China Consumer

Failing to deliver

Investors ponder their losses as grocery start-up’s strategy unravels

Miss-Fresh-w

A Missfresh store is shuttered

When the content creator IC Laboratory found out that Missfresh, a Chinese grocery delivery start-up, might be going out of business, he admitted to a tinge of sadness. “After all, when Shanghai was in lockdown, Missfresh’s delivery saved me multiple times: when I was almost out of eggs, and when I was running out of fresh vegetables in my fridge. But on the other hand, the outcome was almost pre-destined. Everyone knows that the grocery business is: ‘avoid if you can, otherwise you die a quick death,’” he said in a video.

The company, which attracted well-known backers like Tiger Global, Tencent and Goldman Sachs, to name just a few, announced in late July that it would temporarily shut down its on-demand “distributed mini warehouse” (DMW) service, a network of smaller-sized distribution centres located in close proximity to residential neighbourhoods so that groceries can be delivered rapidly (the claim was that orders would be fulfilled within 30 minutes).

At the moment the Missfresh shopping app is still active, but placing an order is almost impossible. Its employees have been told not to turn up to work, with many still owed salaries. Head office in Beijing is said to be deserted.

The dramatic reversal of fortune comes just over a year after its initial public offering on the Nasdaq, when Missfresh raised $273 million at a valuation of $2.8 billion. But its shares had plunged 98% since debut, trading at just $0.10 compared to $13 at its listing price.

Founded in 2014 by former Lenovo executive Xu Zheng, Missfresh got a boost during the pandemic, which forced people to stay at home and order their groceries online. But as the company expanded its coverage across the country, costs and losses also ballooned. In April, it announced that it was unable to publish its 2021 annual reports on time after discovering what it later described as “questionable transactions”. It also reckoned that net losses for the year could have more than doubled to as much as $558 million.

“In the beginning, with the help of venture capital, Missfresh quickly expanded its footprint and became the biggest grocery delivery company in the country. However, as its operation expanded, costs also climbed and became impossible to control,” explains Economic Observer. “The problem is that while the fruit and vegetables were brought to its warehouses by suppliers, Missfresh then had to go through manual sorting, packaging and distribution, which was all done by hand. These costs did not come down with economies of scale.”

Meanwhile, competition was heating up. Dingdong Maicai, backed by Softbank, and Meituan Maicai offered rival services. The struggle for market share meant Missfresh had to splurge on advertising. Worse, there was little room to raise prices. The mark-up for grocery stores is already notoriously low, says New Retail. Compared with higher-margin products like apparel and cosmetics, which boast healthier gross margins of 80% or more, grocery stores struggle to deliver much beyond 10-15% on their goods.

In the first three quarters of 2021 Missfresh saw revenue reach Rmb5.5 billion, but net losses climbed to Rmb3 billion, up from Rmb1.6 billion in 2020. Between 2018 and 2020, the company had already lost over Rmb6.8 billion.

Missfresh’s financial troubles were hardly breaking news. Suppliers like Yu Gonghong, who sells potatoes to the grocery delivery company, told the Economic Observer that he hadn’t been paid for some time. Missfresh still owed his company Rmb5.8 million, he said, and other suppliers were in a similar situation.

Employees, too, had expressed concerns over the company’s financial health. “For the past four or five years, all the staff knew that Missfresh was haemorrhaging cash. Basically, every sale it made meant more money was lost. There were a lot of worrying signs. When they couldn’t pay my salary at the beginning of this year, I quickly changed jobs,” a former staffer told ThePaper.cn.

There was speculation that Missfresh had tried to bring in new investors to keep itself going but the deals never materialised. There were also rumours that Bytedance had expressed an interest in buying what’s left of the e-commerce firm, although the social media giant quickly denied the reports.

The company’s demise is another cautionary tale for investors. “In reality, Missfresh and its customers were for years the beneficiaries of venture capital funds’ largesse. As with so many urban convenience services of the past two decades, from ride-hailing to bike-sharing, investor money subsidised [low] prices to gain market dominance. For Missfresh, groups including Tiger Global and Goldman Sachs financed its unending losses,” the Financial Times lamented.

“The era of large-scale cash-burning subsidies in the grocery e-commerce industry has become a thing of the past. Investors are bound to be more cautious,” another investor cautioned.

Missfresh is now contending with several class-action lawsuits in the United States, with allegations that it offered false figures in its IPO prospectus and that underwriters promoted its shares based on a “defective prospectus”.


© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.