Alibaba and Meituan Compete with Veggie-selling Startup Meicai
Meicai purchase from primary suppliers and farmers in straight, or what the company calls as F2B (Farmer to Business) model. Meicai claims farmers account for approximately 50% of their purchases and it sees the percentage keep increasing.
Meicai (美菜), a China startup that helps farmers sell vegetable to restaurants, face competition from China’s biggest lifestyle platform Meituan Dianping and E-commerce giant Alibaba, which bet on the future of business-to-business (B2B) service to restaurants industry. Founded in April 2016, Meicai allows restaurants to order raw materials, food ingredients, and disposable restaurant supplies from a large variety of vendors by simply clicking a button. The company is reportedly valued at USD 7 billion.
The foodservice distribution industry in China is a highly fragmented market. It is, in the U.S. as well, with 15,000+ distributors satisfying the needs of more than 500,000 restaurant and institutional customers, Credit Suisse reckons.
China catering market generated CNY 3.9 trillion revenue in 2017, with a CAGR of 9.6% from 2017 to 2022. Self-operated restaurant chains accounted for only 4.3% of the China catering service market in 2017. Franchise restaurant chains and standalone restaurants contributed more than 95% of revenues in the market in 2017. Millions of foodservice distributors are satisfying these small- and medium- restaurants scattering at different cities around China.
China Hospitality Association calculated that the top 100 self-operated restaurant chains generated 5.04% of the total transaction volume in 2017, which normally have historically stable relationships with its food suppliers. Assuming the rest of restaurants spend 30% of sales for food materials, we estimated the foodservice market that Meicai targets values at approximately CNY 1.1 trillion.
Meituan Dianping apparently noticed this potential market several years ago. The company launched Kuailv Jinhuo in March 2016 after Ele.me rolled out Youcai in July 2015. The two food delivery platforms Meituan and Ele.me, which offered only a traditional B2C online-to-offline (O2O) food delivery service, expanded into B2B successively.
Meituan and Ele.me had ambitions at that time, however, both failed to become the market leader. It is partly because Meituan and Ele.me were distracted by more fierce competition in their core business, and Meicai has a dominant position in the vertical with its prominent fast-mover advantage
Meituan appointed CHEN Xudong (陈旭东) as Senior Vice President of Meituan in charge of B2B Food Supply Chain Business in April 2018, signaling the company has returned to the battlefield again. Ele.me was acquired by Alibaba in April 2018 and Alibaba announced it planned to relaunch Ele.me’s Youcai in December of the same year.
It’s a new battlefield for the two tech giants, which both possess abundant merchants data and knowledge for consumer consumption preference. As the two are phasing out their heavy subsidies, they are weighing more on B2B supply chain management.
Apart from internet-background competitors, there are also several that needs to mention. Songxiaocai (宋小菜), a B2B platform that links food ingredient vendors with restaurants, differentiates itself from Meicai by focusing only on information offering and leaving alone serving as a middleman in the supply chain. Meicai’s the closest rival Farmlink (链农) announced it passed its BEP (breakeven point) in June 2017.
We are resistant to say that foodservice distribution is a winner-take-all marketplace after benchmarking the U.S. situation, where three top players Sysco, USFD, and PFG hold a total market share of 30%.
Optimization of the overall supply chain
LIU Chuanjun (刘传军) graduates from the Chinese Academy of Sciences with a bachelor degree in astronomy. LIU founded Meicai in 2014. Thanks to the popularization of smartphone and internet from 2013 to 2014, Meicai allows customers to order vegetables, meats, and seafood directly from farms, disrupting traditional wholesaling by cutting out middlemen. He calculated that, between restaurant and farm, seven layers of middlemen extracted up to 90 percent of the crops' value.
To localize its food supply, Meicai expands its distribution facilities throughout the country and launched regional operating offices in Beijing, Shanghai, Shenzhen, and so on. In August 2014, the company employed more than 9,000 people, 4,000 of whom are freelancer drivers. The firm has 15,000 employees now and expands to 100 cities. Meicai has processed more than CNY 10 billion in transactions as of the end of 2017. Meicai served 2 million enterprises as of April 2018.
JD-like model: all in logistics
After its Series D round financing which valued it at more than USD 2 billion, Meicai decided to build its own fleet of trucks and invested in cold-chain logistics. In 2017, the company roll out its cold chain trucks and announced its “cold beauty” plan to purchase 3,000-5,000 cold-chain trucks. The company had 5,000 trucks back in 2016. If the plan panned out, it means that most of the trucks are available for the transportation of frozen or perishable foods.
As context, the US Postal Service operates 211,264 vehicles and Sysco, largest foodservice distributor in the U.S., owns approximately 95% of these vehicles and leases the remainder.
Relying on its own logistic ability, Meicai is able to deliver reliable service for customers. Meicai slashes the average transaction price by 15% and saves 36% of budgets for enterprises, the company claims.
Meicai is choosing a similar way as JD.com when it comes to logistics. Thanks to its own logistics network, JD.com has successfully differentiated itself from Alibaba, its competitor in Chinese e-commerce sales. The standalone subsidiary JD Logistics increased its revenue by 91% year-over-year in the first quarter of 2019.
The attrition rate is a problem that all fresh-food sellers need to emphasize. By adopting an online subscription model, Meicai can purchase and deliver goods according to orders. Meicai needs to invest in equipment like refrigeration systems and tanks and also technology.
The company closed its Angel round of funding for CNY 10 million from Zhen Fund, a Chinese well-known venture capital founded by XU Xiaoping (徐小平) in 2014. Meicai later got investment from Blue Lake Capital in the same year. The firm soon became the industry leader, or at least, in raising fund. Meicai has raised more than CNY 1 billion (USD 150 million) until the end of 2015.
The company raised at least USD 600 million in a funding round led by Tiger Global Management and Hillhouse Capital, Bloomberg reports in Oct 2018.
Now, with millions more in available funding, Meicai is set to expand still further, especially its ability of salesforce, quality control system, and delivery methods.
Pivoting toward “platform + capacity”
The company frees farmers from the early-morning trek to their local market and gives chefs certainty about their supplies. Enterprises purchase fresh meats and veggies from Meicai, which sends out trucks and minivans every morning, most outsourced, operating a military model. Each truck delivers to at least 15 enterprises on the routine.
Meicai’s proprietary TMS (Transportation management system) determines each car’s optimized load weight arrangement and plans the delivery route. Meicai opened its platform to granted third parties and allow them to open stores, list, and pricing their products, in 2017. The company charges a commission fee out of the total transaction as compensation for its warehouse and delivery services.
As Meicai is pivoting into a “platform + capacity” model, its main revenues come from price-gap and commission fee from third parties.
This move highlights the company’s efforts in growing its SKUs and improving customer stickiness. There are 100,000 SKUs in China catering market so that means Meicai only has a 5% penetration rate with its current 5,000 SKUs.
A business with diseconomies of scale?
Songxiaocai’s CEO YU Lingbing (余玲兵) claimed that it is hard to define a target customer regarding a B2B platform like Meicai that supplies goods to restaurants directly by itself. Restaurants often utilize their historical procurement procedure. Average ticket of small ones is the lowest among all kinds of restaurants while mid-tier and higher-end restaurants have more hard-to-satisfy needs when purchasing specialty and center-of-plate product;
A Wide product expansion does not always mean a selling power, as well. The platform may find itself losing bargaining power in the single product;
Diseconomies of scale happens when the platform needs to pre-treat goods, a process that can hardly be automatic.
We believe that the three claims are reasonable considering Meicai is exposed to volatility in food cost, salesforce and fuel cost, however, Meicai can learn from its counterpart in the U.S. Sysco a lot. Sysco’s business model is showcasing its competitive advantage.
Sysco reports its financials according to three operating segments: U.S. Foodservice Operations- primarily includes U.S. Broadline operations, which distribute a full line of food products, including custom-cut meat, seafood, specialty produce, specialty imports and a wide variety of non-food products; International Foodservice; SYGMA- customized distribution subsidiary that focuses on distribution to certain chain restaurant customer locations, instead of independent or small chain restaurants that Broadline is responsible for.
Sysco operates a variety of business segments to distribute its products to customers- the two major segments are called Broadline and SYGMA. Of these segments, Broadline accounts for the majority of the company’s overall revenue in FY 2018. It is also much more profitable than others, with 7.7% operating margin in FY 2018. SYGMA's customers are mostly chain restaurants. High-volume chains have the buying power to negotiate for better prices, or bad margins for Sysco. Thus, Meicai’s utmost mission is attracting as much as small- and medium-size restaurants in China.
As for selling power, the threats of customer leakage keeps Meicai price-competitive - or a strong buying power that millions of restaurants that consider products for qualities beyond price from a diversified supplier list. That’s why we usually say subsidies won’t work long in a 2B world.
Sysco’s salesforce and geographic capability in its distribution area and resulting purchasing power make Broadline successful. It is a success that can be duplicated in China’s Meicai and we’ve seen evidence that Meicai is poised to leverage its market-leading assets to energize the sales line.
After procurement, warehouse and delivery standards being well-established in 2017, Meicai released City Partner project. Partners set distribution facilities and are in charge of delivery service for Meicai. They invest in the venture and get all the operating profits. Meicai, serve as a trainer to teach partners using Meicai’s system, support them in the aspect of marketing and financing.
Meicai’s distribution centers, or we could refer to as operating companies, lies in the core of the company’s competitiveness. Meicai is trying to establish a consolidated product procurement program designed to develop, obtain and ensure consistent quality food products. Meicai purchase from primary suppliers and farmers in straight, or what the company calls as F2B (Farmer to Business) model. Meicai claims farmers account for approximately 50% of their purchases and the company sees the percentage keep increasing.
Meicai needs to guarantee products purchased by Meicai follows specifications that have been developed by Meicai quality assurance team, which certifies the manufacturing and processing plants where these products are packaged, enforces its quality control standards and identifies supply sources that satisfy its requirements. After that, the company can attain a strong purchasing power as a result.