7:00 pm. But the consumers during this period are mainly older people, who are not the target customers. It is the white collars that make stores profitable as they consume at the times when prices are higher than in supermarkets.

However, Qdama needs to explore how to increase the stickiness of these users so that they can buy lower-priced products in the surrounding vegetable market.

The franchise model accelerated expansion but may sacrifice future profitability. At the very beginning of attacking a new area, several chain stores open in the place it plans to enter. After being profitable in its new stores, Qdama will attract massive franchises to grab market share to raise its bargaining power further quickly. Up to now, among its 1652 stores, 1500 are concentrated in Guangdong province, and only 152 are outside, including Shanghai, Wuhan, Changsha, Chengdu and Chongqing.

Qdama looks for at least 1500 residents in a store's community as a single store is expected to attract 500 households. Subsequently, the firm holds that if the daily passenger flow can be stabilized at 350, the store can be profitable.

Qdama charges franchisees a premium, ranging from 6% and 8%, with stores passing over the costs to consumers. A fixed franchise fee and brand usage fee also contribute to the firm's revenue, as well as a 1% profit from franchisers. But franchisees must bear their profits and losses. After deducting depreciation, rent, utilities and labor costs, the franchisees often have trouble in maintaining a positive net profit.

If all the franchisees fail in making a profit, eventually leaving the market, how can Qdama continue to operate? 

Offsite expansion is tough thanks to different regional preferences and competition. With the gradual saturation of the Guangdong market, Qdama gradually expanded to Shanghai and Wuhan in 2019. However, expansion is not smooth. Guangdong customers have high expectations around fresh meat, due to their dietary preference for Cantonese Soup, and thus will pay higher premiums for high-quality meat. On the contrary, consumers in Northern cities are less willing to pay for the 'fresh' element. To rebuild the supply chain costs money and time, which also poses significant challenges for Qdama.

Moreover, headquarters have already been laid out in North China, East China and Central China. For example, in terms of offline stores, Qdama has to compete with Fresh Hema, backed by Tencent (00700:HKEX), in East China and Central China. Headquartered in Shanghai, Hema mini-stores recorded daily sales of CNY 200,000, and sales increased by 185.7% year-on-year in 2019, ranking first among supermarkets, while Qdama's sales in Guangdong saw only CNY 15,000 per day. Coupled with the high cost of the reconstruction of the offsite supply chain and distribution center, after entering the new area, Qdama's offsite expansion takes time.

Attempts at the online model bring new opportunities but lead to high competition as well. In October 2019, online sales broke CNY 10 million. After the epidemic, online business exploded, amounting to CNY 15 million by April 2020. Moreover, the pre-order mode better matches orders from customers and purchases from suppliers, resulting in a lower cost than clearing inventory by discounts in offline stores. 

However, Miss Fresh, Fresh Hema and Dingdong Maicai have been cultivating their supply chain for around five years, putting pressure on the newcomer to grab online market share.

Taken all together, the emergence of Qdama has opened up a new model of fresh community food, but how long this success lasts depends on whether the company can catch up swiftly with the changing market.