Thursday, 2022 December 8

Dingdang Health and the volatile pharmaceutical O2O industry

In early September 2022, China-based digital medical services provider Dingdang Health was listed on the Hong Kong Stock Exchange. The company opened at an issue price of HKD 12 (USD 1.53) per share with a slight increase of 2%, and its market value reached HKD 16.3 billion (USD 2 billion).

The company—which also goes by Dingdang Kuaiyao and Dingdang Medicine Express (Beijing) Technology Co. Ltd.—provides comprehensive medicine delivery and healthcare services via the Dingdang Medicine Express app.

Since the pharmaceutical O2O industry is still fairly new and volatile, Dingdang Health hasn’t had an easy journey over the past eight years. With competitors like Meituan and Ele.me entering the fray and capitalizing on their current online traffic and delivery resources, competition is heating up.

However, the recent successful listing marks a new chapter for Dingdang Health, and for the pharmaceutical O2O industry in general.

A difficult start in the industry

It can be argued that the pharmaceutical O2O industry was a natural progression in the order of things, the next step after catering and food delivery services. If one can order groceries and a hot meal to be delivered to one’s door within minutes, why not medicine?

It helped that the pharmaceutical retail market is an extremely lucrative one, worth trillions of dollars. Seeing the opportunity, several O2O platforms set up shop between 2013 and 2014, some of which were supported by well-known investment institutions. Dingdang Health was among a handful of companies established during this period. These platforms aimed to bridge the gap between pharmacies and users by making it easy to order medicine online.

However, the bubble soon burst. Many of these companies failed after just two or three years—according to VBData, by 2016 more than half of the platforms established in 2013 had ceased operations.

Reasons for failure

Their failure can be attributed to a number of factors.

First, the demographic of smartphone users (and therefore those who would use such services) skews towards the younger generation. Among the population, younger people often need medicine the least, and demand hasn’t evolved enough to the point where they would purchase medicine for their elderly parents yet.

Second, speed is an important factor when it comes to medicine—arguably more so than in food and grocery delivery. This calls for a mature logistics system that requires heavy investment.

Third, there are restrictions in place that have yet to evolve. For instance, while online platforms often want to offer 24-hour delivery, pharmacies have fixed business hours.

The capabilities of the founding team and the business’s capital investment can also affect a project’s success.

Dingdang Health’s advantage

Dingdang Health is one of the few that managed to find solutions to the above problems. Founder Yang Wenlong raised over RMB 3 billion (USD 414 million) in five rounds of financing and built a strong founding team.

It also helped that Yang is the chairman of Renhe Pharmacy Company, a position that enabled Dingdang Health to do what its competitors could not: build its own pharmacies to ensure 24-hour operation, establish a standardized delivery team, capitalize on current brand recognition, and continue to tweak operations to ensure speed of delivery and adequate supply.

In the last few years, the numbers of Dingdang Health’s smart pharmacies and drug orders have increased rapidly, driving overall revenue growth. The company’s total revenue increased from RMB 580 million (USD 80 million) in 2018 to RMB 3.68 billion (USD 509 million) in 2021.

Since the setup costs of its physical pharmacies and online delivery system are high, this rapid revenue growth has not resulted in profits. However, the loss ratio is gradually being reduced, with the adjusted net loss ratio dropping from 11.9% in 2018 to 8.9% in 2021 and 4.5% in Q1 2022.

This self-supporting model, where Dingdang Health operates with its own supply, has enabled it to differentiate itself from traditional O2O companies.

At the same time, others are now eyeing the market. New competitors now include Meituan, Ele.me, JD Health, and Chinese pharmacy chains such as LBX Pharmacy, Dashenlin Pharmacy, and Yifeng Pharmacy.

These established companies already have enough capital and resources, as well as advantages in current traffic and production volume, to compete.

Sharing of delivery resources

When it comes to items of a sensitive nature like medicine, delivery speed is key. The pharmaceutical O2O businesses know this and advertise this aspect accordingly.

However, it’s expensive to hire one’s own delivery fleet, especially when the demand for medicines is relatively unpredictable. This is where the sharing economy comes into play. For these businesses, sharing delivery services may help to lower costs while still meeting demands.

Taking Dingdang Health, for example. Its prospectus shows that as of March 2022, its express medicine delivery service is mainly provided by 2,600 riders who are commissioned according to outsourcing arrangements with delivery partners. These appointed riders currently provide exclusive delivery services for Dingdang Health.

However, whenever a surge in orders requires additional staff on hand, Dingdang Health will deploy other riders, which are from a third-party delivery service that has a non-exclusive agreement with Dingdang Health.

It’s not the only company to do so. Pharmacy chain enterprises are also hopping on the bandwagon. For example, LBX Pharmacies has an ongoing collaboration with instant delivery platform Dada Express to provide quick citywide delivery of its products. Other Chinese pharmacy chains like China Nepstar, Quanyuantang, Shuyu Pingmin, and Yifeng Pharmacy, as well as providers like JD Health, have also engaged Dada Express or other similar carriers.

This sharing of delivery services significantly lowers costs for O2O companies, while carriers can ensure efficiency of scale when they integrate orders from different platforms.

Merging different streams of traffic

There are three main categories of O2O businesses at the moment:

  1. Platforms that have the advantage of existing online traffic on a large scale, such as Meituan
  2. Pharmaceutical chain enterprises that mainly have offline traffic, such as LBX Pharmacies
  3. Self-operated companies that have access to both online and offline traffic, such as Dingdang Health

Are they mutually exclusive? Not necessarily, as there is an evolving trend of collaboration between large online platforms and smaller companies. Getting on the online platforms would mean maximizing their reach, enabling them to potentially earn more from the existing audience on these platforms.

Shuyu Pingmin, a pharmaceutical chain, revealed in its financial report for Q1 and Q2 2022 that its online business revenue exceeded RMB 360 million (USD 50 million), of which revenue from third-party O2O platforms accounted for 53%, and revenue from the company’s platform accounted for a mere 8%.

Dingdang Health also mentioned in its prospectus that the proportion of revenue from third-party platforms hit 72.6% in Q1 2022.

It’s an interdependent relationship since these large platforms need a large number of different pharmacies to meet the variety in demand.

JD Health, for instance, built a grid-based operational ecosystem with over 60,000 merchants, enabling it to provide omnichannel 24/7 drug delivery services to users in more than 400 cities. And as of March 2022, Meituan is collaborating with some 200,000 pharmaceutical chains, which are an important part of Meituan’s O2O ecosystem.

This interdependent relationship works in the consumer’s favor as well, since they can access a greater variety of services from the same applications.

However, this doesn’t mean smaller platforms owned by pharmaceutical chains and self-operated enterprises will gradually shut down. They simply cater to a different type of consumer. For instance, in its 2022 financial report, pharmaceutical chain Yixintang disclosed that the UPT (the average number of items purchased in a single transaction) revenue of its own platform was 4.17 times higher than that of third-party partner platforms.

Integrating technology for the improvement of physical stores

Even with an increasing online presence, it has to be acknowledged that brick-and-mortar pharmacies are still one of the main channels of pharmaceutical retail. These are widely distributed and close to local communities, which has helped foster a high level of loyalty among users.

It’s possible to apply technology to help improve the effectiveness of these brick-and-mortar stories. Self-operated O2O enterprises like Dingdang Health, for instance, can choose a location for a new smart pharmacy based on big data, ensuring coverage efficiency of its pharmacy network. A smart drug selection system seamlessly connects user orders, drug retrieval, and drug delivery.

Logistics can be improved with tech as well. For example, a smart order splitting system can be used to record order levels and labor, schedule orders based on cost and delivery time, and consider complex factors such as weather conditions to ensure that drugs are delivered on time and at a lower cost.

The large online platforms can play a part in helping with the expansion of physical stores into the online space, too. Since 2021, programs such as Ele.me’s “Little Blue Light” and Meituan’s “Little Yellow Light” have been in place to establish 24-hour pharmacy services.

Some of these include the integration of smart pharmacies into the network. Using technologies such as visual recognition and automation control, Meituan has managed to automate the management of the entire process, from sorting, order closing, and packing to handover. The sorting and dispatch process is monitored, and drug safety is ensured through systematic calibration.

These smart pharmacies can serve customers in person or send drugs through O2O delivery. They solve the problem of high labor costs for night operations, while ensuring a more comprehensive 24-hour delivery network.

These integrations herald a bright future for the pharmaceutical O2O industry, which is estimated to reach RMB 144.4 billion by 2030 according to MENET.

What will happen to the industry in the future?

The pharmaceutical O2O industry is already moving towards an integrated approach. The next natural step is to expand into providing a wider variety of health services, such as medical checkups and vaccinations. Dingdang Health is already looking into this, disclosing plans in its prospectus for the acquisition of pharmacy chains, testing centers, and other medical service providers.

Longer-term patient management is also on the books. In order to encourage repeat business, current O2O services will need to consider how they manage their customer relationships and patient records to deliver better services while navigating privacy protection guidelines.

Finally, as the industry evolves, the demand for O2O may niche down into specific types of medicine. After all, the primary purpose of O2O is to meet urgent medical needs while ensuring discretion. With enough transaction data, pharmaceutical chains can use O2O platforms to carry out effective digital marketing.

Compared with the uncertainty it faced in its early years, the pharmaceutical O2O industry is now entering a more stable phase with integrations across platforms. With collaboration among different industry partners, there’s potential to expand the market and serve a wider range of people with better digital healthcare products.

This article was adapted based on a feature originally written by Zhang Xiaoxu and published on Artertial Network (WeChat ID: vcbeat). KrEurope is authorized to translate, adapt, and publish its contents.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted content published by 36Kr.com, the largest and most influential tech portal in Chinese language.
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