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Yummy 77 is a case about grocery delivery in the O2O context. It illustrates the opportunities and risks
involved in China’s new economy.

Before I start introducing the company Yummy 77, let me first talk about some key issues in doing
grocery delivery business.

I shall first describe the challenges in grocery delivery.

First of all, let us focus on the main subject here: food.

Food is perishable, it is not durable good. Fruits and vegetables can be damaged in handling. Fresh and
frozen food like meat and seafood must be temperature controlled. They need to be handled with care.

So with this in mind, grocery delivery requires high fixed cost due to the facility and equipment in
storage and transportation. And the perishability concerns mean that short journey from distribution to
customers is preferred or required.

Apart from that, customers are usually price sensitive. Food is something we need day-to-day. It is
certainly not luxurious products. Most customers wouldn’t mind taking the time for grocery shopping,
while some of them even find it fun to do so. So most of them are not willing to pay higher price to avoid
grocery shopping.

Therefore, don’t expect grocery delivery is a high premium service.

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Next let us consider the important decision regarding site selection. Where should you launch the
service among the many cities in China?

You should identify the cities where customers’ willingness to pay is high.

It appears that the list on the left column of the table would fit in.

We should target the wealthy cities where potential customers are wealthy and busy.

Second, we should identify the cities with much congestion in traffic. Our service would save customers’
precious time then.

Finally, a sparse city with long distances to customer will further add to our value as the service
provider.

Now let’s go through the right column of the table.

We want to save cost for our service. We don’t want our costs to be too high to hurt our profits.

To this end, a midrange city with delivery staff willing to accept modest wages sounds attractive. After
all, this is not a vocation that requires high skill sets from delivery staff. We shouldn’t over-spend on
staff.

Second, we want to have easy delivery logistics. In that sense, a congested city would attract more
customers yet makes our transportation make difficult. It’s a double-edge sword.
Finally, dense city with short distance to customers is preferred from our operations point of view.

So you can see, the left and right columns speak of something negative. You wouldn’t find it nice
marketing-wise and operations-wise, both at the same time.

Looks like it is not an easy business.

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Yummy 77 was founded a UC Berkeley alumni called Ping Mi in Shanghai in 2013.

The company aims at providing convenience, freshness and value regarding grocery delivery to average
people.

It promises food delivery within 4 hours from 9 to 6 daily at a price of 10 yuan. The charge is waived for
large orders.

It offers 2000 food items including fruits, vegetables, meat, seafood, milk, egg and snack.

The company carefully selects the items and focuses on import and premium items, in order to
differentiate from its competitors.

To keep prices low, Yummy 77 sources directly from suppliers.

In terms of competition, it competes with existing grocery giants and other start-ups that are backed by
Alibaba and Tencent.

And as a start-up, its survival heavily depends on capital investment.

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Perhaps the company was better known thanks to the $20 million USD investment from Amazon. It was
widely reported in the media including leading tech review website CNET of US. This is known to be the
first time Amazon has invested in a Chinese company.

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On this page we can have a look of Yummy 77’s supply chain in Shanghai.

It operates a 120000 sq. ft. central warehouse. This is the main facility for storage and distribution.
Underneath that in the diagram there are 30 delivery stations scattered within Shanghai. They serve as
intermediate sites for temporary storage before goods are shipped to customers.

Each of these delivery stations is responsible for shipping to customers that are within a radius of 10 km.
And because many streets in inner city are narrow and also highly congested. The delivery personnel
often rely on roller blade as transportation vehicles – a creative way that is both convenient, economic
and environmentally friendly.

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Now let us turn to the competition part. It is probably impractical to list out each of the competitors.
But we can look at the four main elements that characterize a company in this business. As you can see
in each element there are different ways for a company to position itself. So in the end if you just
multiply all the possible combinations across the four types of elements, you can get a feel on how many
different competitors are there for Yummy 77.

Let us start with product type. A company may choose to offer food only. But there are companies that
also sell consumer goods. So there is a choice here.

And even if a company chooses to focus on food, one may specialize on local food whereas the other on
international food. Yummy 77 has competitors selling organic, health food.

The second element that charactizes a competitor is about the target customer.

Most of Yummy 77’s competitors try to sell to local customers, but still there are some that aim at
selling to international customers, like those expats that are working in Shanghai and considered to be
the high-income group.

Naturally there are high end customers and all way across the spectrum to reach average customers.

Still we are talking about B2C here, but there are also competitors selling to restaurants or other
business entities. These will be B2B in nature, a different kind of customer here.

The third element in our analysis: mode of operation.

Many existing grocery stores offer delivery service. Consider ParkNShop as a local example just for Hong
Kong. You find similar examples in Shanghai. I call these existing grocer with add on delivery.

The second kind of approach is to do pure delivery while forming alliance with grocers. There are many
of this in Shanghai.

Finally, Yummy 77 itself is considered on-line grocer plus retail as we will elaborate later. You can shop
both on-line and off-line with Yummy 77, it’s a kind of O2O.

Finally, the fourth element: delivery.

Some companies offer on-site delivery while others offer only store pick up. And for a delivery case, you
may want to offer same day delivery, or to make your life easier, next day delivery.

So as you can see, there are tens of possible combinations after you consider all the choices across the
four elements product type, customer, mode of operation and delivery.

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Early on I mentioned delivery stations and in fact Yummy 77 also opened a number of neighbourhood
stores.

Delivery stations are primarily back-end facilities for the staff preparing delivery, whereas
neighbourhood stores have the function of back-end facility but are also front-end stores aiming at
selling.

Let us examine both on this page. We shall start with delivery stations on the left column of the table.
The delivery stations are set up for staff to carry out internal operations.

A typical delivery station is 800 square feet large.

It is an in-transit flow center where items are en route from central warehouse to customers.

A delivery station costs 60000 yuan to open. And it costs 20000 yuan to operate per month.

By 2014 there were 30 delivery stations each serving customers within a 10 km radius.

Neighborhood stores, on the other hand, are used by staff and also visited by retail customers. They still
serve like delivery stations but at the same time also provide retail.

Neighborhood stores are larger than delivery stations. Each one is about 20000 square feet large.

And each would stock roughly 2500 SKUs for retail.

Neighborhood stores are more expensive to build, each costing 200000 yuan to open.

It costs 55,000 yuan to operate each neighbourhood store monthly.

Yummy 77 had set up 50 such stores – one within 2 km of 70% of Shanghai customers.

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On this page you can see how a neighborhood store looks like. From the layout and the photos, it very
much resembles a supermarket. You may describe it as a mini-supermarket.

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As you can see, delivery stations and neighborhood stores serve different purposes and they require
different levels of investment.

Delivery stations are simpler and less costly to build.

They avoid the difficulties and costs hiring retail staff, selecting and paying for retail locations.

Neighborhood stores are something more ambitious and distinctive because of reaching out the wider
market of retail.

The high fixed costs can be spread among more customers, of course, only when massive customers
really show up.

The stores can reduce customer acquisition cost as compared to doing sales purely on-line.

And when more stores are opened, they will be located closer to customers hence facilitates speedy
delivery for those customers who ask for delivery.

Furthermore, with inventory already in store, faster delivery is made possible. And if customers order
more often the delivery cost will drop correspondingly.

Of course, on paper these are all potential benefits. The benefits are real only when the business is run
properly and customers do show up as yo anticipate. Otherwise, everything is pure wishful thinking.

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Will the idea of Yummy 77 work? It is an O2O, on-line to off-line business doing both retail and delivery.

Let us examine this company in a critical manner.

First, one of the selling points of the company is its promise to deliver within hours. Many companies
who made similar promise found it difficult to live up with. A classic example is Domino Pizza who
promised 30 minutes delivery time but eventually needed to withdraw such an offer.

To Yummy 77, to deliver items within an hour means the company must track inventory and replenish
quickly if inventory level is low. And now as my students you know well that a high service level requires
a very high inventory level. I am not sure whether economically it is justified here.

Second, Yummy 77 is a company that initially started with delivery. It would pick up items from
neighbourhood vendors and deliver to customers. It is no doubt that this is value-added service but how
lucrative? This is the question.

SF Express is a delivery company that becomes lucrative by delivery small parcels. But that is a different
line of business. Plus the fact that SF started in 1993 long before e-commerce was in place while Yummy
77 started exactly 20 years later when e-commerce competition intensified significantly.

I haven’t mentioned Yummy 77 also does B2B such as selling to restaurants. And the B2B business
totalled 25% of its revenue. Here average order is 430 yuan. But my question is still: whether it is
lucrative enough?

You also need to consider the fact that traditional grocery stores are not offering any of the service
mentioned above. But they are still surviving. Do you think it is a disadvantage for them not offering
similar service?

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By adding neighbourhood stores, Yummy 77 migrated from being a pure delivery company to one that
can be described as a hybrid of both delivery and retail. The delivery is enacted upon receiving orders
on-line while retail is done off-line. It is O2O.

You have to come up with your own assessment: Is that something smart to the customers? Is that
something smart to the investors given that Yummy 77 had been a start-up?

I will leave to you to decide and to test your intuition here.

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On this page the title is “End of the Story.” So you can now verify your intuition, whether it is right or
wrong.

Not long afterwards, Yummy 77 posted a public notice that reads as follows:

Due to the sudden exit of the acquirer company, the company faced cash flow problems. Management
was forced to suspend business hastily.

At the end of the notice it says that “We hope to resume operations as soon as possible.”

This is the last time we have heard from the company. End game.
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This is the last page and let’s summarize the lessons learnt.

Start-ups come and go. Some last yet others disappear forever.

We have to ask, why is this a case of failure?

To answer that, let’s ask another question: how do you compare pizza delivery and grocery delivery?
Why pizza delivery lasts yet grocery delivery like Yummy 77 is gone?

Pizza restaurants like Pizza Hut and Domino provide delivery, but they make money primarily by selling
pizza instead of delivering pizza. I think that explains everything.

Yummy 77 does not have clear and distinctive value in either selling food or delivering food.

To sell food it can’t compete with traditional grocery stores and to deliver food it doesn’t generate
enough profits.

In 1994 law professor Paul Goldstein popularized the term “celestial jukebox” of every song and music
such that customers would pay-per-play instead of purchasing individual works. His prophesy is to some
extent fulfilled by music streamers like Spotify.

So if you ask me whether it is possible or impossible for Yummy 77’s mission? I don’t know, or I can say
it is possible but may be just not figured out yet.

Even if Yummy 77’s idea works in Shanghai, you have to think about whether it will work in Hong Kong.

Towards the end of this lecture I would like to reflect on e-business. We all know e-business can be a
real threat to traditional retailers. Like what Yummy 77 did when it started doing its online business. But
when the idea didn’t quite work, by operating neighbourhood stores, Yummy 77 eventually became
more or less like a retailer. And its fate was determined from then on.

New economy may sound fancy and lucrative, but only as long as it works. I have a family business of the
old economy. It started more than 50 years ago as a distributor and today it is still there. It will be there
as long as it is not replaced by new economy. So far it hasn’t.