Missfresh Highlights Troubles Facing Chinese Online Grocers

The company, once valued at $3 billion, said last week that an expected equity investment of about $30 million didn’t come through. Missfresh had agreed on the investment with a local coal-mining company, Shanxi Donghui Group, earlier last month.

The troubles at Missfresh, known for its pink-shirted workers dashing on motorbikes to deliver groceries, is the latest example of the scars that China’s yearlong regulatory assault has left on its tech sector. It also underscores the cooling investor enthusiasm for the sector—as consumer demand weakens, room is shrinking in China’s startup space for those that continue to burn cash without turning a profit.

Grocery delivery has become a much sought-after business in China since mid-2020, when the pandemic spurred demand for buying fresh groceries and other household supplies online. E-commerce companies including

Alibaba Group Holding Ltd.

BABA -0.57%

,

Meituan

3690 2.10%

and

Pinduoduo Inc.

PDD -3.55%

ran their own services or supported smaller startups.

But many have struggled to turn a profit after burning cash to build storage and delivery networks and offering heavy subsidies.

Last summer, Alibaba-backed Beijing Shihui Technology Co. started closing businesses in 2,000 cities and townships after being fined about $450,000 by Chinese regulators for inappropriate marketing and pricing behaviors, former employees said.

JD.com Inc.

JD -2.40%

also started cutting staff from its grocery-shopping unit in March, current and former employees said. Ride-hailing firm

Didi Global Inc.’s

DIDIY -10.49%

e-grocery unit, Chengxin Youxuan, was among the business units that cut thousands of employees beginning last year.

Before the latest round of layoffs, Missfresh had also cut around half of its workers since late last year, former employees said.

Globally, in recent years, investors have poured billions of dollars into online grocery delivery, including companies such as Philadelphia-based Gopuff. But for many companies, losses have been heavy given the high cost of advertising and courier payments. Executives and backers of the companies have said losses today are investments in a promising prize.

Founded in 2014, Missfresh was the first Chinese e-grocery firm to go public. It raised about $273 million in an initial public offering on the

Nasdaq Stock Market

last June.

Missfresh, backed by Tiger Global Management and

Tencent Holdings Ltd.

TCEHY -3.85%

, ran a network of small warehouses in neighborhoods throughout the country’s big cities. That enabled groceries and other daily supplies to be delivered as quickly as half an hour from when orders were placed.

Missfresh had spent hundreds of millions of dollars each year to develop order-fulfillment infrastructure and capability, including adding small warehouses. It operated more than 600 such miniwarehouses in 17 Chinese cities in China as of last September. The same-day delivery service contributed to about 85% of its revenue for the first nine months of last year.

The company had been reporting losses since 2018. The latest quarterly results it has released were for the July-September 2021 quarter. In April, Missfresh said it couldn’t release its 2021 annual report and set up an independent audit committee to conduct a review of some transactions. The review concluded in July that certain revenues were recorded inaccurately.

Missfresh posted a loss of more than $468 million for the first nine months of last year. The company’s costs and losses ballooned in the first half of this year, former employees said.

As of September, the company said it had $479 million in cash and other liquid assets, while its short-term liabilities totaled $500 million.

Profitability largely depended on the number of orders received by a single miniwarehouse, former employees and industry analysts said. They said most of Missfresh’s miniwarehouses didn’t get enough orders to break even.

The company didn’t respond to a request for comment.

Missfresh said in its statement last week that it was temporarily closing its flagship miniwarehouse service. It will still operate three smaller businesses including the next-day delivery service, for which Missfresh commissions JD.com to supply products and deliver orders.

Since late last year, Missfresh has approached companies including JD.com and shareholder Tencent for funding, but most were reluctant to pour in extra investment, having lost confidence in the sustainability of its business, people familiar with the matter said.

JD.com, Tencent and Shihui didn’t immediately respond to requests for comments.

More than 99% of Missfresh’s market capitalization has evaporated since the company’s IPO. American depositary shares of Missfresh have traded below $1 each since late April. Nasdaq has warned the company that it could face delisting in November if its performance fails to improve in the coming months.

Write to Raffaele Huang at [email protected] and Shen Lu at [email protected]