Recently, JD.com's 7FRESH integrated with its dark stores and proclaimed the slogan, 'Unbeatable prices, truly affordable with no fear of comparison,' challenging competitors like Hema, Meituan Elephant, and Dingdong Maicai.

The price war in the instant retail arena continues to intensify for 7FRESH. On November 15, 7FRESH announced on its official WeChat account, '10% cheaper! If competitors dare to follow, 7FRESH dares to keep lowering prices,' indicating an increase in the strength of its 'unbeatable prices' strategy.

7FRESH was a project launched by JD.com in 2017 to compete with Hema, also adopting the store-warehouse integration model. As early as 2015, JD.com established a fresh food cold chain project team, investing in Tiantian Fruit and Yonghui Supermarket, and officially setting up the JD.com Fresh Business Department in January 2016.

Over the past nine years, while peers have either closed down or become profitable, JD.com Fresh has not missed any trend but always seems to be 'a step behind.' Now, JD.com's 7FRESH is once again stepping up its efforts, suddenly engaging in a price war.

Upon closer examination, it becomes clear that JD.com's approach to instant retail has undergone a series of transformations, including the 'JD Daojia' model, the '7FRESH' store-warehouse integration model, the 'Jingxi Pinpin' community group-buying model, and the 'JD Maicai' dark store model. What is the connection between the latest integration of JD.com's 7FRESH with dark stores and its previous explorations? Why does JD.com keep failing yet keep trying in the instant retail sector?

Author | Akong | Editor | Haoran

This is an original article by Shangyin Society. For reprints, please contact us.

01

'JD Daojia' Model: Acting as a Middleman Only

JD Daojia, now known as JD Miaosong, was initially overseen personally by Liu Qiangdong. In simple terms, it cooperates with numerous offline stores to provide one-hour express delivery services, equivalent to an 'online one-hour retail convenience store.'

Instant retail began with fresh produce. 2015 was a highlight for the fresh produce e-commerce industry, with over 10 billion yuan in funding. JD.com also made a high-profile entry into this sector that year, contributing the largest single financing in the fresh produce e-commerce field at the time.

Liu Qiangdong once gave a clear explanation for this move: 'My expectations for JD Daojia are similar to Tencent's expectations for WeChat. Fresh produce is an ultra-high-frequency product, and we hope JD.com has a dedicated app that can be opened daily on mobile phones, unlike JD Mall, which you might not open every day.'

In 2015, after over a decade in e-commerce, Liu Qiangdong discovered that clothing, footwear, and electronics sold well online, but fresh produce, the largest consumer category, did not. This was because delivering fresh produce via the e-commerce model could result in delivery costs exceeding the cost of the product itself.

Therefore, JD.com's initial approach was to use JD Daojia to deliver fresh produce from the nearest supermarkets to consumers' homes, meeting consumer demand while also aiding offline supermarkets.

While helping offline supermarkets develop was a stated goal, the reality was that the gross profit margin of fresh produce is mostly below 20%, and it is perishable, with more wastage leading to lower profits. Therefore, JD.com chose to hand over this arduous task to partners, only providing the guaranteed profitable delivery service.

As a result, JD.com invested 70 million dollars in Tiantian Fruit, valuing its ability to control imported fruit products. Similarly, JD.com heavily invested 680 million dollars in Yonghui due to its strong supply chain capabilities and effective control over profit margins and wastage rates for individual products.

However, it is puzzling that JD.com's superior logistics did not become the primary delivery channel for JD Fresh. Instead, in 2016, it merged with the crowdsourced logistics platform Dada. After the merger, they operated independently, with Dada responsible for JD Daojia's logistics and delivery services.

One theory is that JD.com's investment in logistics was too high, and it had not fully recovered its costs at the time. To build another end-to-end, cold chain-specific channel for fresh produce e-commerce according to JD.com's standards was a difficult decision for Liu Qiangdong to make.

Thus, the 'JD Daojia' model can be understood as one where both goods and logistics are provided by allies, with JD.com merely acting as a middleman. The success of this model depends entirely on its allies, putting JD.com in a very passive position.

While some large and medium-sized supermarkets participated in the distribution of fresh produce, starting from a higher point than convenience stores, it still could not change the issues of scattered supply sources, low standardization, and varying service levels.

This prevented JD Fresh from establishing a high-quality, unified impression in the minds of consumers.

Theoretically, there is no loss in only providing delivery services, but in reality, JD Daojia added a level of supply chain, directly incurring delivery fees of 3-8 yuan per order. However, the average order value per order is only around 30-50 yuan, so who will cover the nearly 10% delivery cost?

To balance the interests of consumers, offline merchants, and delivery personnel, JD.com's subsidies have never stopped. Additionally, there is an extra handling step, which increases the risk of wastage, and subsequent returns also constitute an additional expense.

However, the biggest issue remains the poor management of allies. As early as July 2016, Tiantian Fruit was reported to have closed all stores in 202 cities. Today, it only maintains a WeChat mini-program for selling imported fruits, delivered the next day via SF Express. Yonghui has also faced difficulties, once closing over 400 stores and seeing its market value shrink by over 80 billion yuan.

With allies closing stores, cooperation with JD Daojia becomes unsustainable. Moreover, JD Supermarket and JD Daojia merchants are in a competitive relationship. JD.com's traffic cannot be generously shared with allies. Although they are allies, there is still room for negotiation.

In September this year, JD.com sold its stake in Yonghui for 6.27 billion yuan to Miniso. JD Daojia also ceased providing delivery services for Tiantian Fruit and Yonghui, silently declaring the failure of this model.

02

'7FRESH' Model: Following in Hema's Footsteps

7FRESH was a project launched to compete with Hema. In December 2017, 7FRESH opened its first store in Yizhuang, Beijing, JD.com's headquarters, while Hema already had 22 stores at that time.

It is worth mentioning that Hema's founder, Hou Yi, was once the founder of JD Daojia's predecessor. He led the cooperation with Tangjiu Convenience Store, adopting the lightest convenience store dark store model. However, he found that such a light model could not solve inventory and experience issues, so he proposed a heavy model solution similar to Hema but did not receive support from JD.com.

In early 2015, Hou Yi left JD.com and returned to his hometown of Shanghai, where he spoke with Daniel Zhang, then CEO of Alibaba and his fellow countryman. Zhang wanted to explore an online-to-offline integrated new retail model, while Hou wanted to start with a heavy-model fresh produce supermarket, developing offline first and then connecting offline and online through data. They immediately agreed, leading to subsequent developments. Hema's 30-minute delivery service also utilized Hou Yi's experience in planning the entire logistics and warehousing system during his time at JD.com.

7FRESH's progress has been quite slow. Currently, 7FRESH has 54 supermarket stores and 17 lifestyle stores, covering only seven cities. In contrast, Hema has opened 400 stores across over 30 cities, encompassing various formats such as Hema Supermarket, Hema Mini, X Membership Store, NB, and Outlet.

Whether in terms of store opening speed, number of stores, or business formats, there is a significant gap between 7FRESH and Hema. In other words, 7FRESH only serves a very small segment of the customer base and has not yet established a brand.

Moreover, a visit to a 7FRESH store reveals striking similarities to Hema, both consisting of supermarkets, dining, warehousing, and sorting and delivery. The primary customer base is also middle-to-high-income users in first- and second-tier cities, with no significant differentiation.

However, the good news is that in 2021, 7FRESH announced that all its stores that had been continuously operating for three years were profitable, and stores between two and three years old were close to profitability. This may be the reason why JD.com places such emphasis on 7FRESH.

03

'Jingxi Pinpin' Model: Burning Money to Make Mistakes

From a financing perspective, community group-buying emerged in 2018 and experienced over a year of internal reshuffling before regaining capital attention due to the pandemic.

At its peak, there were over 300 community group-buying platforms competing nationwide, including internet giants led by Didi, Meituan, Pinduoduo, and Alibaba, as well as startups led by Xingsheng Youxuan, Shixianghui, Shihuituan, Tongcheng Life, and Meijia Maicai.

Unlike previous investments, JD.com this time personally entered the fray, establishing 'Jingxi Pinpin' to join the community group-buying battle. The Jingxi Business Unit, where Jingxi Pinpin is located, was upgraded to a business group led by Liu Qiangdong, targeting the lower-tier market.

On its launch day, Jingxi Pinpin opened in 13 cities and subsequently expanded to nearly 80 prefecture-level cities within four months.

However, most of the giants' forays into community group-buying at that time were fueled by high investments. Data shows that JD.com's new businesses incurred a cumulative loss of nearly 10.6 billion yuan in 2021, with Jingxi Pinpin being one of the significant contributors to these losses.

The direct cause of the losses was that Jingxi Pinpin relied heavily on local procurement, with almost no national centralized procurement, resulting in higher procurement costs and difficulty in forming a price advantage and scale. During its peak in 2021, Jingxi Pinpin's average daily order volume did not exceed 7 million. In contrast, the first-tier players Meituan Youxuan and Pinduoduo Maicai had average daily order volumes exceeding 40 million.

In reality, Jingxi Pinpin lost at the starting line, as Meituan Youxuan, Pinduoduo Maicai, and others had already entered the community group-buying market. Earlier, community group-buying enterprises such as Xingsheng Youxuan, Shihuituan, and Tongcheng Life had been dominant for years. As a latecomer, Jingxi Pinpin had limited opportunities, and burning money did not yield corresponding scale.

To control costs, Jingxi Pinpin began reducing commissions. Starting from December 2021, its group leader commissions in Jiangsu and Zhejiang regions were reduced from 10% to 3-5%. However, group leaders are crucial in community group-buying, serving as bridges connecting the platform to users in lower-tier markets. Reducing commissions would directly lead to the loss of group leaders, effectively abandoning the market.

At JD.com's strategy meeting in July 2022, Liu Qiangdong acknowledged the failure of 'Jingxi.' This first-tier business group tailored for the lower-tier market only existed for two and a half years before being hastily disbanded.

However, a year later, JD.com once again picked up the marginalized community group-buying, renaming Jingxi Pinpin to 'JD Pinpin.' But after experiencing incidents such as 'warehouse explosions' on the first day of opening in Hefei and direct backend refunds, 'JD Pinpin' almost completely suspended its city expansion plans.

Perhaps community group-buying itself is not a very good business model. It involves a series of processes such as pre-sales, centralized procurement, delivery, and self-pickup through group leaders, inherently plagued by issues such as unreliable product supply and varying product quality, making it difficult to form a stable customer base.

Moreover, community group-buying belongs to community retail, which is merely a supplementary form of offline and e-commerce retail, inherently holding a small market share. Relying on community retail to defeat and replace offline and e-commerce retail is virtually impossible.

Today, companies like Tongcheng Life, Shixianghui, Shihuituan, and Didi have already exited, while Pinduoduo Maicai and Meituan Youxuan once occupied nearly 90% of the community group-buying market share but have never been profitable, teetering on the brink of abandonment.

04

'JD Maicai' Model: A Two-Pronged Approach

In February 2023, JD.com quietly restarted its dark store business, operating 17 dark stores on a trial basis in Beijing over the past year.

Compared to peers, JD Maicai is still relatively small in scale. Dingdong Maicai and Meituan Maicai each have about 100 locations in Beijing, while Sam's Club has over 20 locations.

A dark store is a commonly used model in the fresh produce e-commerce industry, where fresh produce is first transported and stored in dark stores for subsequent delivery, with each store covering an area of about 3 kilometers around it, enabling delivery within about 30 minutes after ordering.

In 2015, Missfresh opened its first dark store in Wangjing, Beijing, and at its peak, had over 1,500 dark stores in 20 cities nationwide. As early as 2018, when Missfresh announced that it had achieved break-even in Beijing and maintained positive cash flow growth for nearly a year, JD Fresh began planning dark stores, but there was no news after 2020.

However, Missfresh collapsed in July 2022, primarily due to excessive costs, including rent, utilities, multi-temperature storage, consumables, and labor, which were unavoidable.

Once upon a time, dark stores were labeled as a 'pseudoproposition' and 'never profitable,' facing an 'impossible triangle' among user numbers, average order value/gross profit margin, and fulfillment costs.

However, in the fourth quarter of 2022, Dingdong Maicai, which also focuses on the dark store model, achieved profitability, marking the first overall profitability in the fresh produce e-commerce industry and giving the industry hope for the profitability of the dark store model.

Dingdong Maicai's profitability stems from cost control, reducing its footprint, and minimizing money-burning subsidies. Additionally, it has a sufficient order volume to cover costs. Moreover, Dingdong Maicai continuously optimizes its supply chain, with 80% of its fresh produce sourced directly from producers, shortening intermediate links, ensuring quality, and increasing profit margins.

JD Maicai adopts a self-operated and aggregated model. On the one hand, in November last year, JD.com launched the 'Daily Fresh Market' event, shortening the procurement, logistics, and decision-making chains through direct sourcing to achieve the lowest market prices overall. Additionally, it launched an evening 'clearance sale' event, offering discounts of up to 50% on leftover produce from the day.

Objectively speaking, JD Maicai's products lag behind competitors in terms of variety, seasonal offerings, and fresh produce processing. Therefore, JD Maicai has made multiple efforts, aggregating third-party merchants such as JD 7FRESH, Dingdong Maicai, Baiguoyuan, Wumart, and more, following a similar approach to JD Daojia, with Dada providing delivery services.

05

7FRESH and Dark Store Integration Model: A New Unknown

JD.com's integration of 7FRESH with dark stores was seamless: In September this year, 7FRESH was reported to have opened its first dark store in Beijing, just 1 kilometer away from Xiaoxiang Supermarket. By the end of October, JD Maicai was merged into 7FRESH. In early November, 7FRESH ignited a price war.

This move may have been inspired by Sam's Club's combination of physical stores and express delivery cloud warehouses, showcasing the huge market potential of integrating physical stores with dark stores.

In the second quarter of this year, Sam's Club continued to record double-digit growth in China, with about half of its sales coming from online channels, and the number of 'one-hour express delivery' orders increasing by 28% to 59 million.",

By combining large stores with cloud warehouses, Sam's Club covers both online and offline scenarios, meeting the instant consumption demand in core areas, increasing purchase frequency among members, effectively attracting new members, and improving renewal rates among existing members.

Currently, JD Seven Fresh focuses on an integrated instant retail model that combines offline supermarkets, self-operated front warehouses, and e-commerce platforms. Self-operated physical stores can ensure that consumers get what they see in terms of product quality, while self-operated front warehouses can cover more areas and ensure timely delivery; at the same time, they can leverage JD's supply chain scale and efficiency advantages.

However, current consumer feedback is not optimistic. After being forced to switch from JD Fresh to JD Seven Fresh, users found that some prices had increased, delivery thresholds had risen, evening discounts had disappeared, some frequently purchased fresh products were no longer available, and product quality control at JD Seven Fresh was unstable.

Based on the above analysis, JD Seven Fresh has a relatively small market share and has not yet cultivated a stable customer base. Previously, JD Daojia failed to cultivate a user mindset for quality products, JD JoyBuy failed to penetrate the lower-tier market, and JD Fresh attracted mainly deal seekers.

06

Why Hasn't It Taken Off?

Over the past nine years, JD.com has tried almost all mainstream models in the fresh food e-commerce sector and has not missed any trend. But why hasn't it gained scale and influence?

The first reason may be strategic indecisiveness. Grocery shopping is not JD's main business but rather a tool to attract traffic. JD has never been fully committed, and its organizational structure has undergone multiple adjustments, resulting in many efforts being half-hearted and core competencies not being forged before being halted.

Taking JD Seven Fresh as an example, unlike Hema, which received personal encouragement from Jack Ma and Daniel Zhang multiple times, JD Seven Fresh did not receive sufficient strategic attention.

Preparation for JD Seven Fresh began in the first half of 2017. The early team comprised two groups: one led by Wang Xiaosong and his JD Fresh team, and the other led by Du Yong's offline retail team.

Wang Xiaosong is a JD veteran, while Du Yong was a professional manager invited to lead the JD Seven Fresh project. There were significant differences between their approaches. Wang Xiaosong's approach was more internet-focused, emphasizing rapid iteration and hoping to leverage JD's brand; while Du Yong's approach was more offline-focused, emphasizing store perfection and single-store models, initially unwilling to leverage the JD brand but rather exploring the model first.

Due to these differing approaches and poor internal communication, this business carrying JD's dream of boundaryless retail faced difficulties from the outset.

In early 2018, Du Yong led part of the team to leave, and JD Seven Fresh's early operators exited the project. JD appointed Wang Xiaosong as President of the FMCG Business Group, which included the Consumer Goods Division, New Channel Division, and Fresh Food Division, with JD Seven Fresh being just one of its businesses.

In December of that year, JD underwent another organizational restructuring, disbanding the less-than-one-year-old FMCG Business Group. Wang Xiaosong returned from the FMCG Business Group to lead JD Seven Fresh and the Fresh Food Division, focusing on the fresh food business.

Later, JD launched a core executive rotation plan, transferring Wang Xiaosong from his position and appointing Wang Jing to take over. JD Seven Fresh underwent its strongest reform and iteration, becoming a gourmet solution supermarket, establishing the OFC strong management franchise model, and introducing new formats such as 7FanClub and JD Seven Fresh Life.

However, this good situation did not last long. Within less than a year, JD Seven Fresh underwent another leadership change, with Zheng Feng replacing Wang Jing. Upon taking office, Zheng Feng restructured the strategy, focusing more on the Beijing-Tianjin-Hebei region and the Guangdong-Hong Kong-Macao Greater Bay Area, preferring self-operation over franchising, emphasizing organizational efficiency, highlighting front-end departments such as operations, production and sales, and marketing, and adopting a "small headquarters, big stores" model.

Confusingly, in February of this year, JD PLUS adjusted its benefits and will no longer enjoy JD Seven Fresh privileges. This means that JD's premium members will not be directly referred to JD Seven Fresh.

JD Seven Fresh has been frequently adjusting its organizational structure and replacing executives. Each executive has different strategic and management approaches, resulting in JD Seven Fresh never having a clear strategy or approach. Many good ideas have not been fully implemented before being changed again.

It is difficult to accumulate core competencies to solve instant retail problems in this way, so there is no significant differentiation from competitors and a unique user mindset has not been cultivated. Moreover, there is overlap between different departments' businesses, making it difficult to concentrate all efforts on capturing a market segment.

Another important reason is that JD mostly decides to enter a market only after competitors have validated the model's feasibility. By the time JD enters, its competitors have already captured a share of the market, often leading to fiercer competition. This is true for both community group buying and front warehouses.

Moreover, JD Fresh's front warehouses are still incurring losses, and they have not yet explored a profitable model for front warehouses. By following Sam's Club and adding physical stores to front warehouses, JD has introduced more uncertainty.

Instant retail emerged in 2015, primarily for fresh produce. It has evolved to enable rapid delivery of almost all categories, including fruits, vegetables, grains, oils, and condiments, seafood and aquatic products, digital products, alcohol and kitchenware, and daily necessities, within a short period.

Currently, after years of operation, Hema, Xiaoxiang Supermarket, and Dingdong Maicai have gained a loyal customer base and brand influence. It will be challenging for JD Seven Fresh to compete for users through price wars, and the sustainability of price wars remains to be seen.