Missfresh Limited

Hello, ladies and gentlemen. Thank you for standing by for Miss Fresh Limited Center 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's three months, there will be a question-and-answer session. Today's conference call is being recorded. I'll now turn the call over to your host, Lingling Hu, Senior Director of Finance and Financing of the company. Please go ahead, Lingling.

Thank you. Hello, everyone, and welcome to Miss Fresh second quarter 2021 earnings conference call. Our financial and operating results were issued via Newswire services earlier today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.missfresh.cn. Participants on today's call will be Mr. Zheng Xu, our founder, chairman, and CEO, Mr. Jun Wang, and Ms. Katherine Chen, our co-chief financial officers. Management will begin with the prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Mitigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the comments' results may be materially different from the views expressed today. For the information regarding this and other risks and uncertainties, as included in the relevant public filings of the company, as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that MISFRA's earnings press release and this conference call include disclosure of the unaudited GAAP financial measures, as well as non-GAAP financial measures. Ms. Fresh's earnings press release, issued earlier today, contains a reconciliation of the unaudited non-GAAP merits to the GAAP merits. We also posted a slide presentation on our IIR website, providing details on our results. We will refer those results in our prepared remarks, but not refer to specific slides during today's discussion. I now turn the call over to our founder, chairman, and CEO, Mr. Zheng Xu.

Please go ahead.

大家好,感谢大家参加报告电话会议。 Hello everyone, and thank you for joining our inaugural earnings conference call today. 在此我仅代表公司全体员工,向所有新老股东们表示最衷心的感谢。 On June 25, 2021, Miss Fresh was successfully listed on the NASDAQ global market, an extraordinary milestone marking the start of our new journey as a public company. On behalf of all of our employees and myself, I would like to extend our sincere gratitude and appreciation to our new and existing shareholders for their support.

Today, we announced the first quarter report after the listing. In the second quarter of 2021, we achieved 23 billion RMB of GMA and 19 billion RMB of revenue. Revenue increased by more than 40% in the same ratio. As innovators and leaders in the digitalization of Chinese community retail, we have always insisted on conducting strategic layout in the face of the middle of the industry. We have built a front-end retail, smart food and retail cloud three major businesses. Today represents another important milestone for Miss Fresh as we reported our very first quarterly results following our IPO. In the second quarter of 2021, our GME grew to RMB 2.3 billion and total revenue reached RMB 1.9 billion,

an increase of more than 40% on a year-over-year basis. As an innovator and leader in China's neighborhood retail industry, we remain relentlessly in the pursuit of our growth strategy, targeting at the final landscape of the industry. Our unique business model consists of three pillars. Our pioneering on-demand distributed mini-warehouse, DMW retail business, our intelligent fresh markets, and our retail cloud business. This pillar works in concert to drive digital transformation across the huge neighborhood retail market in China, meeting the involving needs of consumers as we pursue our mission to help every family enjoy quality grocery at their fingertips. Our on-demand DMW retail business targets to grow into the prevailing grocery shopping channel for mainstream urban consumers in first- or second-tier cities. Our pioneering DMW solution featuring full-spectrum product selections, better price-performance ratio, and convenient on-demand delivery services enables us to efficiently provide consumers with quality fresh produce and fast-moving consumer goods, FMCGs, at competitive prices every day.

As of June 30, 2021, we have

625 self-operated CMWs across 16 cities, offering over 4,000 SKUs with an average delivery time per order of 37 minutes. In terms of customer strategy, we stick to our business philosophy to pursue high-quality sustainable growth. We have amplified our marketing efforts with a dual-pronged approach, including online social network-based consumer acquisitions and offline community-based promotional events, resulting in a 35% of year-over-year increase in the number of new transacting users in 2Q 2021. We also actively promote our paid membership program, which features exclusive member-only product selections, service offerings, and exclusive benefits. Our membership program efforts drove year-to-year growth of about 240%, In our revenue contributed by paid members.

As we strive to strengthen our supply chain capabilities, we remain diligent in our efforts to refine our full-spectrum quality product selection on the fresh groceries front.

We focus on quality improvement from places of origin, end-to-end coaching coverage, and shelf life management for seven major fresh food groups, including meat, fish, eggs, dairy, vegetables, fruits, and flowers, maintaining the high quality of our fresh produced offerings and creating a superior neighborhood shopping experience. With respect to FMCG, we further enhanced our strategic collaborations with leading consumer brands and top trend-setting brands, employing joint marketing campaigns to cultivate customers' on-demand shopping habits. In the second quarter, our average value per order grew to RMB 96.1 at a leading position in the industry. With more customers adapt to an increased spending on on-demand retail channel and with the continuous improvement of our core capabilities, we believe our on-demand retail business will maintain its strong growth momentum and realize long-term profitability. 将线下菜场打造成为社区商业中心,为用户提供更好的消费体验,并助力商户增收增利。 Moving to our intelligent fresh market business, this business segment targets to transform the major neighborhood retail channel by mainstream consumers in third-tier or fourth-tier cities, leveraging retail chain operation model along with digital upgrade initiatives. We aim to transform offline fresh market into a neighborhood shopping mall, delivering a better shopping experience to consumers while helping marketplace merchants increase revenue and profits. I'd like to highlight that our intelligent fresh market business inherently encourages neighborhood development and community development. Our socially responsible model garnered widespread recognition and secured community and local government support during its development. As of June 30, 2021, we have entered into contracts to operate 58 intelligent fresh markets in 15 cities, 34 of which have commenced operations. We have great confidence in the future prospects of our intelligent fresh market business. We're poised to accelerate the expansion of the business segment with our hundreds of cities, thousands of fresh mouth initiative, making the intelligent fresh market business one of our significant growth drivers. 我们的零售云业务通过产业互联网技术赋能的方式,

By way of technology empowerment through industrial internet, our retail cloud business will help the massive neighborhood retailers across China in lower tier cities to start their online operations and digitalization.

which will create a better shopping experience for customers and enable retailers to boost revenue growth and profitability.

Based on the practical experience we have accumulated in the front-end self-sales business and the long-standing self-sales smart retail network REN, our retail cloud products are quickly established by the SaaS platform to help small and medium-sized businesses to have online operating capabilities and optimize the overall operating management process and efficiency, including all channels of marketing, private domain traffic, product operation cancellation, supply chain management, and the last mile of contract delivery.

At our Retail Cloud Strategy Conference on June 2021, we joined forces with Tencent Smart Retail Division to launch our Retail Cloud business, which enables traditional retailers, especially small and medium-sized supermarkets, to improve their digital operation capabilities. Thus far, we have established Retail Cloud collaborations with several regional supermarket chain operators, Supported by our extensive industry know-how accumulated in our 1P DMW operations and in-house developed retail AI network, RAINN, our retail cloud business provides a SaaS platform which allows small and medium-sized supermarkets to swiftly build digital operating capabilities while optimizing all aspects of operations to increase efficiency, including omni-channel marketing, private traffic, merchandising, supply chain, and last mile fulfillment capabilities.

To summarize, the neighborhood retail industry in China, which encompasses multiple business models to accommodate diverse consumer needs for fresh produce and FMCG shopping in different tiered cities.

has tremendous potential. Its growth is accelerating rapidly due to the wave of industry-wide digital transformation. Our unique business matrix, consisting of on-demand retail, intelligent fresh market, and retail cloud, along with our core capabilities built on supply chain enhancement, technology, and value chain empowerment, presents an excellent value proposition in the neighborhood retail market. We believe this waning combination will support Miss Fresh to achieve even stronger, higher quality and more sustainable growth in the long run, ultimately underpinning our vision to become the leader to drive the digitalization of China's neighborhood retail industry.

Thank you, everyone. With that, I will now turn the call over to our co-CFO,

Ms. Catherine Chen to discuss our financial performance for the second quarter 2021. Thank you, Mr. Xu. Our results demonstrate our robustness, strength, and the effective execution of our strategy, solidifying our leadership position in the industry. This quarter's success will allow us to explore more strategic partnership, and our recent listing on the NASDAQ has further reinforced our brand name recognition and influences in the market. We're encouraged by our second quarter results and are optimistic about our future growth opportunities. Now I'd like to walk you through our detailed financial results. Total net revenue reached RMB $1.9 billion in the second quarter of 2021 compared to $1.3 billion in the same period of 2020. The year-over-year growth accelerated significantly to 40.7%. Net revenue grew by 23.8% on quarter-over-quarter basis. Sales of products through online platform increased by 41.2% to RMB $1,854.1 million in the second quarter of 2021 from RMB $1,313.4 million in the same period of 2020, primarily driven by an increase in the numbers of orders. Other revenues reach RMB 40.4 million in the second quarter of 2021, representing an increase of 23.6% from RMB 32.7 million in the same period of 2020, primarily attributable to an increase in the sales of products throughout our convenience-go-smart vending machine business. Cost of revenue increased by 65.5% to RMB 1,752.6 million in the second quarter of 2021 from RMB 1,059.1 million in the same period of 2020. Gross profit was RMB 141.9 million in the second quarter of 2021, representing a decrease of 50.6% from RMB 286.9 million in the same period of 2020. Gross margin was 7.5% in the second quarter of 2021, compared to gross margin of 12.3% in the first quarter of 2021, and 21.3% in the second quarter of 2020. The decrease was primarily attributable to increasing discounts, coupons, and incentives offers to customers. Operating expenses were RMB 1,635.5 million in the second quarter of 2021 compared to RMB 623.7 million in the same period of 2020. Fulfillment expenses were RMB 541 million in the second quarter of 2021 compared to RMB 342.2 million in the same quarter of 2020, primarily due to an increase in the number of orders fulfilled and an increase in the number of products delivery, warehouse operations, quality control, and customer service staff for further enhancement of our fulfillment capabilities. Fulfillment expense as percentage of net revenue was 28.6% on non-GAAP basis in the second quarter of 2021 compared to 28.8% in the first quarter of 2021. and 25.4% in the second quarter of 2020. Sales and marketing expense were RMB 304.7 million in the second quarter of 2021 compared to RMB 139.2 million in the same period of 2020. The increase was primarily due to an increase in advertising and marketing promotion expenses as we further invested in targeted advertisement in residential neighborhoods to acquire new customers and retail existing customers, to retain existing customers, as well as increase in share-based compensation recognized upon the completion of our initial public offering in June 2021. General and administrative expenses were RMB 396 million in the second quarter of 2021, compared to RMB 58.7 million in the same period of 2020. The increase was mainly attributable to the increase in share-based competition recognized upon completion of our initial public offering in June 2021, as well as an increase in the number of management staff for new business initiatives. Technology and content expenses were RMB 393.8 million in the second quarter of 2021 and RMB 83.6 million in the same period of 2020. The increase was mainly due to an increase in share-based competition recognized upon completion of our IPO. As a result of the foregoing, losses from operations were RMB 1,493.7 million in the second quarter of 2021 compared to a loss of RMB 336.8 million in the same period of 2020. Net loss was RMB 1,433.8 million in the second quarter of 2021 compared to RMB 339.8 million in the same quarter of 2020. Non-GAAP adjusted net loss was RMB 888.9 million in the second quarter of 2021 compared to adjusted net loss of RMB 325.4 million in the same period of 2020. Basic and diluted net loss per ADS were both RMB 33.87 in the second quarter of 2021 compared to basic and diluted net loss of RMB 14.49 per ADS in the second quarter of 2020. Non-gas basic and diluted net loss per ADS were both RMB 18.84 in the second quarter of 2021 compared to basic and diluted net loss of RMB 10.08 per ADS in the second quarter of 2020. As of June 30, 2021, the company had cash and cash equivalents, restricted cash and short-term investment of RMB 3,427.3 million compared with RMB 1,041.5 million as of December 31, 2020. The increase was primarily attributable to net proceeds received from the company's IPO in June 2021. In the second quarter of 2021, the net cash used in operating activities was RMB 698 million. Now turning our business outlook and projections, for the third quarter of 2021, the company currently expects the net revenue to be in the range of RMB 2020 million to RMB 2,090 million, representing a year-over-year growth of accelerated growth of approximately 40% to 45%, and expects growth margin to improve by 250 basis points to 350 basis points on quarter-over-quarter basis. This loud look is based on our current market condition and reflects our preliminary estimates of market and operating conditions and consumer demand, all of which are subject to change. With our innovative business model and core technology capabilities, we will continue to fulfill our mission to help every family enjoy quality groceries at their fingertips. This concludes our prepared remarks. We'll now open the call to questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask questions on the phone, please press star 1 and wait for a name to be announced. If you would like to cancel a request, please press the pound or hash key. For the benefit of all participants on today's call, if you wish to ask your questions to management in Chinese, please immediately repeat your questions in English. To be mindful of the length of our earnings call, please ask no more than two questions at a time. Should you have follow-up questions, please press star 1 again to go back into the queue. First question comes from the line of Andre Chang of JPMorgan. Please go ahead.

许总,王总,Catherine,林宁,谢谢接受我的提问。 再次恭喜各位的成功的上市,还有增长的业绩。 我有两个问题,我先用中文文,之后再改成英文。 The first one is about the situation in which the control environment of China's Internet is getting more and more tight. Some similar industries are facing a lot of control pressure. Does this mean that there may be some structural opportunities for better growth in our pre-industrial and smart vegetable markets? This is the first one. Let me repeat my question in English. So thanks for management taking my question and the Congress on the successful IPO and the decent growth. So I have two questions. One is about the recent regulatory tightening in China for the internet space. So do we see some of our competing business models facing more pressure and leaving us more opportunity for our business, retail cloud, and also the smart, intelligent, fresh market business? And my second question is about the the growth outlook beyond the third quarter guidance. Do we see a chance for acceleration, or is it still too early to say about the fourth quarter or next year's growth outlook? Thank you.

Thank you very much for your question. These two questions have a very high quality. The first one, I think, is that actually we also see that along the entire red line, Some changes in the environment, as you just mentioned, I think the entire industry will actually develop more smoothly. In general, I think the entire community retail industry is huge and is in the stage of rapid development of digitalization. This has not changed, and we have seen that in the past half a year or more, we found that fresh food as a representative category is growing very fast online. On both sides, on the one hand, I think from the perspective of the company, we will insist on high-quality growth strategies in our in-house sales business. We will insist on the growth model of value users, focus on high-quality user operations, strengthen the supply chain, and ensure that our business continues to improve user value, high-speed growth, and good business operation efficiency. On the other hand, it also gives us the overall strategic layout, which we call multi-business layout, which brings better opportunities and space for development, especially for our smart food factory business and our retail business. Our smart food factory business, as I just mentioned, is a very socially friendly business. In the past, we have been directly affected by the government, society, and even public opinion and media's attention and support. Indeed, it is a positive and friendly service for a wider range of businesses, better services and users. Whether it is providing better services and experiences to the people, or helping businesses to receive better benefits, stable employment, and increase income, there is obvious assistance. The retail cloud business is also similar. It is a positive service for a wider range of businesses So I'll translate. The neighborhood retail market in China is a massive market in terms of scale. We're seeing accelerating digitalization of the market.

especially a stronger growth in the online sales of fresh produce and food. For our distributed mini warehouse on-demand retail business, we will continue to focus on quality growth and build up upon our growth strategy by targeting at value customers in the first and second tier cities. We will focus on quality users and constantly improve our core capabilities in supply chain to drive increasing spending by our customers and better operation efficiencies. And meanwhile, our multiple business strategy help us to better positions for the future growth of the market. Our intelligent fresh market business, it's a social friendly business that has been supporting the local merchants to better like support their business, helping them to increase their income and providing jobs and also empower them with digitalization capabilities. And this has been fully recognized by the local government and local society. And at the same time, our retail club business is empowering local retailers and helping them to better grow with the help from the digitalization tools. So our unique business matrix of our on-demand retail in the first and second tier cities, intelligent, fresh markets, in the mid-small-sized cities, and a retail cloud business that empowers supermarkets while we support MISRESH to achieve an even stronger and higher quality and more sustainable growth in the long run.

The second question is about the future growth strategy and expectations of our real-time sales business. Indeed, the company is starting a new round of growth in two aspects. One is in terms of user demand. On the one hand, through this dual engine promotion model of online social media plus offline community, we can see that the same number of new users in the second quarter is close to 35%. This is actually still growing. On the other hand, we are actively promoting the payment member model of specializing in products, specializing in services, and specializing in rights. In the past second quarter, our payment member's revenue The same growth has reached 240%. This will actually maintain a relatively long period of continuous high growth rate. At the same time, in terms of supply and demand, we focus on freshness and standard products. On freshness, we focus on freshness, including our fresh meat, fresh fish, fresh eggs, fresh milk, fresh vegetables, fresh fruits, and fresh flowers. Our strategy is actually constantly improving in terms of source quality, full-time refrigeration, and the management of the delivery period. In the past, our daily fresh milk, the series of fresh meat and fresh milk, has received very good recognition and feedback from the users. The safety, freshness and convenience of our live fresh products, including live fish and live shrimps, has been a very high-quality product for users in the past. In March of this year, SKU has expanded to more than 60 products. The sales volume has increased by nearly three times. So, the whole of Weilao has made a breakthrough. It has been very helpful for the customer's shopping experience, as well as the customer's purchase frequency. On the other hand, we will also strengthen the cooperation with the upstream brands. In fact, since the pandemic, the upstream brands They are very active in migrating their channel strategy, structure and mix. They are also actively strengthening cooperation with online supermarkets like ours. So through this joint business plan, users' shopping habits have grown. In fact, it has improved our entire supply chain to meet the needs of users or hit the needs of users. From the point of view of demand and supply, we will be more optimistic about our true numbers in the future.

We have entered into a new phase of growth. On the supply side, we continue to enhance our core capabilities in supply chain to offer quality products in all categories. On one hand, we emphasize the freshness of our fresh produce offerings and pay attention to quality improvement from places of origin end-to-end chain coverage and shelf life management so that we can consistently provide best shopping experiences to our consumers. For example, our today's production series of fresh meat and milk have been well received by our customers. Our fresh live seafood category differentiates with its safety, freshness, and convenience and includes now 70 as produced. and we have emphasized the fresh, which, like our sales of fresh fish and fresh seafood, has been highly welcomed by the consumers. We also offer 60 SKUs for fresh flowers, and our flower sales increased by three times since launch in March this year. On the other hand, on FMCG products, we have strengthened collaborations with leading consumer brands and top-trend-selling brands by holding co-marketing campaigns to cultivate the consumption habits of the consumers. And from the COVID pandemic, we have seen a trend that the top brands has been shifting their sales from offline to more of the online and on-demand channels. And we have seen there's increasing collaboration potentials between us with the FMCG major brands. And from the efforts from both the demand side as well as supply side, We are seeing the revenue growth is accelerating, and we expect our growth to grow by around, to be further accelerated in the 3Q 2021, with revenue growth estimated to be around 40% to 45% on year-over-year basis. And we also see a further accelerating trend in the coming quarters.

Next question, please, operator.

Thank you. Next question comes from the line of Xiaobo Wei of Citigroup. Please ask your question.

Hello, Mr. Xu. Can you hear me?

Yes, we can hear you. Hello, Mr. Xu.

Hello, Mr. Xu. I would like to ask a very popular question. Because we have entered the third quarter, we know that the epidemic of the third quarter in China is a bit repeated, and it is also the most strictly controlled epidemic since the first half of last year. 那么我们相信这个消费者的行为 还有在零售的业态方面都有一些微妙的变化 那请问公司在这种反复和变动中 看到了什么样的机会和什么样的挑战 特别是在销售的这个MIX啊 还有消费者洞察和消费者互动方面 有什么微调 在您的后勤和仓储这个方面呢 Thank you for taking my question. The question about the market development in the third quarter, as we know that China had a resurgence of the COVID cases in the third quarter, and a lot of cities implemented the most strict lockdown since the first half of last year. So my question is about what did you see the challenges or opportunity in this change in the market dynamics, especially in the areas of the interaction with users and the social mix in terms of category and SKUs? What was your strategy to fine-tune your operation in order to maximize your growth? And also, do you see any pressure on your infrastructure and logistic auto procurement? Thank you.

This is also a very high-level question. Indeed, as you have seen and mentioned, in the past few years, under the very good situation of China's epidemic prevention, there have been some minor cases. I think we have seen that the Chinese government has had a very good response and response speed. In fact, I think the whole epidemic from discovery to control actually has a very good response. Of course, in terms of our business, I think it is actually a very positive help. From a certain point of view, this gradual, although this is not a big impact, such a case of epidemic, in fact, it is reminding all users to improve the awareness of the epidemic. Sorry. Sorry. Can you hear it, Xiao Bo? Ten seconds. I didn't hear it in the last ten seconds.

So we see that this kind of repetition is actually a constant reminder for users.

And this kind of reminder will actually better permeate them. uh, uh, uh, uh, Taiwan Taiwan Taiwan We also received a lot of awards and praises. We also received a lot of awards and praises. We also received a lot of awards and praises. We also received a lot of awards and praises. We also received a lot of awards and praises. We also received a lot of awards and praises. We also received a lot of awards and praises. Okay, so in China overall, let me translate that. Overall, in China, the COVID situation has been well and controlled.

However, in this year, there are several, like, cases, but it has been, like, swiftly been discovered and controlled. So it has, like, some of the positive tailwinds providing to our business, given that users are consistently being reminded of being more aware of being, like, adopting, like, protection measures against, like, COVID-19. So people choose not to go out that often and not to go to some of the offline shopping areas to prevent potential risk. So that helps to help the users to have more adoption of online shopping trends. And they are more used to do their grocery and fresh produce shopping from on-demand retail platforms. And this has been helping us to transform users as well as nurturing their habits and improving their shopping-like frequencies. And on the supply chain side, we have been well-prepared of being reacting to the increasing demand through our commodity sources as well as our service capabilities, and we call it to guarantee your responsibilities and never pull back. And we're able to, being able to fast response to some of the emergence like increased demand. And this kind of attitude and secure of supply has been well received by our users as well as local government. And we have been, we have received several like several letters and thank you letters from the government. And that's helping to stand for our strong efforts during the emergent situations. And we see with this kind of macro environment, and there is an accelerating trend of online digitalization, which helps us to better improve our business. At the same time, our intelligent fresh market business and our retail cloud business which has helped to empowering the digitalization of neighborhood retail market is also accelerating its expansion speed, and we could see a great potential in the new business as well. Thank you, Mr. Po. Let's see if there are any other questions.

No, thank you. Thank you very much. Next question comes from the line of Vincent Yu of Needham & Co. Please go ahead.

Okay, thank you. Can you hear me?

Yes, very clear.

Okay, good. First of all, congratulations to the IPO and this record. I think it broke some of the market doubts from Margin and Grow. My question is actually on both sides. On the one hand, The first question is about our gross margin. In the second half of the year, how do we see it? Because it seems that it is for some of the users. What is this called? The second question is about the progress of our expansion. I would like to ask Can you share some of the recent progress and whether we have encountered any problems, whether it is competition or specific cities? This is for users. The third question is also for users. I would like to ask, OK. OK. OK.

Thank you for your question. I will answer the first question first.

From our second quarter's profit, there is indeed some decline. This is mainly because of the company's new early stage marketing strategy. We expect that the profit will be significantly increased in the third quarter. In the long term, on the one hand, we will insist on focusing on our high-value users' business strategy. And we are actively promoting our specialized products. specializing in service and full-fledged paid membership. Actually, in the second quarter, our paid membership revenue has increased by more than 200%. And this growth is very strong. On the other hand, we will also optimize our product structure, improve our fast-selling products and the ratio of our free-brand products, as well as the ratio of high-end and medium-high-end consumer upgraded products. In this way, we will continue to optimize and improve our profit. Third, we will continue to increase the proportion of our assets to optimize the cost of our products. Through these three aspects, in the user side, the payment member model, the optimization of the product structure, and the source assets, I think we will continue to improve our net profit in the medium term. Okay, so the decrease in the growth margin on a year-over-year basis is mainly contributed by our periodic marketing strategy for a new round of growth space.

We expect that the gross margin will be further increased by 250 to 350 basis points on quarter-over-quarter basis in 3Q 2021. So in mid to long term, we'll stick to our strategy to focusing on high-value customers and actively promote our paid membership program, which features exclusive membership-only product selection, service and offerings, as well as benefits. On the other side, we will continue to optimize the product mix and increase the proportion of FMCG products, private brand products, as well as mid- to high-end consumption upgrade category products. We'll also further increase the proportion of direct procurement to optimize commodity cost so as to further improve the gross margin. So in summary, the growth margin will be further increased driven by the above factors. And the revenue growth is mainly driven by increasing transacting users. So at AOV, we will further optimize our marketing strategy and enhance the customer acquisition through online social network-based customer acquisition and offline community-based promotions to further boost new customers' growth and repeat purchase by existing customers.

The second question is about the expansion of the city. In fact, in the business of our pre-sale and post-sale sales, we have always insisted on sustainable growth, focusing on the expansion of the economic model. The company will continue to expand in the first and second-tier cities. This year, mainly in the existing cities, our value users continue to carry out uh uh uh uh uh uh uh uh uh uh uh uh uh uh uh There is a lot of penetration space in the first and second-tier cities. At the same time, in the third and fourth-tier cities, we will actively expand our smart factory business and play our own advantage of multi-business combination. In this way, I think there will be two business combinations in the whole city.

For the expansion of our DMW business, Miss Fresh continues to focus on sustainable and economic model-oriented growth. So we will continue to expand our DMW business in first-tier and second-tier cities. So we believe that in the current cities that we cover, there is still great potential to further build up our DMW network and to increase the density of our DMWs. And also our strategy is to keep acquiring high-value customers in the existing cities and expand our business. And we have already ranked out among the top 50 top-tier cities in China, there are 35 cities that can build up like the MW network and sustain for long-term growth. So we were targeting on these cities in a long-term perspective, mid- to long-term perspective. So we think there is still room for the penetration rate to rise in the first tier and second tier cities as the customers have higher requirement of consumption for product quality, for fulfillment efficiency, et cetera. And we believe the MW model has more advantages to fulfill this demand compared with other models. On the other hand, for the lower tier cities that we have our intelligent fresh market that's penetrating in this market, that's helped to provide quality products and services to the population in the lower tier cities. So we believe that with these two pillars, the DMW and the intelligent fresh market business, as well as our retail cloud business, we can take full use of our core capabilities to achieve even stronger and higher quality and more sustainable growth in the long run.

Okay, my third question, because of the leak, you didn't hear me, so I'll ask again. The third question is about some of the user growth methods we are taking now. And then think about what is our main strategy for user growth now? And how do we see the user growth in the second half of the year and next year? And then I put this, because of the leak just now, I think some of those who are listening, maybe investors who don't understand English and Chinese, they may have some questions. So I quickly put this So guys, sorry for the signal issue that's on my phone. So I guess some investors who cannot understand Mandarin cannot understand what I just asked with the last two questions and the third question I just asked. So in very quick brief, like a rephrase is my first question was about gross margin. strategy and the long-term goal. My second question was about the progress in entering new cities and the challenges. The third question I just asked is about the user growth initiatives currently in place and the view on user growth trends for second half 2021 and 2022. Thank you. Thank you.

In terms of user growth, there are two things. One is that we will continue to increase the growth of our number of users. In fact, through our continuous adjustment and optimization in the past, we can say that the combination of online social and offline community is actually getting better and better. We can actually see the growth of the number of users. Archidoo's growth is actually 35% and this trend is getting stronger. On the other hand, we think that the entire growth market will also increase the value of single users. So we are continuously advancing this model of paid members through specialized products, specialized services, and specialized rights. We see that such products and services have received very positive responses from users. In the second quarter, the actual revenue of our paid members reached 2.4% in the same ratio. And in the long term, we will see that it will still maintain a very strong attitude. By using these two methods, we will continue to increase our number of users and continue to increase our user value. In fact, it will make our growth very strong. Of course, starting next year, we will continue to expand our new city.

So the company will stick to the online social network-based customer acquisition, as well as offline community-based promotion events. These two double engine that's driving the customer growth of the company. And it also have been providing proven by our, in the second quarter of 2021, our newly added transacting users, on year-over-year basis has been grown at a pace of 35%. And also, we are also emphasizing from increasing the per customer value. So our user value has also been increased through our paid membership program. From that, we can see that in the second quarter, the revenue contributed by our paid members has been increased by around 240% on year-over-year basis. And this, too, has been providing evidence of our effective user growth strategy. And we expect the trend of our user growth will remain strong. And also, our effort has been proven to be effective and will continue with the user growth strategy as well as per user value growth strategy to further improve, to further drive the future growth of the company.

Thanks, Linda. Next question, please, operator.

Thank you. Next question comes from the line of Charlie Chen of China Renaissance. Please go ahead.

I think I'll cut and got it. You know, I mean, I don't know. You should teach her to teach her. I don't know. I don't know. I don't know. I don't know. Thanks for taking my questions. I got two questions here. The first one is about the average order value. I can see the AOV actually increased about 2% to 3% year-on-year. What is the strategies or other initiatives management is taking to further increase the AOV in the future? So that's the first question. And the second question is related to the new initiatives the company has taken recently, including the smart vending machine and also the cooperation with JD's platform. So how does this two new channels fitting the company's omni-channel strategy to maximize coverage of your consumers, as well as minimize possible cannibalization in your business. Thank you.

Thank you, Charlie. Two questions. The first question is about customer service. I think... Indeed, I think our business model, in terms of front-end technology sales and business, I think the price-to-market ratio is a key indicator that affects the whole of UE. Indeed, I think your question is also a very high-quality question. Of course, Meiyu Xian has always been ahead of the industry in terms of price-to-market ratio. We have also done a lot of work in this regard. First of all, I think first of all, We have a very consistent understanding of the customer base. We want to do a good business, a good business. Secondly, I think the reason why the customer base is good is two sides. One side is the demand side. Do you have such a high-value user management strategy? The other side is the supply side. Is there a good face-to-face high-value user to meet the demand of high-value users? uh, uh, uh, uh, uh, So it's a very good question as AOV, average price per quarter, is very, very important for DMW model and is a determining factor for all the overall like the unit economic model.

And for Miss Fresh, we have always been performing very well in the AOV part, which is well above industry average. And it also guarantees that we are able to achieve a better unit economic model. So in terms of the supply side, that you need to have the correct product mix to provide facing to the high-value customers. And on the other hand, you also need become the major channel and the major consumption scenario for your customers. So for Miss Fresh, we have been working a lot in these two areas. First, we emphasize on the freshness of our fresh produce offerings and pay attention to the quality improvement from our places to origin and to end coaching coverage as well as improving the FMCG mix. So by providing the correct mix of our products to our users, we are able to achieve a steady growth. And at the same time, we are also accelerating and continue to improve our fulfillment experiences to make sure we are becoming the major channel and the major channel that account for our customers' wallet share.

The second question is about Jindong's cooperation. Indeed, our cooperation with Jindong has been growing very well in the past. Jindong is also one of the important partners of the company. Our cooperation is mainly in two aspects. On the one hand, through the freshness and tenacity created by Meiyu, uh, uh, Okay, so Dingdong is one of our important business partners.

And also we have seen a great growth in the past. So one part of the collaboration is on the fresh produce and food and categories that we were utilizing our strength in the supply chain side. We were able to sell on the platform. And this part has realized very good growth in the sales volume. And on the other hand, on Miss Fresh APP, that we have this kind of high-frequency and female-oriented customer base, which also we have been able to collaborate with Jingdong on their supply chain to provide our next-day delivery services and products, which also achieve very good growth. So on one hand, that is using Jingdong's traffic and in combination with our supply chain, And on the other hand, it's using our traffic in combination with Jingdong supply chain. Both have very good collaboration potentials and achieved great growth in the sales growth.

But the growth is still very good, and the profitability is also good. From the company's point of view, I think this business, in our opinion, has several important values and meanings. One, I think, is actually also derived from the priority of this gene. For a long time, I think the entire company, we all have a knowledge and ability to explore and set up the future of the face-to-face industry. I think the next generation of smart goods should be the future development trend of convenience stores. So I think in this area, we actually have very active research and we are continuously developing. Secondly, I think the biggest value this business brings to the company is actually from the technical side. Because it has to use a lot of IoT and DT technology to achieve this kind of smart remote, unmanned retail management. The accumulation of these technologies will be in our entire chain. Regardless of whether we are in the smart food business or retail business, there will be a wide range of applications in the future. So I think this is actually the two points that the company saw at that time. I think it is a very potential industry that will come in the future. It is also a potential industrial technology. The first time to be able to practice, practice, practice, practice, practice, practice, practice, practice, practice, practice, practice, practice, practice, practice, practice. 我们最希望看到对未来液态的探索 还是说对未来新兴技术的第一时间的在组织内 沉淀内化应用变成核心能力 这两个意义我觉得更明显吧 So in terms of convenience go smart vending machine business that we haven't disclosed much in the past as it is more of an exploration business as in the past that in the

embedded in the Miss Fresh DNA that would always have the endeavor to facing the final landscape of the industry and making more like the explored visions. So convenience goes to our vending machine is one part of that. And we believe that the smart vending machine would be the next generation of convenience store. So we have developed that business for a period of time and to actively utilize on the technology side, including IoT, internet of things, like data technologies, and to ensure that we have a remote control over the smart vending machine and including also the AI and IoT technologies that can be further formed our core technology capabilities and to be further utilized in our intelligent fresh market and our retail cloud business. So in summary, so this business is more of an exploration business with very good growth and also with good profitability. And we are also emphasizing on this kind of exploration that help us to accumulate technology core capabilities that can be further becoming our core competencies and empower our future other business. So the convenience-go-smart vending machine business is more like the DMW business at five or six years ago, and our intelligent fresh market business around two years ago, and our retail call business around one year ago. It all represents... our endeavor to continue to do more business model innovation as well as technology innovation that's driving the future growth curve of the company.

Next question, please, operator.

Certainly, next questions will come from the line of Thomas Chong of Jefferies. Please ask your question.

Good morning. Thank you for accepting my question. I have two questions. First, I would like to know more about our existing users' cohort analysis. Can you share about the purchase frequency and ASP of our new users in the past few years? And then, you mentioned that the growth in revenue of our members is also very strong. I would like to ask about the behavior of the subcontractors and our current users in terms of frequency and ASP. Can you share the main differences? The second question is about our SaaS business. the empowerment of this technology, we see that there are also a lot of giants in the industry and other players are doing this. And then this market is also very big and there are a lot of opportunities. I would like to ask if management is at the level of R&D or at the level of data and technology, can we share our biggest competitive edge? Thanks, management, for taking my questions. I have two questions. The first question is about the cohort analysis. Can management share about the purchase frequency ASP retention for our existing users? And then, given that our paid members' revenue is going very rapidly, can management also share some of the behavioral differences for the paid members versus those non-paying subscribers. And my second question is about our SaaS business. This sector is a huge market with enormous potential. And we are actually seeing that the competition is also quite intense with a number of payers embracing the opportunities. Can management share about our key competitive edge on this front in terms of our data insights and other areas. And in particular, with regard to the R&D spending, how should we envision our R&D costs going forward? Thank you.

Thank you, Thomas, for your question. For the first question, like, on the AOV and the other frequency, so the company has been, like, continuously to improve our AOV through providing a more, like, abundant product mix and the correct product mix to our facing our value customers. And we have been strengthening our supply chain capabilities by providing, like, fresh meat, fresh fish, as well as more, like, fresh products as well as like providing a wide range of FMCG products that's serving the user's needs for consumption upgrade. And this helps us to contribute to our AOV as people are adding more items to their shopping basket at each time when they order. And also on the frequency side, we also rolled out several sets, for example, our paid membership program that we have been continuing to cultivate that Also, the revenue contributed by our paid members has been increasing significantly, and also their order frequencies. This also helps us to drive the order frequency growth. At the same time, with a stronger supply chain on the fresh-produced side that arises in, for example, live fish, live shrimp. And that helps us to contribute to the increase of the users like other frequency as well as they are more inclined to shop on our platform with a combination of a fresh produce as well as FMCG and to satisfy their day needs. And for the second question, I will turn to our partner and CFO, co-CFO, to answer that.

Hey, Thomas. I heard your question about the retail cloud business. I think our retail cloud business is very much focused on the product optimization and implementation for our sample clients at this moment so that we can pick ways to future expansion. And at the same time, we're actively engaging with business partners for in-depth cooperation in the retail cloud business. As you have seen from the news, we have already had a strategic price conference with Tencent Smart Retail to collaborate on this business initiative. In addition to this, I think as you have been very much interested in the uniqueness of our business, I think it lies in three dimensions. The first one is that we are very friendly to the CEOs of our customers. We offer them private traffic, private domain traffic as the major solution to bring their customer from offline to online without robbing their customer to a centralized traffic platform. So in this way, we sit together with them, empower them, rather than centralizing collecting their customers. In the second aspect, I think we're very friendly to the CTO. Our product is very much standardized. and it is compatible with their existing system. And so they don't have to replace the ERP. We can be compatible with the ERP because we focus on the application level, on the operations, rather than on the bottom level of the EPROS. And also, it's very easy to deploy this system because we have already standardized a lot of the operation into product and into automation driven by the AI. so that it could be easily deployed and it is friendly to employees or the CEOs of our customers. So by offering value to the three key decision makers and the users within our customers, the Retail Cloud is offering them a solution that is powerful and friendly in the meantime. I think that's our... Thank you. Thank you for the questions. In view of time constraints, I will now turn the call back. We are going to turn to the next question from Robin, I believe. There's a line. We'll turn to Robin from Dawa, right?

Certainly. Mr. Robin Leung, your line is now open. You may go ahead.

Thank you, Mr. Robin Leung, for accepting my question. I have a very quick question. I would like to ask Mr. Robin Leung about the expansion cost for the next eight years and 2022. Because in June, the investment in the stock market was smaller than before, and some small investors have already left the market. Is there any positive impact? Could management share a bit on the user acquisition cost in the second half of 2021 and next year? Especially, we are seeing some investment from the community group purchase players decreasing, and some small players have exited the market. So is there any positive impact, especially in the lower tier cities, or are we mainly competing with other front-end warehouse models? Thank you.

Okay. We expect our user and our revenue to further grow. in the coming quarters, which is mainly driven by the increase of our transacting users and AOV. We believe that the cost of customer acquisition in the second half of the year will be continuously to decrease, which is because of our implementation of our online social network-based customer acquisition in combination with our offline community-based promotional events marketing strategies. So as you mentioned that in some of the lower tier cities that you see some of the smaller platforms, there's involving trends there. But for us, we believe that with the current situation that the expansion and competition within the market will be more rational and the whole industry will be more focused on high quality and sustainable growth. So in long term, we believe that there are 7.2 trillion online neighborhood retail market there that will provide several trillion dollar platform. So providing different kind of value proposition covering the needs of various users from different tier cities. So the company always concentrate on the business with scalability and stronger barriers. So facing the final landscape, we have been planning for a long time and implementing our strategy with multiple business contribution, including our DMW and the intelligent fresh market, as well as retail cloud business. That's taking the full use of our core capabilities to achieve a stronger and higher quality and sustainable growth in the long run. So we'll continue to focus on the quality growth, as well as build up our growth strategy by targeting add the value customers in the first tier and second tier cities, and also we'll focus on the quality user and constantly improve our core capabilities in supply chain to drive the increasing spending by our customers. And in the lower tier cities, we're more like covering the customer through our intelligent fresh market as well as retail cloud business to cover a wider range of our customers in a wider spectrum of cities.

Thank you. Very helpful.

Thank you very much. With that, let me hand the call back to the management for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Ms. Fresh IR through our contact information provided on the website of the TPG Investor Relations. Thank you today.

This concludes this conference call. You may now disconnect your line. Thank you.