Cash-burning model ends as fresh food e-commerce enters a "consolidation cycle"

Compared with the investment boom of 2015, the fresh food e-commerce industry began to recede rapidly in 2016. Since April this year, Meishi77, Qingnian Caijun and others have successively gone bankrupt and liquidated, while industry giants such as Tiandiguoyuan, Benlai Life, Tuotuo Farm, and Aixianfeng have also begun to significantly adjust their business models one after another, and the entire industry has entered a winter.

Industry analysis believes that the past enthusiasm of capital brought an irrational situation to the fresh food e-commerce industry. The model of relying on low-price subsidies to gain market and users has already shown problems, and a business model that cannot achieve self-profitability will inevitably head toward closure. In the future, the fresh food e-commerce industry will accelerate the seizure of high-quality production area resources upstream in fresh food and promote the local conversion of agricultural products into agricultural commodities, thereby achieving differentiated competition.

Winter chill: fresh food e-commerce tightens across the board

In April 2016, well-known Shanghai e-commerce company Meishi77 entered bankruptcy liquidation procedures due to a broken capital chain. This was also the first bankruptcy case in the fresh food e-commerce industry this year, marking the entire industry's entry into winter. A Beijing News reporter found that, at the same time as Meishi77's bankruptcy, the entire industry entered a period of intensive adjustment within just a few months.

In March 2016, SF Best CEO Lian Zhijun, who had been in the position for less than a year, announced his resignation and joined Haier. This was already SF Best's fourth change of leader within 4 years. Duodian E-commerce, which had received USD 100 million in financing in its angel round, was also reported to have seen founder Liu Jiangfeng withdraw. Although it quickly responded that this was only a business model adjustment, business registration information showed that its registrant, Duodian Life (China) Network Technology Co., Ltd., had been included in the business abnormality list by the industry and commerce authorities in May 2016 because it could not be contacted through its registered address or business premises.

In June 2016, the O2O platform Benlai Bianli stopped service and was wholly merged into Benlai Life and renamed "Jisuda"; starting in July, Tiandiguoyuan announced the full closure of offline stores, ending its exploration of the "front warehouse + store" business model; Tuotuo Farm CEO Du Fei announced his resignation, and its website successively reduced supply categories and shut down services in Shanghai and other regions, fully retreating to the Beijing market and focusing on the organic market; Aixianfeng, which focuses on O2O fresh food services, was also reported to have carried out mass layoffs, shrinking its original team of 1,100 people to 700...

"Relying only on low-price subsidies to acquire massive users and order volume, and using that to drive up valuation and quickly obtain the next round of financing, was a commonly used brutal playbook in the industry, but after capital returned to rationality, they hit walls one after another." A veteran fresh food e-commerce practitioner told a Beijing News reporter that in early 2016, the capital market began to stop measuring companies by order volume and scale, and instead shifted more toward assessing profitability such as gross profit, with investment also becoming more cautious. After losing the price war supported by capital, companies could not maintain order scale, leading to turnover difficulties and massive overcapacity in warehousing and logistics. "Especially some second-tier e-commerce players have successively made offers to industry giants, hoping to get through the winter through mergers and acquisitions."

Hong Tao, dean of the China Food Safety E-commerce Research Institute and a professor at Beijing Technology and Business University, told a Beijing News reporter that around 2015, about RMB 7 billion in venture capital poured into fresh food e-commerce. The enthusiasm of capital also brought an irrational situation to the industry, with each company successively using low-price subsidies as a competition model to boost sales and better obtain the next round of financing. "The entire industry developed a huge bubble under capital-driven conditions, but it was never able to find a sustainable business model that could achieve self-profitability, and it was inevitable that it would head toward closure."

Transformation: from looking at scale to looking at gross profit

Against the backdrop of overall industry shrinkage, various platforms also began to gradually adjust their models, successively stepping out of the quagmire of price subsidies and launching an assault on high order value and high gross margin in order to achieve "self-blood-making."

Tiandiguoyuan CEO Wang Wei once said in an interview with a Beijing News reporter that under the capital and market boom, some e-commerce companies engaged in large-scale cash-burning subsidies, but subsidies were only a means rather than the ultimate goal. "Quite a few platforms treat subsidies as the goal, which is irrational, and user stickiness is also relatively low, which is not good for the healthy development of the industry."

Wang Wei said that since 2016 the entire industry had gradually stopped subsidies, and capital and the market had also returned to rationality, which indeed had a certain impact on order volume. Taking Tiandiguoyuan's data as an example, its order volume decreased by nearly 1/3 from the peak period, but overall order value and profitability kept rising. At present, its order value has long remained above 150 yuan, and it is expected that revenue in 2016 will reach RMB 1.6 billion, an increase of 200% over the same period last year. Its customer group is also gradually completing the transition from price orientation to value orientation.

Yiguo Fresh CEO Jin Guanglei told a Beijing News reporter that although the model of burning money to exchange for users achieved great success in a short period of time, in essence the target user group of fresh food e-commerce has always been mainly young consumers who value quality, value, and brand, which means that the user group obtained by relying on low-price subsidies is not stable. This was especially true after the market returned to rationality and subsidies stopped at the beginning of the year, which had a huge impact on some platforms.

"Last year was about looking at scale, this year is about looking at gross profit." Jin Guanglei believes that in the earlier stage the industry had already used low-price subsidies to educate the market and cultivate consumption habits, and the next step would be to upgrade on this foundation and return to the essence of business. "The focus of the industry at the current stage must be on the quality and brand of fresh products, solving standardization problems by integrating upstream and downstream resources, and thereby providing consumers with more valuable products."

Analysis: advancing into upstream production areas and emphasizing brand cultivation

Hong Tao told a Beijing News reporter that although the fresh food e-commerce industry is currently experiencing phased obstacles, the overall market space is still continuously expanding. "It is estimated that by 2016 the online transaction value of domestic agricultural products will be RMB 250 billion, with fresh products alone accounting for RMB 100 billion. This is nearly double the RMB 54.4 billion in fresh food online transaction value in 2015."

With the rapid expansion of market space and fresh food platforms entering an adjustment period, competition in the overall industry is also about to enter the next stage. Hong Tao believes that it has now been proven that a model dominated by price wars cannot work. As giants such as Gome, JD.com, and Tmall continue to enter, they are also forcing all players to break away from the low-level stage of price competition and move in the benign direction of optimizing product structure and cultivating brand quality.

Yang Daqing, a specially invited researcher at the China Logistics Association, told a Beijing News reporter that in 2016, more and more fresh food e-commerce companies began to carry out substantial reforms to their business models. First, they contracted their full-category or multi-category fresh food front lines and focused their attack on premium categories or specialized categories of fresh products, seeking to establish strong relationships with segmented consumer groups; second, various vertical platforms also began to gradually enter comprehensive platforms such as Tmall and JD.com, emphasizing service resource integration rather than self-building, and acting as brand supply chain stewards and channel agents on comprehensive fresh food platforms; and finally, they accelerated the seizure of high-quality production area resources upstream in fresh food and promoted the local conversion of agricultural products into agricultural commodities, thereby achieving differentiated competition.