China’s Race to Sell Groceries Online Is Getting Crowded

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Selling groceries online has become hot in China. The cash necessary to succeed may keep investors cool, though.

Chinese online grocery companies MissFresh and Dingdong Maicai both filed to list in the U.S. on Tuesday. The two companies deliver fresh food and other household supplies to customers in China’s bigger cities within an hour of orders being placed. MissFresh is backed by Tencent, while Dingdong counts SoftBank among its investors.

They are tapping the market at a point when every Chinese internet giant is getting into grocery. The appeal is clear: Grocery shopping online is still relatively uncommon, even in China, which leads the world in e-commerce. Research firm eMarketer expects more than half of China’s retail sales to happen online this year, but for groceries the share was 10% of sales in 2019, according to a McKinsey report published in November. The pandemic prompted some people to buy groceries online last year, and many of them will likely stay around. McKinsey expected the online share to rise to between 18% and 28% in 2022.

The strong growth is reflected in the two companies’ financials. Dingdong, which started its business in 2017, reported $1.7 billion of revenue for 2020, nearly triple the previous year’s number. MissFresh’s revenue last year was nearly $1 billion, a 73% increase from 2018.

Both companies target customers who value fast delivery and quality products. MissFresh said its average delivery time was 39 minutes in the first quarter this year, while Dingdong said it aims to get orders to customers within half an hour. They can do that as they have mini-warehouses dotted throughout the cities where they operate—a model that involves a lot of upfront investment. Both companies remain in the red.

The companies also face intense competition, including from internet giants like Alibaba,

JD.com

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and Meituan. For example, more than half of sales for Alibaba’s supermarket chain Freshippo came through the internet. The e-commerce giant bought a controlling stake in big-box supermarket operator Sun Art last year.

While the model favored by MissFresh and Dingdong serves wealthier urban dwellers well, it would be too expensive to roll out to smaller cities. A new shopping method called community group buying has become popular in these more rural areas. A community leader, usually a local shop owner, buys goods in bulk from e-commerce companies at a discount and handles the last-mile distribution.

Internet giants including Pinduoduo and Meituan are pouring money into the business. JD.com invested $700 million in Xingsheng, one of the bigger community-group platforms, in December.

Online grocers are spending money on discounts and rebates to attract customers, in addition to logistics infrastructure. Going public will help MissFresh and Dingdong to replenish their war chests, but they could continue to burn cash for a while, particularly given the deep-pocketed giants that are also in the race. Meituan slipped back into the red in the past two quarters, mostly because it ramped up investments in this area.

Online grocery offers promising prospects in China, but winners may emerge only after a prolonged fight.

Write to Jacky Wong at jacky.wong@wsj.com

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