Ding Dong buy vegetables for the first time to achieve stage profit, pre-position mode and "commodity power" strategy has been verified

We have a firm belief in the pre-position model. There are many, many analyses of the pre-position on the market. But people often forget that the most important key point to judge the merits of a model is what: is it really meeting the needs of users? Is it in line with the changing trend of user consumption behavior? Only the user's choice determines the success or failure of the business model. -- Liang Changlin, Founder and CEO of Ding Dong Maicai

On the evening of August 11, Ding Dong Maicai released its performance report for the second quarter ending June 30, 2022. Data show that Ding Dong Maicai achieved revenue of 6.63 billion yuan in the quarter, an increase of 42.8% year on year; Non-GAAP net profit of more than 20 million, the first time to achieve phased profit.

In addition, the Yangtze River Delta, as a market where Ding Dong bought food services earlier, has a more prominent performance. In the first half of this year, revenue in the Yangtze River Delta region grew 47.9 per cent year-on-year and achieved a positive operating margin of 3.7 per cent. In addition, as of the end of the quarter, Ding Dong Mai was fully funded, including cash and cash equivalents, short-term investments, including a balance of more than 6 billion yuan.

At the same time of high-quality growth, the company's UE is also rapidly optimized, which once again validates Ding Dong's pre-warehouse mode, stable development and rapid organizational response ability in the process of market changes.

"In Q2, among the products sold by Dingdong Maicai, there were 217 SKUs with unique features. In addition, the sales of Dingdong's own brand products accounted for 17.5%, most of which were products developed and processed by Dingdong 3F factory." When communicating with investors, the management of Ding Dong Maicai said that Ding Dong Maicai is not only a leading fresh e-commerce enterprise, but also a food enterprise with research and development and innovation capabilities.

The company's management believes that the outlook for Q3 may be a slight loss. But "comparing our post-pandemic and pre-pandemic data, in addition to revenue growth, loss rates have continued to improve." Therefore, we are very confident that Ding Dong Maicai can achieve full profitability by the end of this year."

01 Profit margin continuous optimization, the first time to achieve phased profit

As of this quarter, Ding Dong Maicai profit margin has been significantly optimized for several consecutive quarters, the gross profit margin of this quarter was 31.6%, an increase of 17.0 percentage points over the same period last year, an increase of 2.9 percentage points in the first quarter. Non-GAAP net profit margin improved by 37.5 percentage points compared to the same period last year.

This is mainly due to the substantial and continuous improvement of Ding Dong's supply chain capacity and operational efficiency. Specifically, on the one hand, it is because Ding Dong has continuously expanded the starting point of the supply link, and boosted the gross profit space through the resource integration and efficiency improvement at the production end. For example, improve the efficiency of commodity supply by improving the capacity of self-research and production and processing; Through order agriculture, data and market demand are used to empower agricultural production, reducing inefficient links and resource waste in traditional production and trading.

On the other hand, the performance efficiency and operational efficiency of the platform are also continuously optimized. According to the financial report, due to the improvement of customer unit price and reasonable optimization of front-line personnel efficiency, the rate of single performance expense in the quarter was optimized by 13.2 percentage points over the same period last year; At the same time, the marketing expense rate was optimized by 6.6 percentage points compared with last year, which shows that the supply chain foundation and commodity power accumulated by Ding Dong Shopping has become a new attraction.

On this basis, more costs are invested in food research and development, agricultural science and technology and technical algorithms, and these aspects will continue to strengthen the competitive advantage of Ding Dong buy food, to users continue to bring high-quality goods and services.

Tianfeng Securities believes that Dingdong buy food provides a variety of commodities through upstream direct mining, and the total number of SKUs exceeds 10,000. The products provided by the company are mainly divided into fresh and general merchandise. The number of SKUs increased from 5,700 + in the first quarter of 2020 to 12,500 + in the first quarter of 2021, of which there were SKU5700+ in the fresh category and SKU6700+ in the daily necessities category. In terms of procurement sources, fresh is mainly direct procurement from the source, and the proportion of direct procurement exceeds 75% as of the first quarter of 2021; Commodities are mainly purchased from manufacturers and distributors, and as of the first quarter of 2021, the two procurement methods are 50/50. The product structure of Ding Dong buying vegetables has been continuously optimized, and the proportion of its own brands, its own production and processing products and prefabricated vegetables has increased. After the launch of the company's private label products in July 2020, the proportion of GMV increased rapidly, from 3.3% in the first quarter of 2021 to 10.2% in the fourth quarter of 2021. According to the financial report, in the fourth quarter of 2021, self-produced and processed products accounted for 6.5% of GMV, and prepared dishes accounted for 14.9% of GMV.

Tianfeng Securities believes that benefiting from the rapid growth of the instant retail industry, the pre-position model has broad space for the company. As a leader in the warehouse industry, the company occupies an important position in the industry based on strong organizational capabilities and digital capabilities. In the future, with the optimization of product structure and customer structure, the increase of the proportion of self-owned products such as prepared dishes and the improvement of operational efficiency, the improvement trend of profitability is obvious.

02 Focus on fresh and food track, "commodity power" has become a new driving force for the company's development

Just last year, Ding Dong Maicai clarified the strategy of "commodity power is the first driving force", and constantly polished market insight and research and development capabilities. Now Ding Dong Maicai is not only a leading fresh e-commerce enterprise, but also a food enterprise with research and development and innovation capabilities.

Continuously delving into the source of ingredients and maintaining the rapid response of the supply chain have brought more goods to the platform that can occupy the minds of users. In this quarter, Ding Dong's sales of private brand products accounted for 17.5%, most of which were developed and processed by Ding Dong Food factory. In addition, among the products sold by Ding Dong Shopping in this quarter, there were more than 200 SKUs with market differentiation.

The fast and solid supply chain foundation also played an important role in ensuring supply during the fight against the epidemic in Shanghai and other cities. During the epidemic, users' large demand for livelihood goods has brought a great test to Ding Dong Buy food, and has also brought more people's recognition. After the epidemic, Ding Dong bought Food quickly responded and continued to optimize the logistics and warehousing system to bring more stable and better user experience.

From the beginning to the end, Ding Dong Shopping focuses on the core track of fresh and food, and helps users "eat better" through infrastructure construction and other actions. In addition, Ding Dong Maicai also expects that compared with the first quarter before the epidemic, the operating efficiency will continue to improve in the third quarter, and the profit margin will also be significantly optimized.

According to the management of Ding Dong Buy Food, the company mainly improves its commodity power from five aspects:

First, resolutely improve the quality of goods. For example, in order to avoid the problem of excessive pesticide residues in the cultivation of leeks and scallions, we ran through more than 10 provinces in China, and finally established a base of leeks and scallions with reliable quality through D-GAP and order planting.

When developing food, the company has been advocating clean labels. When you buy food, pay attention to the list of ingredients on the package of goods, there are many chemicals, flavorings, preservatives, etc., sometimes densely written on a page, and Ding dong buy food advocates: unless necessary, rarely add. And, we continue to improve the technology to achieve this clean label. In this way, sometimes the cost increases, and sometimes the product without those additives tastes rich, but we hold the bottom line of health for consumers.

Second, the company continues to increase its own research and development and production, more development of Ding dong characteristic products. Ding Dong Maicai not only has its own brand, but also has a high proportion of its own research and development and production of products. Ding Dong Maicai is already a food enterprise with research and development and innovation capabilities. In Q2, Dingdong featured 217 SKUs.

For example, the 1972 farm craft beer jointly developed by Ding Dong and Qiandao Lake Brewery takes no more than 24 hours from the factory to the user's home, ensuring the delicate taste and extreme freshness of the beer. For another example, by transforming and applying the patented technology of Jiangnan University, the company has exclusively developed the control-control-carximei enzyme beverage, which successfully realizes the fusion and sublimation of California prume, citrus fiber, probiotic fruit and vegetable enzyme, etc., and achieves a shelf life of 45 days in the case of zero preservatives, becoming a delicious choice for young users to maintain intestinal health and body lightness.

With the advantages of consumption scene and research and development and production, Ding Dong prepared dish plate continues to make further progress, in view of the emerging consumer trend, one after another launched the "air fryer food" series and "vegetarian prepared dish" series, which not only further enriched the consumption scene and user experience of Ding Dong prepared dish, but also led the research and development direction of prepared dish health. Consolidated Ding Dong's leading position in the prepared dish industry.

Third, Ding Dong significantly strengthened the research on user consumption trends and improved the success rate of product development. With Ding Dong's strong data capabilities and loyal user groups, the research department of Ding Dong completed 15 consumer insight research reports in the first half of 2022, organized more than 10 commodity evaluations of nearly 1,000 people, and gave product selection opinions and development and adjustment directions, which strongly supported the early positioning and selection direction of key commodity projects and subsequent growth strategies. Thus, the success rate of product development is significantly improved.

Fourth, develop more consumption scenarios, more efficiently perceive new needs, define new products and cultivate new brands. Because our original intention is to let the children eat healthy, so that every family rest assured, Dingdong buy food has a special channel "Bao Ma Yan selection".

Fifth, we need to strengthen infrastructure development. At present, Ding Dong Maicai has a high standard, semi-automated big warehouse, with more than 10 food factories, and is building three large-scale 3F factories.

Attached is the financial exchange Q&A transcript

1, a peer recently appeared operational difficulties, as a peer, what do you think?

First, we rarely evaluate our friends. Being yourself is more important than pointing the finger. In addition, some people see a company in difficulties and think that the whole industry is not good, we very much disapprove of this simple, linear way of thinking. Even in the same industry, the differences between different companies can be worlds apart. Ding Dong buy food is different from every company in our industry, we have been focused on one thing, has been more concerned about the needs of users, and then forced themselves to progress, we do not play clever, dead knock commodity force, so that we are more and more loved by users, by the user's favorite company, I think are promising companies.

We also hope that the society will have more tolerance for entrepreneurs, and hope that entrepreneurs who encounter difficulties can stick to it and usher in the bright moment.

2. In addition to revenue growth, what growth has Ding Dong Bought vegetables achieved in the epidemic?

In addition to revenue growth, Ding Dong has made progress in three aspects after the test of the epidemic.

First, by establishing a flexible supply chain that is more flexible and responsive, we have established a stronger response constitution. During the epidemic, faced with supply disruptions, transportation system blockages, large warehouses were blocked, and personnel management difficulties, we flexibly adapted and innovated many supply chain models. For example, business direct delivery, neighborhood groups and other ways, during the epidemic, not only to ensure the supply, but also to calm prices, but also to hone our supply system, in the event of an emergency, to maintain the basic responsibility of supply.

Second, we have improved the cohesion of the team. During the epidemic, the workload is heavy, life is difficult, and you can be locked down at any time. Ding Dong buy food colleagues have assumed unprecedented pressure, but everyone to guarantee for their own responsibility, insist on fighting, there are a lot of impressive deeds. But we can also feel the sense of achievement brought by service for users, after the baptism of an epidemic, our team is more united.

Third, during the entire epidemic period, Ding Dong Buy food has always been with users, ensuring supply and leveling prices, and therefore, we have been loved by more users. Whether it is normal consumption, or in difficult times, Ding Dong buy food is a trusted partner that we can choose with our eyes closed.

Finally, I would like to say that with regard to the epidemic, we have always complied with the management and requirements of the government, and fulfilled the basic responsibilities of a people's livelihood security company. I also wish an early end to the epidemic and a healthy and stable life for everyone.

3, the company Q2 achieved phased profit, then Q3, Q4 what will happen? When will the company reach full profitability? Is there a risk to the company's cash flow before it achieves full profitability?

First of all, Q2 was a very, very difficult period for the company. Under the influence of environmental factors, the operational resistance was very huge. Fortunately, the company's partners worked together to meet the difficulties, and we finally achieved a positive quarterly profit. We also observed that after the epidemic compared with before the epidemic, whether it is the aspects that we are most concerned about, such as commodity power and user reputation, or core data indicators such as the unit price to customers and penetration rate, there has been very positive progress. Therefore, we believe that compared with Q1 before the epidemic, the net loss of Non GAAP will be optimized by more than 3 percentage points in Q3, and the subsequent Q4 will continue to optimize on the basis of Q3.

Secondly, in January this year, when we were completely unable to predict the subsequent epidemic, the management set a big goal of breaking even in a single month in December at the end of this year. We have never had any change in this goal, and we firmly believe that it can be achieved.

Finally, although the time to achieve full profitability has not changed, Q2 performance objectively optimized our annual loss rate and the amount of cash outflow, so in Q3 and Q4 this year, our loss and cash outflow compared with the same period last year will have extremely large optimization, next year we estimate that the company will still be positive cash flow. As of the end of Q2, our cash balance was more than 6 billion RMB. The bank and the company cooperated more closely, and the bank's short-term borrowings increased to 890 million yuan. In short, the amount of money we need to spend is low, and the balance is still quite large, so we see no cash flow risk at all.

4, the predicament of daily fresh, so that everyone has doubts about the pre-position mode. In addition, many competitors have repeatedly publicly sang down the pre-position model, I would like to ask, do you think the pre-position model can really run through?

Excluding the three months when the epidemic was severe, Ding Dong has continuously improved the loss rate for 10 consecutive months, and we are very confident that we will achieve comprehensive and sustained profit by the end of this year. So, we have a firm belief in the pre-position model. There are many, many analyses of the pre-position on the market. But people often forget that the most important key point to judge the merits of a model is what: is it really meeting the needs of users? Is it in line with the changing trend of user consumption behavior? Only the user's choice determines the success or failure of the business model.

Pre-warehouse mode, with the highest efficiency, the fastest delivery speed, can better control the quality of fresh, this model to meet the needs of consumers for a better life, to meet the young generation of different consumption habits. Because seeing this, we firmly believe that this is a business model with a bright future, and then push ourselves to make progress. We think that the gross profit margin of fresh electricity supplier is low, we improve the supply chain by making thick and strong; Everyone doubts that the loss is large, we through large order density and prediction, recommendation technology to improve, today's effect has been very good, the loss has been far lower than the traditional fresh business; We feel that the quality control of non-standard products is difficult, we standardize the process, increase manpower and technical investment, and now our quality control should be leading in the whole fresh food industry.