The "repurchase" model, which is premised on enhancing product quality, serves as the "internal combustion engine" that drives the success of micro-fulfillment centers. This is the core reason behind their resurgence.

Having shed the debate over its authenticity, the micro-fulfillment center model has recently emerged as a promising business opportunity for various players.

For instance, Dingdong Maicai released its second-quarter financial report, reporting a GMV of RMB 6.22 billion, a year-on-year increase of 16.8%, and a net profit of RMB 103 million, a nearly 13-fold increase from the previous year, achieving the highest quarterly net profit level since 2021.

Meanwhile, Meituan's "Xiaoxiang Supermarket" announced that it had opened over 680 micro-fulfillment centers in the second quarter of this year, with 550 located in the four major first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen. Coincidentally, Meituan's instant alcohol retail brand "Waima Songjiu" has also expanded its presence, opening over 800 micro-fulfillment centers since its launch in June 2021 and planning to increase this number to 1,000 by the end of the year.

Furthermore, Hema will relaunch its micro-fulfillment center model in Shanghai (abandoned four years ago), offering consumers 30-minute delivery services within a 3-kilometer radius. RT-Mart's M Member's Store has also announced plans to strengthen its micro-fulfillment center and store warehouse capabilities. Additionally, retail brands such as Sephora, Muji, Heilan Home, Miniso, and Uniqlo have entered the market through Meituan Flash and Taobao One-Hour Delivery, signaling the increasing importance of instant retail for top brands.

In the face of tangible business growth, the authenticity of the micro-fulfillment center model is self-evident. From early-stage entrepreneurs' "burn and learn" approach to large retail enterprises such as Sam's Club entering the market, the model has evolved from a pseudo-business for VC showcases to a necessity for retailers seeking growth. As it transitions from a loss-making venture to a profitable one, more and more retailers are integrating the micro-fulfillment center model into their business strategies, marking the onset of a mutually beneficial positive cycle in instant retail.

Rather than focusing on the "necessity" of the business model, industry insiders are now turning their attention to extending the lifespan of micro-fulfillment centers. Currently, three major camps within the industry (store-warehouse integration, store-warehouse separation, and warehouse-only models) are each exploring optimal paths within their respective models.

01 Breakthrough Points: New Customer Flow, Activity, and Repurchase Rate

Flashing back to 2022, pioneering micro-fulfillment center operator Missfresh collapsed, with its four-year burn rate of RMB 14.2 billion seemingly reaffirming that this model is one of the most challenging under the instant retail trend.

At the time, the mainstream industry view was that user numbers, average order value/gross margin, and fulfillment costs constituted an "impossible triangle" for the micro-fulfillment center model, making it difficult to achieve high user numbers, high average order value/gross margin, and low fulfillment costs simultaneously. Failing to meet all three criteria meant the model was unprofitable.

Figure: The "Impossible Triangle" of the Micro-Fulfillment Center Model

The reason for this is that micro-fulfillment centers, built upon the traditional "city center warehouse" layout in remote areas, adopt a "denser" strategy by selecting more locations closer to densely populated communities, covering a 3-5 km radius. Products are distributed from the central warehouse to micro-fulfillment centers and then delivered by riders based on orders, with the fastest fulfillments taking as little as 30 minutes.

The additional delivery step in the micro-fulfillment center model increases transportation costs and loss rates. Meanwhile, to reach a larger customer base, warehouse construction costs continue to rise, while shorter delivery times drive up "last-mile" fulfillment costs.

According to Missfresh's financial report, in 2021, the company's total revenue was nearly RMB 7 billion, a year-on-year increase of 13.3%, but operating costs reached RMB 10.812 billion, a year-on-year increase of nearly 40%. Separately, Huatai Securities estimated Dingdong Maicai's single-warehouse model for 2021, revealing that rental costs accounted for 2.7%, delivery costs 9.8%, labor costs for micro-fulfillment centers 5.2%, and rental costs for central warehouses, utilities, and central warehouse sorting/logistics totaled 11.1%, 1.2%, and 7.4%, respectively.

The 2021 financial data directly exposed the shortcomings of the micro-fulfillment center model. However, this issue is not entirely unsolvable. High costs and loss rates can be offset by order volume, and as long as consumers become accustomed to the model, there is still ample room for micro-fulfillment centers to thrive. Huatai Securities estimates that if a single micro-fulfillment center achieves 1,500 orders per day with an average order value of RMB 75, it could potentially achieve an operating profit margin of 0.4% without considering management and R&D expenses.

Source: iResearch

Industry players were well aware of this logic at the time, but during the rapid land grab phase, most chose to drive order volume through new customers, expanding their user base through large-scale subsidies and marketing. Around 2020, Missfresh's customer acquisition cost for its first order was RMB 30-40, and it required six consecutive orders to cultivate stable repurchase rates, with a retention cost of RMB 200 per new customer.

However, the instability of new user growth and the high cost of customer acquisition (including online traffic and offline promotion expenses) posed challenges. Consequently, repurchases became the ideal source of order volume, with Dingdong Maicai's founder Liang Changlin repeatedly emphasizing the importance of repurchase rates. "People may think traffic is crucial, but we believe repurchase rates are paramount, as they sustain user demand," he said.

Furthermore, repurchases premised on enhanced product quality serve as the "internal combustion engine" that drives the success of the micro-fulfillment center model, which is also the core reason for its resurgence.

Compared to the market environment in 2020, the cost challenges facing micro-fulfillment centers persist. While more precise digital means can reduce loss rates, the fundamental issue remains unresolved. The only variable is that consumers are gradually embracing the instant consumption model of "everything delivered to your doorstep."

This is evident from Dingdong Maicai's financial report, which revealed during its second-quarter earnings call that the monthly average number of ordering users was approximately 7.3 million, a year-on-year increase of 11.7%. The monthly average revenue per user increased by 6% compared to the same period last year, with monthly average revenue from members exceeding RMB 500.

Figure: Dingdong Maicai

Deeply rooted in Jiangsu, Zhejiang, and Shanghai, Dingdong Maicai has firmly captured the hearts of consumers in these regions, with increasing order frequency driving brand growth and profitability through supply chain optimization.

Looking back, despite the departure of pioneering micro-fulfillment center operators, years of evolution and trial-and-error have paved the way for new approaches and exploration opportunities. With timely adjustments, the micro-fulfillment center model has evolved from a pseudo-concept into a business model gradually gaining consumer recognition.

02 Three Camps: A New Ecosystem of Complementary Store-Warehouse Integration

From an operational perspective, micro-fulfillment centers can be classified into platform warehouses and self-operated warehouses. Platform warehouses refer to merchants operating online stores on third-party instant retail platforms while managing their offline warehouses independently, exemplified by Meituan Flash merchants. Self-operated warehouses, on the other hand, encompass merchants who operate both their instant retail platforms and offline warehouses. These can be further divided into two categories: instant retail platform resource micro-fulfillment center models represented by Xiaoxiang Supermarket, JD.com's 1-Hour Delivery, and Pupu Supermarket, and retailer-built online platform models with offline warehouses, such as Sam's Club Cloud Warehouse and Yonghui Supermarket's full warehouse system.

Source: "2024 Instant Retail Micro-Fulfillment Center Innovation and Development Report"

From a "store-warehouse" perspective, three major camps remain in the micro-fulfillment center landscape: store-warehouse separation, store-warehouse integration, and warehouse-only models. As players explore suitable strategies within their respective models, they also provide insights into the iterative direction of the overall model's segmentation.

Taking the "store-warehouse separation" camp as an example, a representative player in this model is Sam's Club, whose business core lies in "store-warehouse synergy." By leveraging store sales data to formulate micro-fulfillment center inventories, Sam's Club minimizes losses and drives sales frequency through store user traffic. In turn, consumption habits cultivated in micro-fulfillment centers enhance user stickiness and business growth for stores.

In 2018, Sam's Club piloted the micro-fulfillment center model in the domestic market, offering a more streamlined inventory compared to its stores. While stores carry around 4,000 SKUs, micro-fulfillment centers stock only around 2,000, focusing on high-frequency fresh produce, perishables, food, and fast-moving consumer goods to boost sales velocity.

From a cost perspective, Sam's Club currently operates 330 micro-fulfillment centers in China, each requiring an investment of approximately RMB 300,000. Each micro-fulfillment center employs only 1-2 full-time staff, with the rest outsourced to third parties, minimizing labor costs.

Figure: Sam's Club Cloud Warehouse's "Express Delivery" Service in Tianjin

Sam's Club's product mix leads to higher average order values, supported by its brand strength and membership system, which drives repurchase frequency. Consequently, Sam's Club is well-positioned to leverage the dual layout of "store + warehouse" in micro-fulfillment centers. Similarly, this model suits retailers with high brand recognition, strong purchasing power among target customers, and steady membership growth, such as Sam's Club.

RT-Mart's M Member's Store layout supports this notion. According to Retail Business Finance, the Yangzhou store simultaneously launched online operations on its opening day, while the Jiaxing store initiated online operations four months before its offline opening. Furthermore, the Yangzhou store established a micro-fulfillment center 7 km away from the store, with plans to continue expanding micro-fulfillment centers as membership grows.

To some extent, RT-Mart stores can be viewed as micro-fulfillment center locations. "Store-warehouse integration" not only reduces micro-fulfillment center establishment costs but also minimizes loss risks through natural in-store traffic, contributing to its reputation as an optimal solution for micro-fulfillment centers. Representative players include Hema, JD.com's 7FRESH, Yonghui Supermarket, and Wumart.

"Store-warehouse integration" leverages minimal costs to drive business growth, essentially a phased product of retailers' omnichannel operations. While it seemingly involves simply adding online channels, the long-term challenge lies in reconfiguring the combination of in-store and online businesses and overhauling the backend supply chain.

Wumart began promoting store-warehouse integration in 2015, fully implementing it across all stores by 2020. Wumart emphasizes that store-warehouse integration primarily tests backend systems, demanding rigorous cost control over personnel, space, and logistics. A mature backend system necessitates multiple trials and adjustments.

However, the online business aspect of "store-warehouse integration" tends to focus solely on "incremental growth." Since stores and warehouses overlap, their coverage areas are essentially the same, limiting the ability of online operations to bolster offline business. Additionally, the convenience of online services can overshadow offline operations, leading to internal competition.

Nevertheless, the low-cost entry point of store-warehouse integration has nurtured new forces, with brands like Miniso and Uniqlo expanding micro-fulfillment center category boundaries and player types within the industry.

Figure: Suning Tesco Joins Meituan Flash

These brands already possess a fixed customer base, and the store-warehouse integration model enhances operational efficiency. Collaborating with third-party instant retail platforms further reduces fulfillment costs, facilitating a transformative "leveraging a small force to move a heavy weight" strategy.

The final camp is "warehouse-only," representing the initial form and initially most criticized aspect of micro-fulfillment centers. However, through supply chain optimization and consumer mindset cultivation, representative players like Dingdong Maicai and Pupu Supermarket have delivered positive results.

Without offline stores to drive traffic, the warehouse-only model faces greater challenges in user acquisition, lacking a crucial prerequisite for success. The solution lies in profiting from the supply chain, leveraging digital systems to optimize inventory more precisely, and increasing sales velocity through repurchases, creating a positive flywheel effect.

Previously, the warehouse-only model was more suitable for fresh food e-commerce. On the one hand, the high-frequency and rigid demand for fresh food ensures repurchases; on the other hand, the immediacy of fresh food aligns naturally with consumer shopping habits.

Source: iResearch

However, as consumer education advances and platforms like Meituan and Ele.me vigorously promote instant retail, the warehouse-only model has reached a turning point, expanding its product categories.

Firstly, Meituan and Ele.me have entered the market with flash warehouses, Dense layout builds a stage for merchants 。Already, the first batch of mature online convenience store formats have emerged. Taking Feixiang Convenience Store's Harbin branch as an example, by early 2024, it offered 4,500 SKUs, with an average of 400 daily orders and a peak of over 572 orders in a single day. Within 16 days of operation, it ranked first in popularity among convenience stores in its business district, surpassing 10,000 orders within 50 days.

Furthermore, Meituan launched Xiaoxiang Supermarket, leveraging its platform-operated model and proprietary brands to enhance product quality and rapidly expand its presence. From January to June this year, online orders and user numbers at Xiaoxiang Supermarket in Shanghai increased by over 30% year-on-year.

Notably, when fulfillment-capable platforms assist merchants in expanding their businesses, they offer more than just traffic inlets; they also provide complementary fulfillment and digital capabilities. The former empowers merchants to confidently choose locations with lower rents and larger spaces, increasing SKUs and sales; the latter enables deeper insights into sales trends, facilitating timely adjustments to avoid inventory risks.

Purely from a model perspective, the warehouse-only model, based on mature supporting facilities, offers lower replicability and a longer lifespan. In contrast, the store-warehouse separation model has the highest barriers to entry and is suitable only for versatile players. Each camp adopts different solutions, catering to the diverse needs and aspirations of businesses of varying sizes and types seeking to deploy micro-fulfillment centers.

03 New Challenges in the Comeback

Although the basic micro-fulfillment center model has proven successful, as market education penetrates and the overall landscape matures, new challenges arise.

For players in the "store-warehouse separation" and "store-warehouse integration" camps, a crucial issue is making offline stores worth visiting. Online business growth, with its immediacy and convenience, has made it increasingly common for consumers to purchase goods of similar quality without leaving home. As such, offline stores must provide compelling reasons for customers to visit.

Further segmented, Sam's Club, which separates its stores from its warehouses, boasts its offline stores' "check-in" appeal, complemented by on-site tastings and cafes, creating an environment that encourages consumers to linger. Moreover, Sam's Club specializes in high-volume, centralized purchasing scenarios, making shopping frequency less impactful.

Players adopting the "store-warehouse integration" model are also gradually strengthening their offline presence. For instance, Wumart recently added a "canteen" section to its supermarkets and aims to expand this service to 20 stores by the end of the year, leveraging food and beverage to attract customers and boost offline traffic. Before the introduction of the canteen business, the daily sales of Wumart Zhongguancun's food stalls were only around RMB 3,000-4,000. However, since the trial opening of the canteen a week ago, daily diners have exceeded 500, with food and beverage sales surpassing RMB 10,000.

Photo: Wumart Canteen

Another force driving "store-warehouse integration" is brands themselves, who are strengthening their offline competitiveness through enhanced customer experiences. Take Uniqlo as an example. It is gradually closing inefficient stores and opening larger ones in core first-tier cities. Earlier this year, Uniqlo opened an urban experience store in Wuhan, which not only sells clothing but also features floral arrangements and other amenities to make the store more engaging.

It is evident that players with physical stores cannot solely focus on expanding their online presence when leveraging forward warehouses to drive business growth. Instead, they must preserve offline characteristics through "store-warehouse collaboration."

For players with warehouses but no physical stores, the challenges lie in two areas: product competitiveness and location selection.

Firstly, in the "warehouse-only" model, product categories have expanded beyond fresh produce and fast-moving consumer goods to include apparel, 3C products, and more. The continuous entry of new players has driven an increase in product categories, rendering generic products less competitive. Only products that offer unique value or superior quality can stand out in a sea of homogeneity.

This is the core reason why Eleme Supermarket launched brands like Chef Elephant, and Dingdong Maicai introduced over 20 private labels, including Cai Changqing, Dingdong Haoshihui, Dingdong Wangpaicai, Boxing Shrimp, and Dingdong Damanguan. Only attractive products can drive repeat purchases.

The essence of this trend mirrors the evolution of offline retail enterprises. When products are no longer scarce, private labels enhance competitiveness and reduce operational costs.

For online convenience stores specializing in standardized products, it is challenging to differentiate with unique offerings. Instead, they rely on extensive SKU counts of over 5,000 to compensate, embracing comprehensiveness over specialization.

Secondly, regarding location selection, as more players enter the market, those who can secure prime locations and reach denser populations will reduce fulfillment costs and improve operational efficiency. Gradually, they can cultivate ordering habits among surrounding consumers and gain more control over order volumes and repeat purchase rates.

Zooming out, the overall forward warehouse industry is maturing under increased investments from various players. A notable characteristic of this maturity is increasingly clear division of labor. As the industry transitions from its incubation phase to full-fledged development, it signals that few new, comprehensive players are likely to emerge. Instead, the Matthew Effect will prevail, where the strong will continue to grow stronger.