Dada Nexus Limited (NASDAQ: DADA) has not yet gained the followership or investor respect that is commanded by other fast-growing retailers like China-based Pinduoduo Inc. (NASDAQ: PDD) or the US-based Wayfair Inc. (NYSE: W), even though Dada carries similar traits, i.e. revolutionizing retail using a differentiated approach and a management that is focused on building long-term sustainable advantage.
Dada’s differentiated approach allows the company to act as a bridge to bring out the best in offline and online business models, one that brands love and customers find utilitarian for its fast delivery, while giving the platform more than one venue to monetize.
Covid-19 driven lockdown has accelerated brick-and-mortar retailer’s necessity to digitize their businesses and move towards the omni-channel delivery model, which is why Dada, as a leader in the category, is able to grow revenue at almost 100%.
There are enough growth catalysts to suggest that this revenue momentum is sustainable for now. Yes, like many other growth stories, the business is making losses, but some early green shoots are visible on the profitability front as well. Thus, Bears who continue to shrug off the name as merely a delivery service are just plain wrong.
For the last 2-3 weeks, the name has been a part of our weekly list of top ideas for the week and yes, we are long the stock.
A differentiated approach
One thing any institutional investor will attest is that most portfolio managers, even those at great asset gatherers in Boston and New York, rely heavily on 10-second pitches for small and medium cap companies, and the 10-second pitch for Dada Nexus rarely covers anything beyond the delivery business, which Bears will compare to the business model of Grubhub, Uber Eats and Postmates, i.e. sole reliance on ‘take rates’ to drive revenues, which leads to a limitation on revenue per order as well as the value generated for retailers.
Dada Nexus provides much more than that and the difference lies on two levels.
- The number of product categories served. The company started with grocery, followed by continued expansion into more products.
- Varied revenue sources from a transaction, beyond the usual service fee charged by delivery companies.
More product categories
Dada’s goal is to bring everything on-demand for customers. As the largest open on-demand delivery platform in China, with infrastructure to deliver various products within one-hour, the barriers to entry for new entrants are high enough.
The company started with grocery and then expanded into other categories like pharmaceutical, consumer electronics, and apparel. Besides growing the TAM for the company, it creates a ‘network effect’ where riders find orders quickly which leads to quicker delivery for customers and so on.
Revenue sources beyond service fee
Another major differentiator is the company’s numerous revenue sources, i.e.
- Take rates from retailers and delivery fees from the customers, revenue sources that are somewhat similar to other delivery business models.
- Marketing dollars from brands. With digital knowledge of offline retail customers, Dada is slowly taking a growing share of brands’ spending on offline promotions.
- Although not a major revenue source right now, but the CRM solution that is already adopted by more than 30,000 stores and brands has the potential to be a major value creator for the company.
Overall, this combination of the largest quick-delivery infrastructure, marketing platform for brands, and CRM & inventory management software for retailers offer much more, comparing which to simple food delivery platforms may be misleading.
Indeed, the company is planning to launch dynamic pricing functionally, which will price each order differently, and paying delivery riders based on real-time supply and demand.
Differentiation that leads to better performance as well
Yes, differentiation is of little use to investors if the same doesn’t boil down to revenue growth and other numbers.
As the chart above shows, whichever way you slice the numbers, the company is a growth powerhouse, probably the fastest-growing retailer of this scale in the world right now. Not just revenues but almost all major operating indicator numbers are growing at an extremely fast pace.
What some of the headline numbers haven’t highlighted enough is that online marketing services revenue is emerging as a major source of revenue, thanks to promotional activities from brands, revenue from chain merchants increased around 500% last quarter, average order value trend continues to be strong, with or with recently launched consumer electronics category, and growth from lower-tier cities is faster than that of larger cities now.
Yes, guidance for the current quarter is equally strong, almost 80-90% revenue growth over the same period last year.
Growth catalysts that have attained critical mass
The key question from here onwards is whether this momentum is sustainable and looking at some of the growth catalysts, it definitely looks like that. Some of the catalysts that are easily identifiable can be summed up as,
- Geographic expansion
- Expanding into new product categories
- Signing up with big retailers
- Growing revenue from marketing services
- New revenue opportunities like live streaming, etc.
The company has continued to expand into new cities and towns. The recent expansion into tier-2 and tier-3 cities has proven that these geographies have more to offer than previously expected. Indeed, last quarter alone, Dada expanded coverage to 300 more cities and counties. GMV from these lower-tier cities increased by more than 170% during the second quarter, significantly higher than the consolidated average.
Dada Nexus started with delivering groceries and after refining the technology and dominating the category, the company expanded into pharmaceuticals and over the last few months, the company has made a significant stride into the consumer electronics space, a category that carries significantly higher ticket size and one that can benefit from JD.com’s (NASDAQ: JD) recent acquisition of offline consumer electronics chain retailers. Take-rates from some of these high-ticket items might be lower, but aggregate revenue opportunities for the company may end up similar or better, with growing opportunities from co-promotion activities, etc.
There is a race among big Chinese online retailers to partner with supermarket channels, as evident from reports of Alibaba Group’s (NASDAQ: BABA) acquisition of Sun Art Retail Group, China’s largest chain of hyper-marts, announced earlier today. By the end of last quarter, Dada Nexus was already working with about sixty of the top 100 supermarket channels across China and looking at the company’s extension of the partnership agreement with the supermarket chain CR Vanguard, the partnerships are only getting deeper, with capabilities like omni-channel fulfillments, product sourcing & management, consumer insights, marketing, etc.
Dada’s revenue from brands increased fivefold last quarter and as the fastest-growing sales channel for brands, the company is bound to command a bigger allocation of their marketing budgets. Brands rarely have insight into their end customers from brick-and-mortar stores and Dada Nexus platform can solve that problem, allowing the brands to target their promotional activity more effectively. Another benefit of drawing more revenues from marketing services is that the company can cross-subsidize take-rates, unlike food delivery platforms.
The company has successfully ventured into new service models, like the one hour delivery during the live streaming program, where customers can order online during the live streaming programs and have the product delivered in an hour or less. Another one is Dedicated Delivery, where the company is providing tailored solutions to major merchants across China to help them ramp their omni-channel deliveries.
Profitability, yes it will come
Yes, like all great growth stories of current times, the company is making losses, but the trajectory of those losses is encouraging. Most of the heavy lifting, i.e. spending on technology and support infrastructure, is done, and given the operating leverage visible in the model, profitability may be nearer than some of the other high profile growth stories in Cloud and SaaS space.
DISCLOSURE: We are Long Dada Nexus stock. Before writing a note, we usually ask (via Twitter and Stocktwits) for things readers would like us to cover in the note, please do share your views for our next note. This is purely an academic exercise for our internal use and you should NOT invest based on this note.