Front-End Warehouses, a New Growth Opportunity for Offline Maternity and Baby Stores?

The incremental value of instant retail for offline retail formats has become evident. Moreover, the potential for growth is expanding further. As Meituan states, “From January to August 2024, the proportion of night orders on Meituan Quick Shopping continued to rise, reaching 26%; in counties and other lower-tier markets, the volume of instant retail orders on Meituan grew by 54% year-over-year. These are purely incremental consumptions.”

On a broader scale, the “Instant Retail Industry Development Report” shows that in 2023, China’s instant retail scale reached 650 billion yuan, a year-over-year increase of 28.89%, and it is expected to exceed 2 trillion yuan by 2030; the number of active users of instant retail in 2023 was about 580 million, a year-over-year increase of 34.88%, accounting for 53.11% of the netizen population.

During our visits to the regional markets, many maternity and baby stores have gradually recognized the value of instant retail. A practitioner from a maternity and baby store told us that instant retail orders for their store can now exceed 60%, compensating for the loss of business due to reduced offline foot traffic. As instant retail becomes more popular, the concept of “front-end warehouses” is being embraced by platforms like Meituan, Ele.me, as well as retail entities like Sam’s Club, Yonghui, and Hema.

What exactly are front-end warehouses? For maternity and baby stores, could it be a new growth area to tap into? And as maternity and baby stores explore front-end warehouses, what kind of model should they choose?

What is a Front-End Warehouse?

The earliest exploration of the front-end warehouse model was represented by fresh grocery e-commerce platforms like Dingdong Grocery and Daily Fresh.

In the traditional model explored by e-commerce platforms, they usually established a “central city warehouse” in remote areas while adopting a “densification” strategy by setting up more “front-end warehouses” closer to densely populated community areas. Goods are transferred from the central warehouse to the front-end ones and then delivered to customers by couriers based on order details.

However, this model, especially after the fall of Daily Fresh, was once considered to have high operational costs and difficulties. The main reason lies behind the high wastage rate of fresh produce, low gross margins, high fulfillment costs, and equally high customer acquisition costs, which makes it challenging to maintain an equilibrium between increased user numbers, higher average order values, and reduced operating costs.

The turn came in the fourth quarter of 2022 with Dingdong Grocery turning a profit for the first time, underpinned by growing consumer demand for instant retail that allows consumers to shop without leaving home and by progressively optimized supply chains. The improvement of the model and the establishment of consumer habits have allowed the new generation of front-end warehouses to go beyond the realm of fresh products and be explored by more retail players. Due to different types of exploration entities, the new generation front-end warehouse model can be roughly divided into three categories: store-warehouse separation, store-warehouse integration, and warehouse-only.

Which Model is More Suitable for Maternity and Baby Stores?

First, the “warehouse-only” approach remains essentially the model explored by the previous generation of fresh food platforms. However, with supply chain optimization and gradual capture of customer mindshare, players represented by Dingdong Grocery are currently seeing satisfactory progress. Yet, for maternity and baby stores with physical storefronts, this model isn’t quite appropriate for transformation exploration.

The “store-warehouse integration” approach, on the other hand, is the mainstream model currently explored by maternity and baby stores. Based on their existing customer base, stores either explore on their own or partner with platforms to enter the instant retail business. However, this model leans more towards seeking “incremental” customers who don’t visit the store physically. Since the store and warehouse overlap, the area served by both online and offline is the same, making it difficult to feed the online business back into the offline business. Additionally, as the convenience of online services increasingly captures the consumer mindset, there can be a problem of online and offline businesses competing against each other. Ultimately stores may face the dilemma of shrinking offline business, an increasing proportion of online business, yet with the same operational costs, store performance, and increased online fulfillment costs.

The “store-warehouse separation” model is currently exemplified by “MINISO.” Reportedly, they have set up “24H Super Stores” aimed at instant retail consumers’ online shopping needs, located mainly in densely populated community areas to supplement the coverage of regular offline mall stores, providing 24-hour services.

The advantages of this model are clear—the warehouses tend to be located where opening stores is not viable, keeping rents and renovation costs low and focusing mainly on online sales, saving on staff costs. Since these warehouses are set apart from the existing stores and the inventory is also differentiated, it means that the stores can reach broader markets and new demographics. The 24-hour operational timeframe captures incremental consumption during nighttime.

However, the particularity of maternity and baby stores lies in that they split from department stores to become an independent industry, dealing with “slow-moving” goods that are scattered in demand and that require in-depth services.

In other words, maternity and baby products, unlike FMCG, rely heavily on human services. Whether the warehouse in the “store-warehouse separation” scenario, which involves only pickers and delivery personnel, can meet the consumption needs for maternity and baby products remains to be proven. Moreover, with relatively low gross margins for maternity and baby products, when the gross margin level cannot cover the fulfillment costs, front-end warehouses naturally face profitability pressure.

Of course, in the “store-warehouse separation” model, maternity and baby stores could adopt differentiated inventory strategies, such as adding alcoholic beverages, hygiene products, and daily family cleaning categories. However, this would surely challenge their supply chain capabilities. Moreover, venturing into family-oriented products invites competition with supermarket retail formats.

Another competitive challenge arises when, for example, maternity and baby store A deploys a front-end warehouse separate from its physical store, potentially overlapping with the consumer base covered by existing store B in the area, or when A’s front-end warehouse faces B’s front-end warehouse head-on. As the maternity and baby industry enters a phase of stock competition where the market cannot accommodate that many stores, the scramble for traffic and excessive competition will be inevitable.

As things stand, although it’s still uncertain as to “which front-end warehouse model is more suitable for maternity and baby stores exploring instant retail,” it’s undeniable that the resurgence of front-end warehouses reflects the change in consumer buying habits. People’s needs for conveniently purchasing items without leaving home are growing, moving from “uncertain” towards “certain” consumption. Under the drive of certain needs in instant retail, which model will outpace in the maternity and baby retail sector, only time will tell.

Topic Discussion

Currently, how are maternity and baby retail practitioners exploring instant retail? What insights do they have about the different front-end warehouse models?

Feel free to join the discussion with us in the comments section~