Yiguo’s B2B Transition Along with Alibaba’s New Retail Revolution
On the back of the secular growth and intensifying competition in the fresh produce market, Yiguo’s business model consists of three pillars: (1) Win-Chain Supply Chain; (2) ExFresh; (3) Diversified sales channels.
Yiguo E-commerce Co. (易果生鲜) was founded by YE Zhang (张晔) and JIN Guanglei (金光磊) in 2005 in Shanghai, China. It is one of the first Chinese companies that sells groceries online; categories include fruits, meat, eggs, vegetables, alcohol and ready-to-eat meals. It is currently the largest E-commerce fresh produce marketplace in China, with the number of orders exceeding 50,000 per day and estimated FY17 GMV hitting CNY 10 billion.
The company experienced a slow expansion from 2005 to 2012, but the growth accelerated after the tech giant Alibaba invested in Yiguo and provided it with Tmall’s E-commerce platform. Yiguo has raised approximately USD 1 billion in funding so far, including four injections from Alibaba and other investments from Goldman Sachs, KKR and Suning. The funding allowed Yiguo to develop its in-house logistics system and to acquire/partner with overseas suppliers.
Secular growth amid a shift in consumer behavior
Across the world, grocery shopping has been falling behind other products in going digital. The primary factor is that consumers prefer a visual experience when shopping for groceries and they want to see and touch certain foods before making purchase decisions. Online grocers need to convince consumers that they have the ability to pick better vegetables and meat as well as build life-long trusts with consumers.
Yet, the online grocery industry found the consumer pain points - too much stress in going to physical groceries, demand cannot be fulfilled immediately when they need it, etc. According to Analysis Yiguan, China’s fresh produce market was CNY 1,914 billion or USD 285 billion and the online penetration reached 11% in 2018. The overall fresh food market is expected to grow at 6%, and the online market is expected to grow at 47% in the next two years. The large addressable market and potentially high customer lifetime value push Alibaba, JD and Tencent to relentlessly compete for market shares. We see smaller online grocers to be further squeezed and consolidated by larger competitors, and Alibaba, JD and Tencent to dominate the market via integrating offline and online channels.
Online B2C grocers are still facing high costs per order
While offline grocers are relatively easy to reach break-even, online grocery businesses have not proven a path to profitability, as delivering perishable goods to scattered locations requires 1) upfront CAPEX investments in refrigerated warehouses and cooled vehicles 2) high OPEX per order. Unlike offline grocers, online grocers are also impossible to sell fresh produce at discount, thus suffering from high attrition rates. There were approximately 15 small and medium-size online fresh food enterprises either closed or being acquired in 2016 and 2017. Scale can alleviate some semi-variable costs incurred during transportation. For example, Yiguo is able to keep its gross margin around 30%, thanks to a large amount of orders from Tmall.
Solution likely points to the New Retail revolution
New Retail seems to be a suitable way to solve the dilemma. New Retail introduced by Jack Ma is meant to offer consumers both digital and physical experience, blurring the lines of E-commerce and brick-and-mortar stores. Alibaba is already implementing this strategy: FreshHema, 100% owned by Alibaba, complements the lack of offline presence in Yiguo. Other two investments made by Alibaba, SanJiang Supermarket and RT-MART, are strong in offline fresh produce distribution and are close to end-consumers. Yiguo, FreshHema, Sanjiang Supermarket and RT-MART can combine their strengths and together, deliver a great shopping experience for consumers. For instance, after a consumer places an order online, whichever physical store is closer to him/her will deliver the fresh produce to consumers’ homes in an efficient manner. Yiguo will stand behind the scene to support those businesses with logistics and food supply; moreover, Yiguo can leverage its 2C businesses and deliver goods from its fulfillment centers if none of the FreshHema, SanJiang Supermarket and RT-MART store are available in consumers locations. We noted that a similar strategy is also adopted by the competitor JD. As a matter of fact, 4 out of 5 supermarket chains in China are acquired by or partnered with E-commerce giants - Walmart China (partnered with JD), YH Supermarket (10% owned by JD), Lianhua (18% by Alibaba) and RT-MART (acquired by Alibaba).
Yiguo's B2C segment
Yiguo utilizes both direct-to-consumer channels (Tmall flagship stores, the official site and mobile app) as well as third-party distribution (Tmall Supermarket, the Kitchen app and Haier). Among these channels, Alibaba’s Tmall remains the biggest revenue stream for Yiguo, contributing over 50% of total orders. Comparatively, Yiguo’s mobile app significantly lags its peers, showing only 62k of MAU vs. Dmall’s MAU of 7 million and Miss Fresh’s MAU of 3 million.
Upon checkout, there are options for same-day delivery, next-day delivery, scheduled delivery and instant delivery based on purchasers’ locations. The majority of delivery falls under next-day delivery. There is no delivery fee for orders above CNY 100 or a delivery fee of CNY 10 for orders under 100.
As the online grocery wars intensify, cutthroat competitive landscape may inhibit growth in traditional B2C fresh E-commerce like Yiguo, which lacks physical presence and ultrafast delivery service. New players, Miss Fresh, FreshHema and Dmall, have been constantly upgrading their services and employing different strategies based on their strengths - Miss Fresh is leaning on its front-end warehouses to realize ultrafast delivery; Dmall works with supermarkets to offer competitive pricing. Below, we compare those top performers’ business models.
Miss Fresh: Miss Fresh was launched in 2014. Thanks to its lead investor, Tencent, Miss Fresh was able to quickly expand its reach to more users and become the most popular fresh food app in China. Miss Fresh features guaranteed 1-hour delivery to members and 2-hour delivery to non-members. It narrows the SKU down to the most demanding 2,000 products and built over 1,000 front-end warehouses in 22 cities to tackle the issue of “last-mile delivery”. (Front-end warehouse is a small transition point with the storage function located close to communities and neighborhoods; each front-end warehouse can cover regions within a 2-mile radius.)
Dmall: Dmall is another investment made by Tencent. In 2015, Dmall was founded as an Instacart-like business that partners with ~50 nationwide supermarkets and sources all goods from local supermarket stores. Dmall earns delivery fees and service fees and receives revenue shares from retail partners. The upstream supermarkets can cooperate with Dmall and benefits from its more than 300 internally developed retail IT systems. Downstream end consumers can pay the same price while enjoying the 2-hour delivery service. Dmall’s members have exceeded 50 million (vs. Yiguo has 20 million members) and the mobile MAU exceeded 10 million, the highest mobile MAU among its peers, according to Quest Mobile. The 2018 GMV was estimated to be CNY 18 billion according to the company.
FruitDay: Along with Alibaba and Tencent, another E-commerce giant, JD.com has also participated in the fresh produce competition by investing in FruitDay. FruitDay is specialized in delivering fresh fruits produced globally. Claiming fruit distribution is a race against time, FruitDay utilizes JD’s in-house logistics and offers 29-minute instant delivery in Shanghai and the service accounted for 43% of the total orders, according to the company.
FreshHema: Launched in 2015, FreshHema is the most representative case of New Retail model established by Alibaba. Hema utilizes its retail spaces to function as a combination of storefronts, in-store dining and warehouse for online orders. Similar to Amazon Go, consumers shop in Hema physical stores with the app and can see the goods details including their origins and reviews - just like online. After they complete shopping, food will be delivered to their homes in 30 minutes if the customer lives within 3 kilometers from a Hema store. Unlike the traditional E-commerce fresh produce platform, it allows consumers to see and taste the food at the spot. According to Business Insider, Hema has expanded to 46 stores in 13 cities in China, with plans to open 2,000 more branches in the next five years.
Yiguo’s transition to B2B
Yiguo has been shifting its focus from B2C to B2B model, likely driven by two factors 1) the costs of cold chain logistics (>20% logistics fulfillment costs) and the difficulty to transfer high costs to consumers led to the net losses in the previous years. 2) at the “industry outlook” sector we illustrate how Yiguo’s transition is in line with Alibaba’s transition to New Retail. Today, Yiguo’s business model consists of three pillars: Win-Chain Supply Chain, ExFresh Cold-chain Logistics and New Retail.
1) Win-Chain Supply Chain
The competency of Win-Chain Supply Chain is its broad supplier networks driven by acquisitions and partnerships made over the previous years. In 2016, Yiguo made three material strategic moves 1) acquired 51% stake in SunMoon, a Singaporean fruit and vegetable company, for USD 24 million to get access to more than 150 international suppliers; 2) partnered with Yimutian (一亩田) that owns more than 12,000 agricultural products; 3) partnered with Youpeiliangpin (优配良品) to further expand its domestic vegetable and meat supplier networks. Win-Chain sources over 4,000 SKU from 147 locations across Americas, Asia, Africa, Europe and Oceania. While sized grocers may have accumulated enough supplier networks, smaller grocery businesses do not have the budget or access to different international suppliers, which creates opportunities for Yiguo.
2) ExFresh Cold-chain Logistics
ExFresh started as Yiguo’s internal logistics arm and now becomes a third-party logistic provider for restaurants, supermarkets, farmer’s market and E-commerce companies. Yiguo invested more than half of the funding to build ExFresh - similar to JD, Yiguo’s heavy investments in logistics raised doubts, but it eventually becomes Yiguo’s largest differentiator. ExFresh covers 310 cities (nearly half of cities in China) and offers four types of transportation services, unconditioned, cold, fresh and frozen modes, with a daily processing capacity of over 2 million orders and an average attrition rate of 3-4%.
In 2015, the cold chain circulation rates in developed countries exceeded 90%, but the circulation rates in China for meat, vegetables and fruits, and water products in 2015 were 34%, 22% and 41% respectively, indicating that most fresh produce is still circulated in normal temperature during processing and transporting and is easy to result in quality deterioration. With the higher awareness on food quality in China, we expect for the demand on cold chain logistics to improve.
Currently, ExFresh mainly serves merchants operated in Tmall and Suning, such as FreshHema, Ele.me, Lianhua Supermarket and Good Neighbors. The company is working on obtaining non-Tmall businesses. We see the main risks come from competition with the traditional logistics companies such as SF Express and JD Logistics. SF Express, for instance, have broader geographic coverage and grew their cold-chain logistics revenue by over 50% last year.
3) New Retail
The New Retail segment intends to offer supply chains and logistics services to convenience stores so that they can start selling fresh produce just like farmer’s markets. However, this segment is still small at this point and comes with many execution uncertainties. For example, in order to have enough room for fresh produce, existing stores need to replace some of the shelf space and “break agreements” with existing suppliers.
Final thoughts on the new business model
According to Yiguo’s Operation Director CHEN Junqi, Yiguo’s B2B customer can save costs by around 20% after connecting to Yiguo’s back-end IT systems and using Yiguo’s supplier, storage, quality inspection, processing, packaging, distribution and home delivery service. Additionally, they can also free themselves to focus more on the core businesses of acquiring customers. We believe the combination of B2B and B2C models can diversify the business risks and going forward, Yiguo should leverage its upstream and downstream networks, unparalleled infrastructure and mature technology in cold-chain and logistics IT systems to address more B2B customers. Risk come from Yiguo’s New Retail business and ongoing competition with more established cold-chain logistics providers.