Cecilia Sun of Miss Fresh: The Economics of Online Grocery in China

This episode is the recording of a private webinar we recently organized for GGV portfolio companies working to improve the supply chain of food in different markets. 

Online grocery is one of the most throat-cutting sectors in China. A study shows that with over 4,000 online grocery companies, only 1% is profitable, 4% can break even, and the overwhelming majority is burning money. 

Miss Fresh is among the rare ones that have survived and thrived after waves of competition. Miss Fresh is China’s leading online grocery retailer that offers 1-hour instant delivery services across 16 cities in China, including first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen. The company has 1,000 distributed micro warehouses that fulfill up to 2,000 orders per day with over 3,000 SKUs. Its GMV tripled during the height of COVID-19 in China. 

Cecilia is a partner and the COO at Miss Fresh. She joined the firm in 2015. Prior to Miss Fresh, she was a private equity investor at Baring Asia, an investment banker at Deutsche Bank. She holds dual bachelor’s degrees in economics and statistics, a master’s degree in finance from Peking University, and is a member of Forbes 30 under 30 list.

On the show, we covered the impact of COVID-19 had on the eGrocer business, the innovative model Miss Fresh came up with, and how it competes and collaborates with tech giants in the grocery delivery business. 

TRANSCRIPT: 

Hans Tung:
Today on the show, we have Cecilia Sun, partner and COO at Miss Fresh. Miss Fresh is one of China’s leading online grocery retailer, but also offers one-hour instant delivery service across 16 cities in China, including mostly tier-one cities such as Beijing, Shanghai Guangzhou, and Shenzhen. The company has over 1000 distributed micro warehouses that fulfill up to 2000 orders per day per warehouse with over 3000 SKUs. Its GMV tripled during COVID-19 in China in February and March.It claimed that its damage rate is less than 1% with its data-driven supply chain management typically.

Rita Yang:
Cecilia is a partner and COO at Miss Fresh. She joined the firm since 2015. Prior to Miss Fresh, she was a private equity investor at Baring Asia and investor banker at Deutsche Bank. She holds dual bachelor’s degree in economics and statistics, master’s degree in finance from Peking University and a member of Forbes 30 under 30 list. Welcome to the show, Cecilia.

Cecilia Sun:
Thank you very much Hans and Rita.

Hans Tung:
We’re very happy to have you on the show. For those audience who have not lived in China before, can you describe Miss Fresh? And what was the innovation you guys come up with, with the micro warehouse approach?

Cecilia Sun:
Okay, in the short term, Miss Fresh is actually an online grocery retailer which has two key features. One is the 30-minutes home delivery, which we call instant delivery. And secondly, we have a full coverage on categories, ranging from fruit, vegetable to packaged food. And compared to a similar model, which is called Instacart, which is more familiar with westerner, we have a similar user experience. People can actually order from the App, and then we can get all these things delivered to you within around 30 mins to one hour.

And one slight difference that we make is actually we built warehouses to replace our stores to further increases efficiency, and why actually we do this, why we use warehouses to substitute all stores is because retail actually has three waves of trend changes.

First of all, we have this traditional offline stores that was happening around 20 years ago. And then we have stores plus home delivery, which is Instacart has done and JD Daojia (京东到家) have done before. And for this type model, we see some problems from it. Because for the stores in China, especially in a tier-one to tier-three cities, the rent is really high and labor is actually high as well. So stores have very low margins, they merely have 3% net margin, or even 0% net margin. So if you plus home delivery to customer, and this delivery cost is actually ranging from 5% to 10%. And also you have some connecting costs between stores and the delivery, and you have some kind of value loss from this.

So for this kind of model, we don’t see economics works, unless you charge delivery fee from the customers, and then will decrease the user experience from customer as well. So we replace it with warehouse. For warehouse, one warehouse is actually covering a wider range than a store. For the store, it covers around 500 meters to 1 kilometre. And for warehouse, it can cover around 1 kilometer to 3 kilometers. So it can sell more than a store.

And also for the warehouse, the rent is much lower than a store for same places. The store’s rent is actually three times more than a warehouse. And also for the storage capacity, the warehouse can store more SKUs and have more storage. It is roughly two times more than a store. So in total, one warehouse is really 10 times more efficient than the store. So we use the warehouse to replace the store so that we can reduce the operating costs of the supply chain. And then we use this price advantages to compete with the stores. So that is how this model works.

Hans Tung:
So basically in terms of pricing for users, yours is one third cost compared with the price in the store. So you are giving almost like a wholesale price to the user. And in terms of the SKU, you offer more because a micro warehouse is bigger than the store, what is the size of micro warehouse?

Cecilia Sun:
For the micro warehouse, it is around 200 to 400 square meters. So the store capacity is almost 800 to 1000 square meters. So the SKUs and categories.

Hans Tung:
So micro warehouse is actually smaller than the store?

Cecilia Sun:
Well, what I mean is its capacity is actually two times bigger than store. So for 200 square meters warehouse is similar to the capacity of 800 square meters store.

Hans Tung:
Got it. Stores are not as efficient as warehouses. Warehouse is all for storage.Delivery come and go. So, every square foot is highly utilized. So, you can end up carrying more SKUs for lower footprint. where do you have the micro warehouses? Is it spread over the city or more concentrated in a particular area?

Cecilia Sun:
For certain cities, it is spread all over city. Because we do online business from the numerous sites. So, we actually offer the user that you can actually purchase goods anywhere anytime. So it covers the entire city. But for the demand which is more density and then the warehouses will have closer distance between each other, so people can get even faster delivery. For some places which is outside the city and for the region that not many people living there, so have fewer warehouses. So people may have a slower delivery experience.

Hans Tung:
For these micro warehouses, how many delivery people do you need per warehouse? And how many orders can each person deliver per hour?

Cecilia Sun:
Depending on the size of the warehouse as well. For example, for a warehouse that is 200 square meters, we can deliver around three to four orders per square meter. that is efficient for per square meter. And per person, one delivery guy can deliver 60 to 70 orders per day, and that is efficient enough for delivery labor. So this efficiency is actually much higher than a store. So for stores, normally it is 100 RMB per square meter, that is the sales volume of store. So for us, one square meter is three to four orders. And our average order price is also around 100 RMB. So that is the 300 to 400 RMB per square meters, that is the average sales per square meter. And the delivery is 60 to 70 orders per day per person, and compared to Meituan (美团) which is around 30 to 40 orders.

Hans Tung:
For Instacart, if they can do two orders per hour, it’s already very amazing. One could argue that in China, with such high population density, many people live in high-rises and cluster together, so it’s easier to have the chance of delivering three, four orders per hour. Whereas in countries that people live more spread out, that’s more of a challenge. What is your experience as you move from more densely populated cities to lower-tier cities?

Cecilia Sun:
So for this kind of model, what we called distributed warehouses model, shortened to DW model, we think it’s still a model that is adaptable to tier-one to tier-three cities, which is around 30 to 40 high-tier cities in China. For very low tier cities, actually, we don’t think that works either. It really needs the people population density happening. And also people need to have their shopping behavior that is switching from offline to online. And people actually get quite busy in these big cities and their time is very valuable.

So our business model is to help people to save time, not to kill time. So we actually have barriers in this type of model happening. So what we are doing is we actually focus on tier one to tier three cities, but for tier four to tier six cities, which are smaller cities, we’re actually also having some other creative models that is working on. So that are two different kinds of cities, and actually different cities and different culture will have different retail models as well.

Rita Yang: 
So Cecilia, you talked about how you are there to help customers save time rather than kill time. I think that’s a key difference between the consumer group that you chose to serve in the first place, which is millennials in first-tier cities of China. And when you look at the App, you intentionally make it not an option but a default to have the delivery within the next hour? So can you walk us through what was the thinking behind that? Why not make it the Tmall supermarket for JD, which did the next-day delivery as well?

Cecilia Sun:
So why we decided to do this model because that is coming from our idea five years ago. First of all, on a macro basis, and on the competition basis, there are two different dimensions of why we think of this model. On the macro basis, this model is driven for long term changes or for trend. Post 80s and 90s is regarded as a new generation in China, because they have quite a different shopping behavior in the mindset. So, this post-80s generation is becoming the major shoppers of grocery since 2015. Because they are going up to be beyond 30s. This actually drives a fast growing of online penetration of groceries, so the demand is actually growing naturally. So that’s why we decided to do grocery business and to focus on on online penetration of grocery market.

And the second is the new technology. The new technologies, including LBS, mobile internet and also IoT business, make it possible to have this model happen with a lower price and lower cost. And then the new channels is happening, including us and some online new models like Pinduoduo (拼多多) and Kuaishou (快手), and including some offline new models and convenience store. So this are new channels. And the third is that new brands are coming up. So the new brands from upstream is also ready. So the new channels is able to cope with new brands to build our own supply chain barriers. So all these happening and make us to think this market has an opportunity to be all-in.

And then on the competition basis. So no matter who is doing eCommerce, you’re facing a competition from Alibaba, JD and Meituan (美团) naturally, and then we need to create a value proposition which is very unique from them. And for Alibaba and JD, what they are doing is actually inter-city business, which we call non-local business. So they bring some national goods everywhere and then do the non-local business. So, that is what JD and Alibaba are doing. And Meituan (美团)  is doing local business, and they are stronger in local service. They are connecting restaurants and also movies and other services part.

So for us, we think there is empty places which is called local retail, no one is focused on it. So we started our first startup for local retail. The local retail versus local services, the biggest differences is, because local retail have a much lower margin than local services. So, for local services, you can use connecting model, you can connect all offline stores and enable them to be online platform where you can actually have your own value proposition because they have a very high margin. For example, for a restaurant, the gross margin for restaurant is over 70%. So for every order they sell online, the restaurant is able to give 10%-15% commission to Meituan (美团) to make profits from this order.

But for retail, the gross margin is less than 50%. The highest is around 40%, on average is 25% to 30%. So this gross margin is not able to give 10% – 15% commission rate to any platform. So this connecting model, which actually don’t really increase any supply chain efficiency, so it’s only create connecting commission and costs from the online user side.

So in the very beginning, we think this connecting model is not the future because it doesn’t create supply chain value and it only increased the delivery cost to customers. So eventually, it doesn’t work. And also for local retail, people don’t really need much variety. So people don’t really go one retail today, and go to RT-Mart (大润发) for shopping tomorrow, and go to Hema (盒马) another day. Actually, they only need one or two choices. That’s enough. So there is not really information arbitrage opportunities, either. So this is why we think we actually can do self owned offline facility. And also we can do this online. So this can really increase the efficiency of entire supply chain and then using this efficiency that is saved  from the supply chain to serve customers with their online marketing expenses. So that’s how we come up with this idea.

And why we don’t use second day delivery, first of all, because we don’t have the strength to compete with JD and Alibaba who already do this second day delivery efficiently. So, our opportunity is on the local business. So, for the local business, the convenience and the instant delivery is actually a must for customer. So, we think, if we want to compete with offline stores, because that is our competitor, and we need to shift people’s shopping behavior from offline stores to online shopping, so we have to have a more convenient user experience than them, so for the second day delivery is not convenient at all compared to a store shopping. So we have to limit this time of delivery within two hours at least that is a comparing advantage to the offline to online business as a wholesaler. So that is the story for it.

At the very beginning, there’s a very small story that happened to us. In the very beginning, we actually did a lot of consumer surveys, to ask people if you need instant delivery for vegetable and fruits, and a lot of people said no, actually, they think second day delivery is good enough. But when we have decided to do this, and have our first product model on app, and we see the rapid growth. People actually need it, but they don’t really know it before we actually tried it. if we’ve ever tried. So, this is the past story that we have gone through.

Hans Tung:
Look at the distribution of orders, is it mostly throughout the mealtime? Is it more clustering effect or more spread out?

Cecilia Sun:
It is more spread out. Not really have that obvious time. In the morning, it’s normally around 10 to 11am, and in the afternoon, it’s around 5 to 6pm. Before dinnertime or before lunchtime is a little bit more. And other time is a little bit less, but generally it’s more spread out.

Hans Tung:
And what time do you open up the micro warehouse until?

Cecilia Sun:
It also varies, different places may have a different time. So it opens around 7am for earlies place, and some cities will open from 9am. And for the nights, it closed around 9pm and some places extend to 11pm.

Hans Tung:
So roughly about two shifts per day. How long does it take to get up to that kind of volume of 200 orders a day to breakeven after micro warehouse open? How long does it take to get to that volume per day?

Cecilia Sun:
It depends on the if you’re opening a warehouse in the existing city or a new city. For the existing one, because you already have users and people know you, and then we open up a new store, it needs three months. So it’s pretty soon for mature cities. But if we’re opening up in a brand-new city, like we opened in Wuhan last year, it may take as long as six to nine months.

Hans Tung:
And then as you figure out what’s the optimal SKU we should carry per city, does it vary very much? What kind of data analytics did you utilize that help you to determine what’s the optimal mix of SKUs to carry per micro warehouse?

Cecilia Sun:
For the number of SKUs, 70% across China are the same, another 30% varies city by city. So it’s around this ratio. So we have 70% SKUs  purchased from origin, and for another 30% is actually purchased locally in the local market. So this is the SKU’s combination. And for the number of SKUs, that is growing year by year, so in the very beginning, we have around 800 SKUs, and then 2,000, and then 3,000. It grows as we expand the categories. So for example, for fruits, it may need around 100 SKUs. And for vegetables will be a little bit more. We need 150 SKUs. And for meat, it needs around 70 SKUs. So we actually extend our category step by step, from fruits to vegetable to meat to sea food, and then we increase our SKU step by step. So we’re now around 3,000, and we are also still increasing the number of SKUs along with our expansion on categories. So we are now expanding our categories on packaging food. So we may increase SKUs from 3,000 to 3,500. And then maybe later, we will also extend our categories to drinks, and maybe increase SKUs from 3,000 to 4,000. So this is how it goes.

Hans Tung:
The eGrocery phenomenon started in 2013, 2014 and 2015. Many companies got funded, there may be other big players coming in which don’t need VC funding, but they also compete. So the capital raised per player are intense, and sometimes hundreds of millions of dollars. So through all this, you guys survive and thrive, can you walk us through that journey or some highlights and the key things that you guys did well in order to survive, and what are the sort of key differentiation or advantages that you built up over the last five or six years?

Cecilia Sun:
So eGrocery retailer is quite a lot. It’s really more than thousands. We pass through three different times of competition. In 2015, at that time, there’s a new startup which is on this E-grocery, what they are doing is vertical ecommerce platform. So at that time, we see Benlaishenghuo (本来生活), Tiantianguoyuan(天天果园), Yiguo(易果), these are the major players at that time. So what they are doing is second day delivery, but they are more focusing on fresh. So that is the key business model.

And for that business model, this model just doesn’t work well. They’ve done a lot on the supply chain and logistics.  They also builds logistics system, and  they also have corporate with farmland, and they also have done many years of operation on users. But what it went wrong is second day delivery is actually a vertical category for JD and Tmall. So for vertical limited category eCommerce, you really cannot compete with Tmall and JD.

Hans Tung:
Second day delivery and big warehouses is trying to maximize efficiency per warehouse. Now this model is very hard to compete against JD and Tmall of Alibaba because they have so many categories so that they can make the large warehouse much more efficient than a vertical ecommerce player.

Cecilia Sun:
Yeah, exactly. So they cannot really compete with JD and Tmall at that time. And also on the user cost as well, you actually cost a lot to acquire new users, and you only offer very limited category. And then for Tmall and JD, they acquire user for the same price but they can offer a much more variety of goods, so the user cost is actually much higher than JD and Tmall. So for this vertical ecommerce Benlai(本来生活) and Tiantian(天天果园), they really cannot compete with JD and Tmall. So that’s why actually they lose the battle. And that is the first wave.

Cecilia Sun:
And in 2016, we have some other players coming up and the main business model is actually the connecting model, for example JD Daojia(京东到家), Aixianfeng(爱鲜蜂), and DYD (点呀点). What they are doing is actually as Meituan (美团) model. So they creat a platform,and they cope with a lot of stores which do home delivery. So that is what Aixianfeng(爱鲜蜂) and JD Daojia(京东到家),such companies are doing. So that is around 2016 and 2017. And these company are all died as well, because the UE doesn’t work, the economics doesn’t work. So it’s either you sell at higher price to customer, or you need to charge commission from the stores, and there’s no another way. The stores cannot pay the commission, because their margins are really low, and they really cannot afford any commercial marketing which is more than 5%. But the platform needs 10 to 15 to be profitable. So that’s why such model doesn’t survive. So that is the second generation of innovators with which they made a Meituan (美团) model to make a platform to help them online.  

And then we come to the third generation which happened mainly in 2018 and 2019,  So that is JD, which has similar model as Miss Fresh, and Hema(盒马) is also happening in 2018. So for us, we actually do this business as a retailer. We don’t really do platform business. We’re doing the retailer business. We have offline facilities, and we have online connection to customers. But we have a different way of coming up with offline facilities. Hema(盒马) is now focusing on big stores, and all kinds of stores. And for us and JD, we’re doing warehouses. So there’s different offline facilities that are built on. So this is the third generation of competition, and we have this model coming up.

I think it doesn’t really matter what business model you believe in and what business model you’re in, as long as we’re all retailers, because for retailer, we are really low-margin players in any way. So we have net margin over 3%. That is the most to be expected. And for operation efficiency, if you’re not doing well anywhere, you may lose 3%. For example, you have too many inventory and then you lose 3% on the goods loss. And if you don’t manage people well, you have 30% headcount happening and then you lose 3% on the people cost.

You rent a store or a warehouse at 10% higher price because you don’t really bargain well with the landlord. You have 3% loss. So entire operational efficiencies coming from many operation details. I think store model or warehouses model, they both can’t work because they’re just different philosophies and different logic. For warehouses, we have lower rent price, lower labor price, and then we have lower goods price for a customer. For store business, you have a higher employee cost, and a higher people cost. It charges people higher, but also offer better experience. So for people who are richer and actually can pay more,  they can go to stores and have a better experience. And for people who are poor and don’t want to pay too much on this, then they can go to warehouse business. So I think model itself is not really mattered. And operational efficiency actually mattered more so you actually can manage this distributed facilities in a more efficient way that you actually can save cost from it, and then it can make it work.

Hans Tung:

So after billions and billions of VC money, three generations of evolution business models and operations, everyone agreed that the micro warehouse model is the most efficient, easiest way to be profitable on a per unit basis. So JD and Alibaba, they both have a lot of money and a lot of operational experience, what is they decide to do this and put all resources into this model. How do you deal with that?

Cecilia Sun:

That is also what Meituan, JD and Alibaba actually done. So we actually compete with them, but we also coorperate with them. Because offline business is really the dirty work. And giant companies have two choices, they can cope with us, or they can actually adopt that themself. So we actually also corporate with them, our store is also on Meituan App. So they’re actually a platform and we are one of the retailers that they corporate with. That’s a conquest. So that is our Different proposition that

Hans Tung:

Meituan is a platform. It doesn’t want to operate the stores. They’re not e-tailers. Both JD and Hema(盒马)  are e-tailers. So you have to partner with a platform to compete against e-tailers. So you’ll be aligning with Meituan to do that. This is very natural and makes a lot of sense.

 

Cecilia Sun:
And we also corporate with Tencent. So Tencent gave us all the support on the user side, because they are also a big platform.

Hans Tung:
Tencent is the investor in JD as well. Tencent is very loving. It helped  many people. The enemy of my enemy is my friend.  

Cecilia Sun:
Yes, that’s true.

Rita Yang:
Thank you so much Cecilia. I think that’s a fascinating recount of what has happened in China’s E-grocery business. I also have two questions for Hans, as you were sitting in the US and have seen this similar wave that is going on in the US right now, with a company like Instacart, doing really well during COVID-19, as well as GrubMarket and Yamibuy, which are all GGV’s portfolios. What’s your view on the E-grocery business in the US? And what is the overall GGV thesis in this sector in general? we have a selection of portfolios who solve this problem in very different ways.

Hans Tung:

I think US is a competitive market, but I have to say that China is a much more competitive market, and all these companies had nothing to do with Chinese government support, everybody’s fighting on their own with money raised from VCs who are experimenting new models all the time. So the intensity of the competition is fierce. For the most part, we have not invested in this category. That was a small investor and DYD (点呀点) , because I thought it’s worth trying, but quickly realized that this model is very hard to to pull off.

In the US, we have looked at four buckets in food supply to distribution, our thesis is that over time, the production and distribution of the food ideally should be more localized, more self sufficient, we had no idea that COVID-19 would happened. But when you have a pandemic, when you have a more interconnected and interdependent food supply chain, where each region is specialized in one area, when everything breaks down, it creates a problem. So our first investment in the US was in Bowery Farming in New York, because they can do indoor vertical farming, starting with vegetables.  And if the way they’ve done is right, then each of these farms could be replicated throughout the country. If not, in other countries, so that the food production could be localized and self sufficient. The second bucket that we make investments in were food wastage management companies, such as Shelf Engine in Seattle or Odeko in New York City are helping either coffee shops or grocery chains to become more efficient and managing food usage and wastage.

The third bucket where we make investments in is in the food distribution area with GrubMarket in San Francisco, Yamibuy in LA or Boxed in New York made by my partner Jeff Richards, they’re all figuring out how to distribute from the farms to the actual users or from manufacturer brands to the users much more efficiently either to C or to B or some kind of combination. They used to try to do with some kind of wholesale pricing to get cost advantage.

In China, we’re making investments in these high and I was investing in MeituanDianping (美团点评) before I joined GGV, and those are also dealing with supply chain management and food distribution management. In Southeast Asia, we invest in Grab Food, my partner Jixun invested in series B when the company is still a transportation company. And now it has mobile cash wallet, as well as food business. In India, most recently we invested in Khatabook and invested in the most recent round of Udaan, and these are more B2B marketplaces and B2B SaaS. So all these companies mentioned are in a sort of food distribution layer.

The last layer is food prices analytics. As you have data around the world of food production, and crops in weather climate change, you can come up with ways to hedge some of the risk involved with the uncertainties, and test the supply chain risk with indices and other financial instruments. So we think that in food there are multiple areas that one can play, and overtime is geared towards a society where it will become more self efficient in the local area that with worldwide prices information to help them make the most efficient decision locally.

China’s highly urbanized. So, you have community of high-rises, an average community may have 20 to 30 such high-rises, and each tower has between 20 to 40 or 50 floors. Each floor has between four to eight units, depending on the configuration. So you have 10,000 people living in one of such communities. And in that scenario, during COVID-19, these communities are kind of locked down, except one entrance per community. So you can deliver to one place and people in the community will come to that meeting point and pick up. so it is quite efficient because you don’t have to go into all the various tower and go on to various floors via elevators or stairs. Post COVID-19, how do you deal with that and still stay quite efficient and profitable on a per micro warehouse basis?

Cecilia Sun:
During the virus time, it’s true that we cannot enter the community, we have to choose orders in the gate and then customer come over to pick it, and it’s actually increased our efficiency a little bit, around 10% more efficient. But later on, when it opened up as we delivered to the door. It slightly decreased our efficiency, but not that much. From the door to the building may need 10 to 15 more minutes. And for our delivery guys, the biggest impact factor on his efficiency is for one trip, how many orders he can take. So for him to put all orders on the store into the building, it may renews one order only. So during the crisis time, it takes maybe ten orders per trip, and during the non-crisis time, it takes six to eight packages per trip. So per trip orders is similar to per hour orders he can take.

Hans Tung:
So even post COVID-19, it is definitely still high at about five or six packages per trip?

Cecilia Sun:
Yeah, five to six packages per trip is the average number that’s throughout last year.

Hans Tung:
So during COVID-19, it is even high to nine or ten orders?

Cecilia Sun:
Yeah, crisis time is even high. So you’ll see our delivery guy holding too many orders in his box, outside of the box and everywhere on his bike.

Hans Tung:
As you know, food supplies areas and food production areas are spread out but not universally spread out. It got concentrated mostly in the southern region and eastern region. So, as you expand across the country, how do you inset these regions where local food supply may not be as abundant, and you shift from outside. How do you make the cost work in this business model?

Cecilia Sun:
We have some big distribution center that built in some major cities, like Beijing, Shanghai, Guangzhou and Wuhan. So this is actually packaging house. So it contains three functions. One is factory house, and one is distribution center, and the third is the testing center. So from the supply, and we purchase directly from the origin. That’s true that actually in China that different products coming from different provinces, this cross spread out in China. For this products, they coming to Beijing, Shanghai, Guangzhou and Wuhan naturally, so we cope with this farmland, and then the farmland actually ship from their home place to Beijing, Shanghai these co-cities, and then they actually cover the delivery costing from the homeland to our main distribution cities. And this is the delivery.

How we lower the prices of group purchasing that is directly sourcing. Because in China, the sourcing is actually happening many more layers for most retailers. And for us, we don’t have that many layers because we actually can group buy, and we’ll cope with factories and the farmland directly. So actually, we reduce all layers of purchasing that is how we reduce price from the purchase side. So we have a 70% that is coming from this homeland. And why we can do is this also because we have really limited SKUs compared to big supermarkets, we have 1/10 of SKUs they have. So this can help us to have bigger volume per SKU. And then we can have a good bargain price with this origin, and then we can actually directly source from the farm.

Hans Tung:
When we look at one of your competitor like Dingdong (叮咚买菜), they include recipe inside their App as well. So you can order based on food you want to eat or cook and eat for breakfast, for lunch, for afternoon tea, for dinner, and for supper. And within each meal, there are a variety of food. You click on the dishes you want, it tells you what ingredients you should buy that you can buy on App and then tells you how to cook it. I imagine that they can control the number of dishes so that the number of SKUs which is more or less easier to manage. Do you think that makes sense in China? Or is that micromanaging too much that just solving the supply and keep the fewer SKU and get great prices on them is a better model? Between the two, do you see any differences?

Cecilia Sun:
Actually, for Dingdong (叮咚买菜) and Miss Fresh, our model is quite same. There’s no major difference. Our customer group is slightly different. But operation model is similar, for Dingdong (叮咚买菜), their customer base is actually a little bit older than us. So their main customer group is around 40-60 years old. And for us is around 30-50 years old. So this is slightly different on the user group.

But for the other side, actually we are the same. For the menu-based shopping that we actually have it as well, because we have a second tab on App, it also has menus of dishes and then you can click on the menus and then you can know how to cook it and  what to order and buy. So this purchasing is actually similar.

That are two different kinds of shopping behaviors. For some people, they know what they need and then they just go to shelf and order from App. For people that don’t really know what to eat, they can go to the menu side and look at the menu and click on what they want. For the shopping behavior, I think we are the same. For Dingdong (叮咚买菜) and Miss Fresh, we have some difference on the key targeted people.

Hans Tung:
When you once introduced the menu features, did you see any changes in customer order behavior in terms of average order value, in terms of frequency? Do you see any changes at all?

Cecilia Sun:
For customers, order by item is the majority of needs. So we see a customer shopping behavior, 30% is also by searching basis, and 40 to 50% is by screen basis and they just rolling down this list. And less than 10% is actually shopping from this menu basis.

Hans Tung:
In terms of time spent on the app, do you see people spend more time on the App because there’s more things they can browse, and hopefully come more frequently? Does that help in any way?

Cecilia Sun:
Yeah, I think it helps. If you have some contacts on your app, it helps to increase people’s average using time, so that helps. For the retailer, the key features you offer to customer is to help them browse the fruits and buy it more efficiently. And you have your contacts that is inserted in this App, and to help them to have a better experience when browse your App. So it helps.

Hans Tung:
If you look at your MAU and DAU, how frequently do people come back to the App?

Cecilia Sun:
On average is around four times per month. Once a week, that is the average member. And for people in different age, it is quite different. Older people purchase goods more frequently than younger people. So for people who is 50-60 years old, they come maybe one or two days, maybe everyday. And for people that is younger than 30, it’s less than two weeks once.

For younger people, there are two different behaviors. One reason is younger people cook less than older people. secondly, younger people buy more at once, so the ASP is higher for younger people. They may buy over 100-200 RMB once and put it in the refrigerator. That is enough for one week or maybe two weeks. And for older people, they buy more frequently, they cook more frequently. They maybe buy only for one meal and then buy two times a day.

Hans Tung:
Yeah, I can tell my personal experience. My wife and I couldn’t discuss what to eat for each meal. That’s very difficult to plan and purchase for three meals. I think that’s why older people need to purchase more frequently.

Rita Yang:
I actually have a follow-up question on that. I know during COVID-19, that user group that above 40 years old actually grew very significantly for E-grocer Apps. They were at home and they were originally didn’t know how to use it. But their kids also stuck at home. So the kids teach them how to use. I was wondering that China is probably 90% back to normal, at least in Shanghai, what changes you’ve seen on the users who are above 40 years old? Have they gone back to wet market around their neighborhood, or they continued to order from Miss Fresh App?

Cecilia Sun:
COVID-19 really has a long-term impact on people’s shopping behavior. It actually quicken this online penetration trend, maybe two or three years ahead of the original schedule. So one of the biggest impact is to bring older people online. So in the past, they order from wet market and supermarket, and now they have this new experience that is ordering from internet. And because ordering from internet can offer a full variety of food, and it is also more convenient. So when people actually have this better user experience, it’s not that easy to come back to the old way.

So for us, we see these new customers coming from this COVID-19 time for the last three months.The retention rate is similar to the last year, which means that this new group of customer coming up and they actually stayed on the website as before, but of course you have some loss from the new customer as well. And now we also have changed our category combination because of this. Before, our customer is actually younger, which is around 30 to 35. Now we see our customer is actually getting older, the average age is up to 40. So because of this, we actually increase the SKU numbers of vegetables, meat and seafood. And then we actually slightly decrease the SKU numbers for younger people’s need, like snacks and other goods. So this is what COVID-19 has made to us for the last three months, and essentially a long term impact.

Hans Tung:
So as you expand very quickly, how does that impact the traditional Carrefour or Walmart and other Chinese supermarkets? How are they impacted and how are they responding?

Cecilia Sun:
In higher tier cities, supermarkets are also changing their business model. They offer home delivery as well. All of them,Wu Mart (物美) in Beijing, they have Demo online. And Yonghui (永辉) has Yonghui (永辉) online, and RT-Mart (大润发) cooperate with Alibaba together. So for the higher tier cities, they also have a home delivery as well. And another big strategy I think they are doing is that they are moving from high tier cities to lower tier cities.

So for last year’s annual reports from these supermarkets, their growth is coming from a lot of lower tier cities mainly. And their profit is also coming from low tier cities as well. So they have put more focus on the low tier cities. And for high tier cities, they cope with online platforms, or they have their own delivery fleet to do online as well. So these are two different strategies they are using now.

Hans Tung:
It sounds like even Hema (盒马) supermarket store in China is responding to what you guys are doing. The stores cost a lot to build out, it has this amazing user experience inside but also expensive to operate for obvious reasons. Now they came up with the mini version of that to drop out more in neighborhoods. If there is a mini Hema (盒马) around one of your micro warehouses, how will this fact impact your business?

Cecilia Sun:
I don’t see really direct impact between different models because the market is so big. And then we don’t really face the direct competition with each other yet. I think because we’re both getting new customers and we are in a really huge market that we’re competing. For mini Hema (盒马) , I think their model is still using store and store plus online delivery. And same story, a store has higher cost. So, they have to make their price a little bit higher than us. So Hema (盒马) ’s price is actually 20% higher than us on average. So basically this is the price difference between us. mini Hema (盒马) has around the same SKUs as we do.  And user experience is also similar, so we actually have a price advantage than mini Hema (盒马). That also depends on the cost basis for we have different cost structure.

Hans Tung:
This is a great podcast. For me, my biggest takeaway is that as anyone want to do to C business. It’s not about just aggregating demand or promotions and so forth, that is important, but at the same time, you need to figure out a way to build out the logistics delivery distribution system in a very cost efficient manner that will allow the most number of delivery per hour, and then figure out what is the right SKU to cut to be able to provide and distribute to the distribution points needed to be. And whereas a lot of people want to have that amazing in-store experience. The reality is when you have a pandemic like this, the in-store  experience becomes less important, the delivery and effective cost to consumer becomes extremely important.

It is a model that’s worth looking at, and people can do b2b better in the long run, they’ll have a more efficient supply chain or distribution system can end up winning the to C battle when they decide to do so. because they already have built up something that’s much more efficient over a period of time, they’ve had the scale that matters. So in the past, we tend to want to build a to C business immediately. That actually makes more sense to do to B first and then figure out what is the right to C strategy down the road. You think it as a 10-year kind of process. First five years build up strong capability in the to B area, you can always go after the customer later because you have efficiencies already in the system. So that’s a fascinating takeaway. Thank you so much for that.

Cecilia Sun:
Okay, thank you.

Rita Yang:
So you were on the investment side for quite some time. You are an investment banker. What are the adjustment that you have to make since you have been with Miss Fresh from day one? What is the biggest takeaway? And for the entrepreneurs or people who are on the investment side thinking about becoming an entrepreneur, what would be your advice for that?

Hans Tung:
Most people want a white collar, investment banking investor job. Why would you want to give that up to run operation? Fight over your 30 other companies with all raised a lot of money in five and six years?

Cecilia Sun:
Yeah, I think becoming an entrepreneur is quite different from becoming an investor, that’s  really a different kind of life that I’m living. I have made a lot of changes, among all the changes I’ve made, the biggest challenge is to learn to manage a big group people, I think that is the biggest changes. When I was doing investment bank or being a PE investor, you don’t really need to deal with people quite a lot.

You deal with CEO and the chairman only for one company. And in your organization, you deal with associates or analysts.  Maybe only 10 people. So dealing with those people is quite simple. most of them are eligible and easy to deal with. They are self-driven, and you don’t need to push them to do things and they want to learn naturally, and they understand what they are saying.

But for managing corporate and the business, you’re facing very different people. They come from all kinds of backgrounds, and they may not be educated and they may not be that smart. And they may not be that hard working either. There are a large group of them. Our employees are around 1,000 to 2,000 sometimes, and we also have a large group of delivery guys and fleets, which are more than 10,000. So, managing all these kind of people is a challenging task for me. And I have learned quite a lot, how to optimize organization and which is across different kinds of people.

Hans Tung:
Why would you want to do that? I know how hard is to be a founder. It is 90 times harder to get 10,000 people to do what you want them to do. So why do you want to do it?

Cecilia Sun:
First of all, deeply in my heart I think entrepreneurs can really change the world, and can make significant impact on society. Actually, I think entrepreneurship contributes more than investors.

Hans Tung:
I totally agree.

Cecilia Sun:
For me, I think I want to use my limited lifetime to do something that is matters more, and can really change the world. So that’s why I want to do the entrepreneurship. And this is not the first time I do this. When I was in university, I have my first startup, for education, that is the online education platform on which we offer classes and tutorial lessons from Peking University and Tsinghua University to the people who cannot access this kind of lessons like Tieling and Handan, this four or five tier cities.

So that’s the first startup I’ve done before when I was around 18. So that business actually went on quite well, when I was in my school time, so we have really cheap source of students, because they have nothing to do at school. So when you have them to make a video that can teach high school students, they are happy to do that, you just need to pay them like 50 RMB or 100 RMB. Therefore, for students in cities like Tieling and Handan, they really wanted to have better education resources and to get into a better school, especially getting into Peking University and Tsinghua University. So these students are really attractive to them so they are willing to pay to listen to what they say, and to listen to what they are telling them. So this business model naturally comes up, so that is the first startup I’ve done before. and after a few years, I cooperated with other people to do a P2P business in 2010.

But that also when I was in school. After graduation, I still went to investment bank. So I think maybe I need to work first before carrying on my entrepreneur dream. So I work for a few years in banks and PE, and to see how other CEOs manage companies. In the investment banking, I see how this IPO process goes and how other people manage a mature and successful company, and then come to PE and the VC side, to see how people bring a small company to a big one, to meet a lot of CEOs and talk with them about this.

And then after this experience, I think maybe I can try by myself and go back to startup and enterpreneurship again, so I met Zheng Xu, My friend is the angel investor for him, I told him that I think this sector is really sexy. And there is a huge opportunities afterwards. Because for E-grocery, first of all you do grocery as a retailer, and then the upstream for groceries actually is agriculture. In China, agriculture is a fundamental business of the entire country. So there are also a lot of opportunities on the upstream side. So I think it’s really a long term thing I can devote for, from retail to the channel supply chain, and then to the  agriculture. So it makes sense to me. And the team is also quite eligible. And it’s really a strong CEO I have met compared to other CEOs I’ve met before.

So I joined them together as one of partner and then we spent five years together to build up the business. So this is how it comes. I think in the very beginning, I just wanted to do startup, because I want to make some more contribution to the world. And then I tried in the school two times, and then I go to banks and PE to meet more CEOs and to see how they work and then I come up with my own practice and to do this by myself.

Hans Tung:
In this journey, how many times did you have regrets? Like what am I doing here?

Cecilia Sun:
Once I think.

Hans Tung:
Only once?

Cecilia Sun:
For my own philosophy, if I make a choice, I have to make the choice the good one. So I spent time to make a good choice, but afterwards, I have to make it the right choice. So for all the suffering and all the difficulties, I need to face it and come over it. And when the company is growing bigger, it doesn’t mean that you solve all the problems that a bigger company don’t have problems. For example, in the very beginning, I may get really nervous or uneasy to go up and down. So my mood is up and down. But after one year, I don’t have this kind of feeling at all. So your heart is getting stronger.  Your moods don’t really change along wit your business performance. You focus on more fundamental solutions and focused less on the movements of databases. So people are changing.

Hans Tung:
Thank you so much. Cecilia, that was so much fun.

Cecilia Sun:
Thank you, Hans.

Rita Yang:
Thanks for everyone for tuning in. Bye. Have a good day.