Grocery App Dingdong Maicai: Sky-high GMV, High Costs amid Increasing Industry Competition

• Dingdong Maicai has maintained a high growth over recent years, achieving the largest GMV and user base in the sector.

• High fulfillment and marketing costs, increasing competition between top players and a somewhat fragile business model are the main challenges facing the company.

• Impacted perhaps by Missfresh 's bad performance on the IPO day, Dingdong reduced its ADS offering amount, with some investors turning bearish on the newly listed shares.

• We deem the stock undervalued.
  

On June 29, 2021, Dingdong listed its shares on the New York Stock Exchange with the ticker of 'DDL.' Just one day before the IPO, Dingdong submitted a new prospectus, reducing the size of the offering by 73.5% (from 14 million to 3.7 million ADSs), which was far lower than the funding it raised in Series D and D+ in H1 2021 (USD 87 million vs. USD 1.03 billion). On the first day of listing, the stock rose by more than 19% to break through USD 40, but the momentum disappeared rapidly. As of July 7, the share price had fallen below the level of USD 27, showing a lack of investors' confidence.

Launched in 2014 as an app, Dingdong was transformed into a food logistics company that provides fresh on-demand e-commerce services, building an efficient supply chain. When a user places an order, the goods are distributed by frontline fulfillment stations (warehouses) near the user and delivered within 29 minutes, as the company claims.

To date, the company has accumulated a huge user base – 30 million accounts nationwide. According to its latest prospectus, as of March 31, 2021, Dingdong had set up 950 frontline fulfillment stations in 29 cities in China and developed over 12,500 Stock Keeping Units (SKUs).

The CEO, Changlin Liang, is a serial entrepreneur. In 2003, he founded parenting discussion platform iYaya.com, which achieved an annual net profit of over CNY 26.5 million, attracting over 70 million mobile users by 2016.

Since 2017, Dingdong Maicai has raised over USD 1.75 billion and has been supported by several famous institutional investors, such as SoftBank and Tiger Global Management. Before the IPO, the CEO and other board members held 58.9% of the firm's shares. Now, Tiger has become the largest institutional investor, holding 5.7%, while SoftBank has 5.6% of the grocery platform's shares.

Financials: an outlook typical for a growth-stage company

Dingdong maintained a growing momentum over recent years. According to its prospectus, Dingdong achieved revenue of CNY 11.34 billion in 2020, surging 192% year-over-year. Its gross merchandise value (GMV) increased from CNY 740 million in 2018 to CNY 13.03 billion in 2020, with a CAGR of 319%, indicating a grandiose expansion.

Meanwhile, Dingdong has been suffering from substantial losses. In 2019, the net loss of Dingdong was CNY 1.87 billion and continued to increase in 2020, hitting CNY 3.18 billion. The net profit margin improved over the same period from -48.3% to -28.0%. In the first quarter of 2021, the company reported a net loss of CNY 1.38 billion or more than five times of that reported in the March quarter of the previous year. The company's expansion in the community group buying field pushed the margin back to -36.4% in that quarter. 

The company's high expenses are an apparent bottleneck. According to its prospectus, the cost of goods sold (COGS) and fulfillment cost are two categories showing the highest figures. The latter, for one, reached CNY 4.04 billion in 2020, up 109% year-on-year: while Dingdong is expanding its business, its operating cost is also rising rapidly. Nevertheless, the fulfillment-expense-over-revenue ratio decreased from 50% in 2019 to 36% in 2020, showing a slight improvement.

Money-burning business, intensifying competition

On-demand e-commerce businesses in China usually rely upon two primary modes of fresh products distribution: the so-called 'community group buying' and instant delivery. The former type allows to cut logistics costs but is mainly focusing on the frozen products due to the time lag between the wholesale and individual purchases.

By contrast, delivery through frontline fulfillment stations is well suited for working with fresh products. Along with the consumption upgrade, delivery through frontline fulfillment stations attracts more and more users. According to Chao Sun, a Strategic Investment VP at Red Star Macalline, the penetration rate of online fresh food in the Chinese market was less than 10% in 2020, indicating a great potential in the sector. 

Dingdong is implementing a frontline fulfillment, station-based model. Providing cultivation standards for upstream agriculture, this mode is a prerequisite of building an ecosystem foundation of the supply chain. Such a system allows farmers to optimize their production, meeting the market demand.

Dingdong's competitive edges are valuable for maintaining a steady position in the market. Also, the processing centers and frontline fulfillment stations now have expanded offerings from fresh produce to other daily necessities, including ready-to-eat, ready-to-heat and ready-to-cook (3R products), plants and home/personal care products. The company's product scope is likely to further expand in the following years.

But the new lucrative sector attracts other players. Since 2011, the number of newly registered fresh e-commerce companies has been climbing at a 20% CAGR, reaching 4,103 in 2020.

At the same time, the competition among the top players is becoming sharper. One of Dingdong's main competitors is Missfresh, a company following a similar business model. Dingdong's larger SKU figure (12,500 vs. 4,300) and broader clout in China (29 vs. 16 cities covered) puts the company at an advantage over its nemesis. Dingdong's strategic moves have also proven to be more to the point. For instance, it almost immediately started focusing on China's third- to fifth-tier cities in early 2020, as the epidemic began. Owing to this and other strategic decisions, in the first quarter of 2021, Dingdong's revenue increased by 46%, while Missfresh 's decreased by 9% year on year.

While there are a few other rivals in the field, competition is not the largest of Dingdong's concerns. Its complex supply chain requires well-coordinated but flexible operation mechanisms to facilitate rapid expansion. Small errors in these mechanisms can lead to considerable losses to the company.

Valuation

Though the stock, along with those of many other Chinese tech companies, has been recently dumped by some investors, we remain optimistic about the company's potential.  The average EV/revenue ratio of its five industry peers – MF, PDD, KR, GO, and MPNG.F – is 5.23x, indicating a 12-month target price of USD 38.11. Enhancing profitability and reducing fulfillment fee rates will be key in achieving further progress.