Missfresh Limited (MF) Q3 2021 Earnings Call Transcript

Missfresh Limited (MF 2.84%)
Q3 2021 Earnings Call
Nov 11, 2021, 8:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Missfresh Limited third quarter 2021 earnings conference call. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host, Lingling Hu, senior director of capital markets for the company.

Please go ahead, Lingling.

Lingling Hu -- Senior Director of Capital Markets

Thank you. Hello, everyone, and welcome to Missfresh third quarter 2021 earnings conference call. Our financial and operating results were issued via Newswire services earlier today and are available online. You can also visit the earnings press release by visiting the IR section of our website at ir.missfresh.cn.

Participants today will be Mr. Zheng Xu, our founder, chairman, and CEO; and Ms. Catherine Chen, chief financial officer. 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, the company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the relevant part and filing of the company as well with the executed and securities exchange. This company does not assure any -- that this company does not assume any obligation to update any forward-looking statements, except as required as applicable law. Please also note that Missfresh earnings press release and this conference call include the disclosure of the unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.

Missfresh earnings press release issued yesterday contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. We also posted a presentation on our IR website providing details on the results in the quarter. We will reference those results in our prepared remarks but will not refer to specific slides during this discussion. Now I will turn the call over to our founder, chairman, and CEO, Mr.

Zheng Xu. Please go ahead.

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

[Foreign language] Hello, everyone, and thank you for joining our earnings conference call today. [Foreign language] We are pleased to have maintained our strong growth in the third quarter of 2021. Our GMV reached RMB 2.57 billion, representing an increase of 41% year over year. Total revenue grew 47% to RMB 2.12 billion beyond the high end of our guidance of 40 to 45% RAIN in addition to accelerated revenue growth.

We -- our gross margin increased 480 basis points from the second quarter of 2021 to 12.3%, 130 basis points beyond the top end of our guidance range. We also see net loss narrowed with non-GAAP net margin improved 517 basis points sequentially compared to the second quarter. [Foreign language] Two forces were the main drivers of our robust performance: one external, one internal. Externally, the market environment and overall neighborhood-related consumption trends in China continued to grow steadily.

We saw both digital acceleration in the neighborhood retail industry especially in fresh produce and FMCG sectors and rising popularity in online retailing. These changes were in part motivated by the Chinese government's efforts to promote consumption upgrades. As part of this strategy, a number of policies were introduced to boost digital technology innovation of the neighborhood retail industry, including supportive guidelines, we're revamping and upgrading neighborhood fresh markets. Internally, our multipoint growth strategy is building on our long-term competitiveness as we move ahead.

We are focused on generating high-quality and sustainable growth by consistently improving customer neighborhood shopping experience and cultivating our high-value user base by understanding and shaping consumer habits across our platform. [Foreign language] With the on-demand DMW retail business model we invented in 2015, our goal is to establish DMW as the primary grocery shopping model for mainstream urban consumers in first-tier and second-tier cities as urban shoppers in large- and medium-sized cities grow their desire for a more convenient and high-quality lifestyle. This transformation is taking shape. Our attractive DMW model provides more time-efficient, convenient, and valuable fresh produce and FMCG shopping experiences.

As of end of September, we had expanded our DMW business to cover 17 first-tier and second-tier cities, offering over 5,000 SKUs and a delivery time of 36 minutes on average per order. [Foreign language] On the user growth front, we remain focused on high-value customers and high-quality growth. To that end, we continue upgrading our membership ecosystem in third quarter. We announced an area of measures, including the introduction of an innovative one-stop Missfresh advisor service and cultivating users through private domains.

Our efforts boost the paid members revenue in the third quarter by 800% year over year. [Foreign language] With respect to our supply chain capabilities, we continue to broaden and deepening our direct sourcing partnerships with farmers and quality brand suppliers. These efforts further build out our demand-driven strategy to create a digital supermarket offering with a comprehensive selection of fresh produce and FMCGs. At present, we have expanded our direct sourcing network to include approximately 200 farms nationwide producing vegetables, fruits, seafood; and about 350 factories that produce meat, eggs, and FMCGs.

We are also catering to the growing demand of high-value users by improving product screening, testing, and quality as well as rolling out our private label brand offerings. For example, our sales of chilled pork featured in our today's production offerings grew by 86% quarter over quarter. Thanks to our state-of-the-art fresh food control and our ability to predict and act on consumers' needs. Furthermore, our private label fresh brand, Xiang An Xin Fresh Joy has expanded to over 200 SKUs, covering fresh produce and baked goods.

We are glad to see that Fresh Joy Xiang An Xin is gaining momentum in the third quarter with sales growing at 250% quarter over quarter. Additionally, during the third quarter, our average value per order continued to ramp up, maintaining its industry-leading position. [Foreign language] At the same time, we are steadily laying a strong foundation to unlock solid growth and future profitability by leveraging our technology capabilities in big data and AI algorithms. These allow us to understand and cultivate users' shopping habits and improve operational efficiency, all of which underpinning our core competitiveness in the on-demand retail space.

[Foreign language] Moving to another major Missfresh business arm, our intelligent fresh market business. This business segment aims to transform major neighborhood retail channels, serving mainstream consumers in third-tier and fourth-tier cities. Through our services, we empower these traditional retailers to reinvent their business with our digital transformation solutions and data-driven private domain operations to help local retailers increase revenue and profit by delivering a better neighborhood shopping experience. As of September 30th, 2021, we had entered into contracts to operate 30 -- 73 intelligent fresh markets in 18 cities, 52 of which have commenced operations.

In the near term, we will continue to promote our hundreds of city, thousands of fresh markets initiatives, speeding up our intelligent fresh market business expansion. [Foreign language] Supported by years of experience in operating a neighborhood retail platform and our in-house developed retail AI network, our retail cloud business is poised to assist traditional neighborhood retailers. Here, we are targeting small- and medium-sized supermarkets that want to ship swiftly built digital operation capabilities. Through our retail cloud business, neighborhood traditional retailers are empowered to develop more efficient, comprehensive neighborhood retail solutions consisting of omnichannel marketing, private traffic, supply chain, and last-mile fulfillment capabilities.

These are critical elements in the digital era to bring smaller markets, more urban consumers by offering fast, convenient, and enjoyable shopping experiences. Digitalization is also driving the ultimate efficiency improvement for retail cloud customers to achieve higher operational returns. As of September 30th, 2021, we have signed contracts with 11 supermarkets customers. We will take a step-by-step approach to implement our solutions and ensure customer success, building a solid foundation for rapid expansion moving forward.

[Foreign language] In closing, China has over 12 trillion neighborhood retail markets. According to iResearch, our unique business matrix consisting of on-demand retail, intelligent fresh market, and retail cloud is well suited to tap this vast potential. We are constantly growing and innovating. We will remain at the competitive forefront through our continuous business upgrades, operational breakthroughs, and technology empowerment that satisfy ever-changing consumer needs and promote industry revitalization.

In our pursuit of high-quality sustainable growth, we are dedicated to embracing common prosperity, boosting digital transformation across China's neighborhood retail industry, and fulfilling our mission to help every family enjoy quality groceries at their fingertips. [Foreign language] Thank you, everyone. With that, I will now turn the call to our CFO, Ms. Catherine Chen, to discuss our financial performance for the third quarter.

Catherine Chen -- Chief Financial Officer

Thank you, Mr. Zu, and hello, everyone. We are delighted with our operational and financial performance for the third quarter, which continued to demonstrate our strong growth trajectory. Gross margin grew on a sequential quarterly basis and exceeded the high end of our guidance range, primarily due to our heightened focus on high-value customers and a shift to higher-margin direct-sourced products.

Our efforts to strengthen operational efficiency across multiple fronts also narrowed our loss with adjusted net margin improving by 517 basis points from the previous period. Now I'd like to walk you through our detailed financial results. Total net revenue reached RMB 2.1 billion in the third quarter of 2021, representing an increase of 47.2% on a year-over-year basis from RMB 1.4 billion in the same period of 2020 and exceeding our -- the top end of our previous guidance range. Sales of products through online platforms increased by 48.1% to approximately RMB 2.1 billion in the third quarter of 2021 from RMB 1.4 billion in the same period of 2021.

The increase was primarily driven by an increase in the number of orders fulfilled as a result of an increased number of transacting users and an increase in the next-day delivery sales. Other revenues reaching RMB 43.7 million in the third quarter of 2021, representing a growth of 14.1% from RMB 38.3 million in the same period of 2020. The increase was primarily due to increased sales of products through our convenience store business and the increase in the revenue contribution from membership fees as we enhanced promotional activities for our membership program. Cost of revenue increased by 54.8% to approximately RMB 1.9 billion in the third quarter of 2021 from RMB 1.2 billion in the same period of 2020.

Gross profit was RMB 260.6 million in the third quarter of 2021, representing an increase of 9% from RMB 239.2 million in the same period of 2020. Gross margin increased to 12.3% for the third quarter of 2021, increasing by 480 basis points from the second quarter of 2021 and exceeding the top end from our previous guidance range by 130 basis points. Gross margin for the third quarter of 2020 was 16.6%. The year-over-year decrease was primarily attributable to an increase in discount coupons incentive offered to the customers in 2021 period.

Operating expenses were RMB 1.2 billion in the third quarter of 2021, comparing to RMB 728.1 million in the same period of 2020. Breaking this down further, fulfillment expenses were RMB 637.9 million in the third quarter of 2021, compared to RMB 396.2 million in the same period of 2020. The increase was primarily attributable to more orders being fulfilled and increased headcount of product delivery warehouse operations, quality control, and customer service staff to provide better fulfillment capabilities. Sales and marketing expense were RMB 256.2 million in third quarter of 2021, comparing to RMB 170.3 million in the same period of 2020.

The increase was primarily due to the increased promotional expenses incurred from both online and offline advertising activities for new customer acquisition and current customer retention. General and administrative expenses were RMB 192.2 million in the third quarter of 2021, compared to RMB 74.5 million in the same period of 2020. The increase was mainly due to the increased recognition of share-based compensation and a number of management staff for new business initiatives. Technology and content expenses were RMB 145.1 million in the third quarter of 2021, compared to RMB 87.2 million in the same period of 2020.

The increase was mainly attributable to increased recognition of share-based compensation and the number of R&D staff for new business initiatives. As a result of the foregoing, loss from operations were RMB 970.7 million in the third quarter of 2021, compared with a loss of RMB 40 -- 489 million in the same period of 2020 and narrowed by 35% from the second quarter of 2021. Net loss attributable to ordinary shareholders were RMB 973.7 million for the third quarter of 2021, compared with RMB 616.2 million in the same period of 2020 and narrowed by 39% from the second quarter of 2021. Non-GAAP adjusted net loss attributable to ordinary shareholders was RMB 886.5 million in the third quarter of 2021, compared to adjusted net loss of RMB 469.9 million in the same period of 2020.

Non-GAAP net margin in the third quarter of 2021 narrowed by 5.2 percentage points from the second quarter of 2021. Non-GAAP basic and diluted net loss per ADS were both RMB 3.87 in the third quarter of 2021, compared to basic and diluted net loss of RMB 13.86 per ADS in the same period of 2020. As of September 30th, 2021, we had cash and cash equivalents, restricted cash and short-term investment of RMB 2,479.5 million, compared with RMB 1,041.5 million as of December 30th, 2020. In the third quarter of 2021, net cash used in operating activities was RMB 669.2 million.

Now turning to our business outlook and projections. For the fourth quarter of 2021, we currently expected net revenue to be in the range of RMB 2,232 million to RMB 2,315 million, representing a year-over-year growth of approximately 35% to 40%. We expect gross margin to improve by 100 to 150 basis points quarter over quarter and non-GAAP operating margin to improve by 800 to 1,000 basis points quarter over quarter. This outlook is based on current market conditions and reflects our preliminary estimates of market and operating conditions and customer demand, all of which are subject to change.

With our highly competitive offerings, leading technology, operational acumen, and understanding of the evolving market, we anticipate continued top-line growth and improved unit economics in the coming quarters. We will remain dedicated to serving both our growing customers and supplier partners with superior experiences and elevated efficiency. We look forward to further strengthening our core capabilities to seize the tremendous opportunities in China's neighborhood market aimed at the digital [Inaudible]. We invite you to watch our progress.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Andre Chang from J.P. Morgan. Please ask your question.

Andre Chang -- J.P. Morgan -- Analyst

[Foreign language] So I will repeat my question in English. So thank you management for taking my question. Congrats on a very strong quarter of growth and improving financial indicators. So my first question is about growth drivers.

So we noticed that the company has increased the city coverage, but the growth has been pretty decent. Management mentioned that the drivers are increasing users more next-day delivery, membership fee, etc. So can you elaborate more about what's behind all of this? Is there any specific area that we've seen more user penetration, expansion of a network, or that there are some certain scenarios that the user transaction frequency are picking up or ARPU is picking up? And the second question is about the guidance on the margin improvement. We noticed that fourth quarter margin improvement, the pace is going to be faster than the third quarter.

So I wonder what's the driver behind it. Is there any specific area of cost-cutting? Or there are some structural changes going on? Thank you.

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

[Foreign language] So basically, for your first question that we focus on quality growth, and that consists of two sides: one is our on-demand DMW retail business, which is facing the mainstream consumer base and our first- and second-tier cities. And for the lower-tier cities that we're using a lighter model from our intelligent fresh market to address those needs. And from the DMW side that we are -- we see that there is still lots of the penetration. Now it's still relatively low, and we still see there lots of potentials to increase penetration in first-tier and second-tier cities.

And on one hand, the -- our growth in the past has been contributed by our strengthened network density among first-tier and second-tier states and among our increasing user base in the first-tier and second-tier cities. And we continue to see there's a lot of potential to improve our penetration, our network coverage, our service to the customers. And on the second part, that facing our users that we are focusing more on the user values like operation and private domain operation as well that we launched our one-stop Missfresh advisor services, which helps to address the more tailor-made customers' needs, and we are able to addressing the customers in China the rising demand for upgraded consumption needs, and we are able to improve the consumption frequency as well as the average price per order at the same time. So these two parts has been driven the growth in the past in the third quarter.

And we see it's a very healthy growth trend, and we'll continue to work on that to drive the transacting user growth as well as with the frequency and average price per other. And for your second quarter -- for your second question, we have given the guidance of improving operating non-GAAP operating margin to improve by 800 to 1,000 basis points in first quarter. And that's mainly contributed by first, that with our steady and effective user growth and operation strategy, we're able to improve our gross margin as from the -- through our launch of private domain operations and improved customer services that we are able to offer the best goods to our customers. And we are also able to underpin their demand for upgraded consumption needs.

That helped to drive the increasing consumption level as well as the overall gross margin of the business. And on the second part, with the improving average price per order and improving efficiency, we're able to lower the -- our fulfillment expense rate in the first quarter. And also at the same time, the company is also improving the operational efficiencies on the other expenses level to overall contributed to the 800 to 1,000 basis points improvement of the operating margin perspective. [Foreign language] So for our on-demand DMW business, the high-quality growth that we were able to build up the two engines for our high-quality growth.

That one side is on our high-value customer acquisition as well as our continuous efforts to do customer growth and customer operations. And that helped us to continue to maintain and growing our high-value customer base. And the other side is on the supply chain side that we have upgraded our supply chain capabilities, strengthen our direct sourcing capabilities, and also in order to use the improvement in the supply chain side to fully cover the fulfillment expense rate. So we were expecting -- we are gradually steadily improving our gross margins to cover our fulfillment expense rate to achieve a positive fulfillment profit ratio.

And also, on the other hand, that we are steadily working on the different kind of geographics to [Inaudible] expand in the top first-tier and second-tier cities. And at the same time, we'll gradually turn positive at the operating level from the geographic region perspective to steadily achieve a positive operating cash flow and positive operating margin.

Lingling Hu -- Senior Director of Capital Markets

That's all our answers for the questions. Thank you. Next question, please, operator.

Operator

Our next question comes from the line of Charlie Chen from China Renaissance. Please ask your question.

Charlie Chen -- China Renaissance -- Analyst

[Foreign language] Thanks for taking my questions. I have two questions here. The first one is regarding the fulfillment expenses. As we have seen, the government seems to be pushing for common prosperity and tries to live the lifestyle of the delivery people.

So I just want to get some color on how is that impact your fulfillment expenses and how do you feel the pressure going forward? Or how can you offset this potential impact? And the second question is regarding the fresh market business. Can you share us -- with us more color about the ramping up of the GMV margin and also the unit economics? Does that meet your original expectations? Thank you.

Lingling Hu -- Senior Director of Capital Markets

Charlie, can you please repeat your question in Chinese?

Charlie Chen -- China Renaissance -- Analyst

OK. Sure. Sorry. [Foreign language]

Catherine Chen -- Chief Financial Officer

[Foreign language] I will translate by myself. So as mentioned that in the third quarter, the company also see there is a strong potential to further reduce the fulfillment expansion rate. And we believe that the average price per order is a determining factor on one side that -- for our fixed like warehouse, rental, depreciation. And those fixed costs as a percentage of the revenue will be further diluted as we have a rising average price per order.

And on the other hand, the human-related variable cost as a percentage of per orders revenue will also be further diluted as we can improve the related like the people efficiency and increased the number of orders. And we will continue to focus and keep focusing on the government's initiatives to carrying out new measures to enhance the benefits and protection for flexible employment personnel. And we also think riders are important partners in our business and their benefits and security are critical. We will implement related policies and continuous upgrade of our riders' welfare to improve their happiness.

And at the same time, we want to emphasize our average price per order is nearly RMB 90 per order. And for each order, actually, the last mile, the rider expense is less than RMB 5. So actually, it takes a very small percentage of the -- as a percentage of the AOV. So the related increase of the social welfare will not have a material impact to our fulfillment expense as overall speaking.

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

[Foreign language] So to your second question, the company has a clear time line to further improve our unit economic model that -- to realize a positive fulfillment profit margin and also to realize positive operating cash flow. So we see that from the current progress that our execution on this time line is better than what we expected as we have given out a indication that on fourth quarter, our operating net loss margin will improve by eight to 10 percentage points. And also, we could see that we -- with this kind of improvement, it's driven by the underneath like two important engines as we mentioned before. First is that our engine to acquire high-value customers and deeply operating, creating customer value through our private domain operations as well as our high-quality services.

And the second part is to -- for the upstream supply chain side and our fulfillment and logistics side to further have improvement on the operational efficiencies. So that -- these two engines will drive our growth in, first, the gross profit growth, at the same time, growing our -- at same time, optimizing our fulfillment and other operating expenses efficiency. So this is an important factor that's helping us to improve our operating margin, at the same time, maintaining high-quality growth. And also addressing our -- from our financial perspective, while we realized a positive fulfillment profit level, then actually we are actually on a good track to turning a positive operating cash flow level.

[Foreign language] So behind the high-quality growth, what's driven the time line and timetables to achieve a positive fulfillment profit level, there are three core factors. The first one is on the demand side, whether you are facing the mainstream middle-class families and who have the upgraded consumption needs and whether you can save this kind of demand. That's determined the -- that's the foundation of the future growth of the company. And the second part is on the supply chain part that whether you can integrate it the related supply chain resources and to provide sufficient supply for high-quality products that satisfy the consumers' needs, which is also driving the improvement of the average price per order as well as the gross profit margin.

And the third important factor is density that whether you can operate on the appropriate enough density that helps you to improve the fulfillment efficiency as well as operational efficiencies. These three factors are the key drivers to achieve a positive fulfillment profit level, and we are working hard on these three factors. And also, we are seeing good progress in the execution side, and we will -- we are on track with our timetable.

Lingling Hu -- Senior Director of Capital Markets

Thank you, Charlie. Next question, please.

Operator

Our next question comes from the line of Vincent Yu from Needham and Company. Please ask your question.

Vincent Yu -- Needham and Company -- Analyst

[Foreign language] Hi, management. Thanks for taking my question. I have two questions and a follow-up for the -- on the margins question. My first question is about the marketing expenses and operating expenses.

What's the current DAC now and what we see the potential of market expenses optimization? My second question is, as management has mentioned on the reflection point of cash -- operating cash flow. But how about the EBIT margin seeing that we have improved our margins quite a lot and what we see for the whole company and for certain markets when these margins turn positive? And lastly is a follow-up on the order's pace per customer that part can comment your what current level is for an average customer pace shopping frequency and for like IDO, the high-end user. Thank you.

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

[Foreign language] So let me translate for the first one. So thank you for your question that on the sales and marketing side that we focus on acquiring high-value customers and continuously improving our services and to further boost the customer growth as well as the repeat purchase by existing customers. So what we have launched is our Missfresh Adviser one-stop services which is focused on private domain like operations of our users. So as a result that we see there's continuously growth of our high-value customer base and reducing customer acquisition cost.

And from the sales and marketing expense as a percentage of the revenue part that we see that in the coming quarters, there will be a significant -- reduced in terms of the sales and marketing expense rate in the coming fourth quarter. So that's the -- addressing your first question. [Foreign language] So to address your second question, so our on-demand DMW business that we are -- we'll continue to work on to turning our fulfillment profit to be positive and also turning the operating cash flow to be positive for this business. On the -- on an overall perspective, the group is targeting a massive market with around 12 trillion like market size and also the -- our retail cloud business and our intelligent fresh market business are also growing.

So from -- in terms of the time line of overall business turning operating profit positive, that we will focus on turning the operating cash flow positive first, and we will still continue to focus on growth in the first-tier and second-tier cities as we still have a lot of potential to improve our market percentage, our penetration among the high-value customer base among first-tier and second-tier cities. So for the overall perspective that we don't have a clear time line yet, but we will focus on the -- our on-demand DMW business with improved margins and positive fulfillment profit margin and positive operating cash flow for this business. And we'll continue to invest to -- for our growth and also coupled with our retail cloud business and our intelligent fresh market business that we are aiming a large market and with a fast-growing outlook. And for your question on the frequency of our customer base, so basically that we have been focused on deepening our customer service, customer operations, and private domain services, for example, that we launched our one-stop Missfresh Adviser services.

And this is helping to drive the core growth factors that the core growth factors from -- of the third quarter in the past is first on transacting user, second on shopping frequency; and third on our average price per order. So for a typical customer of Missfresh that they will shop for six to eight times per month, and that means each week for one to two times. And we see that high-frequency customers and high-value customers are among the fastest-growing segment among our customer base. And we are continuing to focus on providing superior services and superior high-standard products to tailor made to this batch of consumers.

And we also see the revenue contributed by our paid members that grew as -- grew on a Y-o-Y basis, 800% of growth. That's mainly driven by our continuous improved growth engine to providing high-quality products and high-quality services that's driving the shopping frequencies of our high-value and high-frequency customer base.

Vincent Yu -- Needham and Company -- Analyst

[Foreign language]

Lingling Hu -- Senior Director of Capital Markets

Thank you. Next question, please, operator.

Operator

Our next question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Thomas Chong -- Jefferies -- Analyst

[Foreign language] I have two questions. My first question is about our private label strategies. Given that we have experienced very strong growth momentum on that front, can we talk about our 2022 outlook and strategies on private labels and how it helps to improve our GP margin? And then the second question is also relating to our user acquisition strategies. We understand that the company has a different way to acquire new users, but more from an operational standpoint, can you talk about the main channel that we acquire users and how we are making our sales and marketing as a percentage of revenue continue to achieve leverage? Thank you.

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

[Foreign language] So addressing your question on private label products that we see that from the supply chain development, there are three stages. The first stage is more on channel trade that's more focused on procurement, and the second stage is on category management that you are able to provide full category selection for your customers. And the third stage is on private label that we could see that the first part on the trade part is more like, for example, Walmart and other supermarkets. They are -- majority of their channels is on -- rely on buyers.

It's more on trade for commodities. And the second part on the full category selection that's more focused on category management. That's more similar to Sam's Club and Costco, which focus on which -- with the capabilities of full category management that they are able to select the correct products among category to satisfy the consumers' needs and they are providing a selection among the categories. And after the completion of the category management, it will be the stage for the private label products.

And for typical brands would be like -- which have a very strong supply chain and they roll out their private label products. And for us, that actually Missfresh has already have been laying a solid foundation on the first stage and second stage and we are able to face our customers to provide a full category selection for our customers. Among our 4,000 to 5,000 SKUs for our speedy delivery SKU portfolio that we are able to select among categories to heat and satisfy the customers' needs. And we -- with the data algorithm and the supply chain capabilities, we already have solid capabilities to satisfy that kind of needs.

So for full category selection, that means that you need to have a good category management capability at the same time for a single commodities that you are able to offer big demand over that single commodities generate a big demand for that single product. So after laying a strong foundation over that, we are going to further develop our private label products. And we see that next year will be a big year for private label products. Now we already have several private label products among all categories on our platform.

For example, our Fresh Joy of private label products, Xiang An Xin, now already cover over 200 SKUs. That's covering categories, including meat, eggs, vegetables, and bakeries. And we are glad to see that the Fresh Joy Xiang An Xin products is gaining momentum with -- In the third quarter, the sales grew by 250% on Y-o-Y basis. And we see that it's very, very important that we have laid a foundation in different categories of our private label.

And we also have private labels in other categories like dairy, etc. And we see with the foundation of the second stage, we already have full capabilities to further develop and it is the correct timing for us to further develop our private -- entering to the private label stage. And the development and expansion of private label products also help us to improve our gross margin and also to further satisfy the customers' quality goods need. [Foreign language] So I will add a few -- more points on the gross margin side.

So from the user part that we -- it is very important that you have a high-value, high-quality customer base that -- who are you facing to? That's very important in terms of the margin perspective. If you are facing the customers who are focused on high-quality products and high-quality services, then that provides a guarantee for your further gross profit margin. And the other side is on the supply chain side that whether you are selecting the correct portfolio of products to satisfy your customers' needs, whether you have the capability to select and source the correct products and develop the correct products. And among our internal data from our deepening operations from our customers that we see the high frequency and high-value customers has already contributed a decent portion of our whole business.

And also these customers, their retention rate is -- also remained high and the sales contributed by this back of -- this type of customers are -- continues to grow, and they are realizing a self-growing engine among this kind of high-value customer base. And on the supply chain side that we already developed a network of 200 Missfresh farm and over 350 Missfresh factories. Among the upstream collaborations and synergies among our supply chain ecosystems that we are able to create better margins along the value chain and also that we will see that this also help us to achieve a good progress on our timetable to realize a positive fulfillment profit.

Lingling Hu -- Senior Director of Capital Markets

Thank you. Next question, please, operator.

Operator

Our next question comes from the line of Yang Pu from Prime Number Capital. Please ask your question.

Yang Pu -- Prime Number Capital -- Analyst

[Foreign language] I will translate in English. So, thanks, Mr. Xu, Catherine, and Lingling for taking my question. So my first question is about AOV.

So year over year, AOV increased by 4.8%. I just wonder, quarter over quarter, it declined by 8%. Is this driven by increasing first -- new users? Or Is it for us -- there is some other reasons, maybe seasonality, or change in the revenue mix of different services? So that's my first question. And then the second question is about capital sustainability.

So the company talked about the road map to profitability and getting positive operating cash flow. I wondered with all this road map and your current cash on hand, what's your expectation for your capital sustainability next year? Do you expect to raise capital somewhere in 2022?

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

[Foreign language] So in terms of, first, your question on the AOV that we see that AOV has also been impacted by seasonal reasons. For example, like in the third quarter that -- because it's summertime that people have reduced the demand on meat and some of the heavy grocery part and they will have more retention on fruit and fruit directly more sourced from the local sources, which is of relatively more lower prices. So that's becoming from a whole year perspective that there is a seasonality on that, that if you see it on a year-over-year basis that we have increased 5% on the average price per order on year-over-year growth side. And from your question on the capital planning.

So the company still have a good balance on cash and cash equivalent. And we are also seeing improving operating cash flow status. So we'll see depending on the capital market environment and future business development needs, we will further think about funding plans for now that the company doesn't have a concrete plan yet.

Yang Pu -- Prime Number Capital -- Analyst

[Foreign language]

Operator

In view of time constraints, I will now turn the call back over to the company for closing remarks.

Lingling Hu -- Senior Director of Capital Markets

Thank you once again for joining us today. If you have further questions, please feel free to contact Missfresh Investor Relations through the contact information provided via our website or The Piacente Group investor relations.

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

[Foreign language]

Operator

[Operator signoff]

Duration: 87 minutes

Call participants:

Lingling Hu -- Senior Director of Capital Markets

Zheng Xu -- Founder, Chairman, and Chief Executive Officer

Catherine Chen -- Chief Financial Officer

Andre Chang -- J.P. Morgan -- Analyst

Charlie Chen -- China Renaissance -- Analyst

Vincent Yu -- Needham and Company -- Analyst

Thomas Chong -- Jefferies -- Analyst

Yang Pu -- Prime Number Capital -- Analyst

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