Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to the Dingdong (Cayman) Limited Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. We will be hosting a question and answer session after management's prepared remarks. Please note this event is being recorded. I'd now like to turn the conference over to the first speaker today, Karen Ji, Investor Relations Vice President, department of the company. Please go ahead, ma'am.
Thank you. Hello everyone, and welcome to Dingdong second quarter 2021 earnings call. With us today are Mr. Changlin Liang, our founder and CEO, and Ms. Le Yu, our CSO. You can refer to our second quarter 2021 financial results on our IR website at ir.dingdong.com. You can also access a replay of this call when it becomes available a few hours after its conclusion on our IR website. Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these forward-looking statements.
All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors, and the details of the company's filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. I will now turn the call to our first speaker today, Founder and CEO of Dingdong, Mr. Liang.
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Good morning and good evening, everyone. Thank you for joining us today on Dingdong's second quarter 2021 earnings conference call. This is our first earnings call since our IPO. Dingdong is the fastest-growing company serving the on-demand consumer needs of China's retail industry, and an industry leader after just four years of operating history. We extend our warmest gratitude to all the investors and analysts, and thank you for your interest and support. Good morning and good evening, everyone. Thank you for joining us today on Dingdong's second quarter 2021 earnings conference call. This is our first earnings call since our IPO. Dingdong is the fastest-growing company serving the on-demand consumer needs of China's retail industry and an industry leader after just four years of operating history. We extend our warmest gratitude to all the investors and analysts, and thank you for your interest and support.
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We're delighted to report that our GMV in the second quarter of 2021 increased by 80.8% year-over-year to RMB 5.38 billion. Geographically speaking, we achieved 49.8% year-over-year growth in our GMV from our most mature markets in the Yangtze Delta region. Growth was mainly driven by growth in our consumer base and a significant increase in purchase frequency by our existing users on our platform. During the second quarter, the number of average monthly transacting users grew 39.1% to 8.4 million. Members of our Dingdong membership program placed an average of 7.3 orders per month, compared to 6.7 orders per month in the first quarter this year. During the second quarter, we proactively adjusted our pricing strategies for certain products to enhance user stickiness, achieving great results.
Meanwhile, we launched a drip marketing system to refine the management of marketing expenses and increase our marketing investment to more effectively target high-quality users and cities with high ROI to invest our marketing resources in truly valuable users. Going forward, we'll continue to upgrade and optimize the system to further improve our marketing efficiency.
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Moreover, we continue to expand into new geographic regions and markets at a rapid pace. Following Shanghai, Shenzhen, Suzhou, Hangzhou and Beijing, Guangzhou became the sixth city exceeding and maintaining a monthly GMV of more than 100 million RMB. In addition, growth rates in average daily orders per frontline fulfillment station was more rapid in third-tier and fourth-tier cities, outpacing growth rates in first and second-tier cities such as Shanghai, Hangzhou and Suzhou. We can clearly see increasing acceptance and recognition of our on-demand home delivery business model in lower-tier cities.
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As this is our first earnings call since our IPO, I would like to take this opportunity to introduce the underlying logic and rationale of Dingdong's business model.
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China's fresh groceries and daily necessities consumption has experienced substantial growth in recent years. The market size reached over RMB 10 trillion in 2020 according to the China Insights Consultancy. The traditional and offline retail models, which currently occupy the majority of the industry's market share, have numerous pain points, which lead to low efficiency on the supply side and inability to meet evolving consumer preferences on the demand side. China's consumption upgrade is a major trend and a key driver of growth and expansion of the industry. These evolving user demands inevitably promote the rapid development of innovative business models.
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As such, we developed a frontline fulfillment grid model to effectively achieve rapid delivery of quality fresh groceries and daily necessities. Each of our self-operated frontline fulfillment stations directly serves the modern households in their nearest respective neighborhoods, providing consumers with immediate delivery of more cost-effective fresh groceries, daily necessities, and services beyond their expectations. Leveraging our upgraded business model through the combination of Costco's model with on-demand delivery within 29 minutes, we aim to build a highly integrated on-demand e-commerce infrastructure spanning procurement, fulfillment and delivery that is as readily available to every household as running water.
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We expect that Dingdong will be the fifth infrastructure next to water, electricity, gas and internet in the lives of future households. We're dedicated to making fresh groceries and daily necessities on the Dingdong platform as readily available as running water for every household. Time is one of the greatest factors that can change the world. Dingdong has reduced delivery times from an average of one to three days in the past to just half an hour today. With the rapid development of the social infrastructure built by Dingdong, we believe we are on our way to becoming a leading consumer company in the new era.
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The construction of social infrastructure has great social value, but also comes with high barriers to overcome. Though it will be difficult and take a great amount of time, it is the honorable thing to do. In order to achieve this goal, Dingdong is making great efforts to further upgrade our capabilities in the following three aspects.
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First and foremost, we'll further enhance our supply chain capabilities in the planting, breeding, processing, and production processes. As we all know, traditional fresh grocery supply chains are redundant and it's inefficient. For upstream planting and breeding, we proactively participate in the process and leverage our proprietary D-GAP, a set of good agricultural practices for production safety and sustainability, and our agricultural technology to upgrade the supply side. This effectively allows us to resolve challenges in terms of market access, demand projection, price volatility, and digitalization of traditional models. Moreover, this helps ensure the stability of the supply, price, and quality of our products, which is in line with China's strategy of rural revitalization.
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We'll participate in production and processing in various ways. For example, we plan to maximize the use of advanced equipment to build our own production lines while increasing production efficiency and quality to improve gross margin. For high gross margin product categories that are easily scalable, we'll continue to utilize our in-depth consumer insights and data analytics to develop private label brands. For example, our private label brand Boxing Crayfish has generated a GMV of more than RMB 80 million in just over two months after its launch. Our private label products not only enhance user loyalty, but also improve our gross margin and average order value. The pre-coupon gross margin of Boxing Crayfish was 33.8%, higher than our overall pre-coupon gross margin. The average order value for orders including Boxing Crayfish reached RMB 98.9, 73.9% higher than the average order value of total orders.
Our private label brands will achieve rapid growth in the future. By continuously improving our product offerings, we are able to meet the ever-changing needs of consumers and create greater commercial value.
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Second, we'll continue to strengthen our technical capabilities in our supply chain system, the automation of regional processing centers and frontline fulfillment stations, and our data algorithm. We'll further optimize our industry-leading supply chain system and utilize data to improve the efficiency of our supply chain and operations. We're currently implementing more automation equipment at our regional processing centers and frontline fulfillment stations, and we'll also introduce artificial intelligence technologies to further improve decision-making processes and order fulfillment efficiency. Meanwhile, we'll continue optimizing our algorithm capabilities to enhance our projections and recommendations. Improvements in these technical capabilities will further enhance our efficiency, reduce operating costs, and enable us to better serve our customers. Technology-empowered operations create significant value in all aspects of our businesses and are a fundamental driving force for Dingdong to stand out in the industry.
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Third, we'll continue to expand our geographic coverage and improve our unit economics. In terms of geographic coverage, we have expanded to 36 cities in four metropolitan regions. There are 19 major metropolitan regions in China, which accounts for 60% of China's total consumption. We expect to expand our operations to all 19 metropolitan regions in the future. We view geographic expansion as a major growth opportunity and will continue to improve our operational capabilities at the same time.
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Meanwhile, we'll work harder to strengthen our operational and management capabilities to achieve self-sufficient capacity. We'll continue to increase our user penetration rate and user wallet share through constant improvements in our products and service offerings. As a result, average daily orders and transaction amounts per frontline fulfillment station, order density, and efficiency of our frontline fulfillment stations will continue to increase. Our unit economics will keep improving accordingly.
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Going forward, we will also continue to improve our technology and management capabilities to optimize our supply chain and operational efficiency while maintaining sustainable growth. We aim to become profitable in our mature markets first, then scale our profit goals to more markets across the nation.
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Dingdong, by nature, is a supply chain company that is deeply involved in planting, breeding, processing, and production processes as to capitalize on the growth potential of China's consumption upgrade. There is significant room to grow in the enormous household consumption markets, and there is no monopoly involved. We simply strive to provide better products and services at reasonable prices and be a part of increasing people's happiness. Moreover, our goals are in line with the domestic development trend of dual circulation and improving the real economy.
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To conclude, we'll stick to our customer-centric approach and keep taking the difficult but just path. Following the developmental trend, we are confident that we'll realize our long-term value and create long-term value for our investors.
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Thank you. Thank you, everyone. With that, I'll hand the call over to Ms. Yu, our CSO, to go over the financials.
Thank you, Mr. Liang, and hello everyone. Before I walk you through our detailed financial results, please note that all numbers stated in the following remarks are in RMB terms, and all comparisons and percentage changes are on a year-over-year basis unless otherwise noted. Our total revenue reached RMB 4.65 billion, representing a tremendous 77.9% year-over-year increase. In the second quarter last year, consumer purchasing patterns shifted from offline to online channels as a result of the pandemic, which drove our revenue up significantly. While the pandemic had a limited impact on our business in the second quarter this year, we still maintain our strong year-over-year growth momentum. During the quarter, we expanded into seven new cities, including Xiamen and Chongqing, where we have seen strong growth momentum.
For example, we launched in Xiamen at the end of May and have already achieved average daily order per frontline fulfillment station exceeding 1,300 in July, which demonstrated the strong demand in the second-tier and third-tier cities. Having said that, our 29 existing markets continue to be the primary driver of our revenue growth during the quarter. As of June 30th, 2021, we had expanded our coverage to 36 cities. In only six of these cities, we have completed comprehensive coverage of all urban areas. Going forward, in addition to geographic expansion in new markets, we will continue to enhance our coverage and penetration rate in existing markets. We believe there is still tremendous growth potential in our existing markets. In terms of profitability, our gross profit margin decreased on a year-over-year basis.
As Mr. Liang mentioned earlier, during the quarter, we proactively adjust the pricing strategy to improve customer purchase frequency and customer retention and achieve great results. Driven by the continued optimization of our supply chain, development in our private label products, and improvement in ROI on marketing expenses through our new group marketing system, for which we have witnessed initial success in the third quarter. Our growth margin is expected to improve while our rapid growth trajectory continues its momentum in the next quarter. Fulfillment expenses in the quarter were CNY 1.69 billion. As a percentage of total revenues, fulfillment expenses improved to 36.5% from 39% in the first quarter of this year. Meanwhile, average fulfillment cost per order decreased significantly from CNY 20.6 in the second quarter last year to CNY 17.9.
Increasing order density is an important driving force for improving our order fulfillment efficiency, and the average daily order per front line fulfillment station is an important indicator of overall order density. During the second quarter, we opened 147 front line fulfillment stations in new and existing cities, reaching 1,136 total front line fulfillment stations as of the end of this quarter. Although opening new stations may negatively affect the overall average daily orders per front line fulfillment stations, the average daily order per front line fulfillment stations in the second quarter still increased by more than 20% to 1,000 orders. Due to the pandemic, user acquisition in new markets was fairly limited in the second quarter of last year.
As a result of our expansion to several new cities during the quarter, our new user count in the second quarter of 2021 was more than twice that of the same period last year. Accordingly, selling and marketing expenses as a percentage of total revenues increased year-over-year. In the third quarter, we expected to maintain rapid year-over-year growth in new and customer acquisition, while decreasing our selling and marketing expenses as a percentage of total revenues on a quarter-over-quarter basis at the same time. We have already seen improvement in our user acquisition efficiency in July and August thus far. Excluding share-based compensation expenses, our general and administration expenses as a percentage of total revenues decreased to 2.3% from 2.9% in the second quarter last year, driven by our growing economies of scale. Technology and data will create significant value in all aspects of our business.
We increased our spending on product development during the quarter. As a percentange of total revenues, product development expenses increased to 4.4% from 2.4% in the prior period. We believe investment in product development will continue to drive great value generation for Dingdong in the near future. Our non-GAAP net loss was RMB 1.73 billion in the second quarter, while our non-GAAP net loss margin expanded slightly to 37.2% from 36.2% in the previous quarter. As we remain committed to cost reduction and operating efficiency improvements, we are confident that our net loss margin will keep improving in the third quarter and the fourth quarter of 2021. Net cash outflow from operating activity was RMB 1.62 billion in the second quarter. Considering supply chain finances, adjusted net cash outflow from operating activity improved to less than RMB 1 billion. Our CapEx in the second quarter was RMB 0.07 billion.
Our cash equivalents restricted cash and short-term investments totaled RMB 7.29 billion as of June the 30th, 2021. To sum up, we achieved a robust growth in the second quarter in both new and existing markets. As overall user stickiness and purchase frequency continued to improve, transacting member of Dingdong membership program grew by 85% year-over-year, representing the strength and the loyalty of Dingdong's users. For the third quarter, we expected to see a 100% year-over-year increase in total revenues, an improving gross margin and a narrowing non-GAAP net loss margin. Non-GAAP net loss margin will be narrowed in the third quarter and will be further narrowed in the fourth quarter.
In Shanghai, where our business is more mature, we expect to see improved unit economics in both growth margins and fulfillment efficiency, and deliver a positive operating profit in terms of unit economics in the fourth quarter of this year. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. When asking a question, please state your question in Chinese first, then repeat your question in English for the convenience of everyone in the call. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Eddy Wang from Morgan Stanley. Please go ahead.
[Non-English content] Thank you management for taking my question.
My question is about competition. We noted that in the second quarter Dingdong actually recorded quite strong GMV growth, and we expected that in third quarter, the total revenue could also grow over 100% year-over-year. However, on the other hand, we actually noticed then the other unlike online grocery , the format such as group buy purchase business actually experienced a little bit slowing down. How do you think the reason behind the gap of the growth between two business model? How do you think the long term competition between these two models? Thank you.
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Thank you. Thank you for your question. It's a great question. Actually, from a business model perspective, Dingdong offers customers on-demand home delivery service within 30 minutes. Also, our pricing is much more attractive than traditional supermarkets. Community group buy models actually only deliver orders to certain collection points, usually in the morning, for the morning during the next day for consumers to do self-pickup. Community group buy models actually generally offer lower quality products at a lower pricing level than Dingdong. We actually have captured the tailwind of consumption upgrades, whereas community group buy captured the demands of consumers who are more price sensitive.
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In China's enormous consumer markets, there are great opportunities to capture for consumption upgrade and consumption downgrade. PDD is growing really fast in lower tier cities, JD.com has actually grown to a company serving over 400 million yearly purchasing users with its efficient logistic infrastructure and quality goods. Dingdong has achieved rapid growth with our even more convenient services and deeper involvement in the supply chain than JD.com. Meanwhile, community group buy models also have huge opportunity and potential with its even cheaper services than PDD. As we serve different types of consumers compared to community group buy models, actually, we feature a lot of differences in terms of our merchandise selection, logistic infrastructure, our branding mindset, and also our company philosophy and culture.
If you look at today and look at the short term in the future, we are actually, as two companies, are targeting different addressable markets and we target different consumer groups and different consumption scenarios, even though we do have overlapping markets. Just as PDD does not occupy the core market and core consumers of JD.com, we believe community group buy models will not cannibalize the growth of Dingdong.
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If you look at this year, community group buy model actually achieved relatively stable growth, whereas Dingdong continue our rapid growth momentum. In terms of geographic coverage, we only penetrate 36 cities, while almost every community group buy company actually has covered over 2,000 cities. If you break it down, we actually have larger scale in cities that we enter, and we have more room to grow in the future.
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Last but not least, I would also like to highlight that actually community group buy models help us cultivate the market and help boost the online shopping habits of consumers in lower tier cities. We have discovered that we actually grow faster in cities where community group buy models had better performance. We have validated this in first tier and second tier cities such as Guangzhou and Chengdu, and third and fourth tier cities such as Dongguan and Hangzhou, etc. Thank you.
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The next question comes from Ashley Xu from Credit Suisse. Please go ahead. Hello, Ashley, is your line muted? Hi, Ashley. Is your line muted? All right, the next question comes from Joyce Ju from Bank of America. Please go ahead.
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My first question was related to the regulation. We have seen there are a series of policies recently being released regarding the fair trade, cybersecurity, and also the overseas listing of ADR. Just want to check if the company have been in communication with the regulators in terms of these problems or questions, and any feedback or any guidance from the regulator side and which the management can share with us. The second question was related to our private label. We know the private label will be a key driver for the mid- to long-term growth margin improvement. Just want to get more colors in terms of our private label development plan. What's the current situation in terms of GMV contribution revenue, gross margin and the cooperation model, and in the future, how this will evolve and in the long term, what our target is.
Thanks a lot.
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Thank you. Thank you for your questions. I know that these questions actually have drawn a lot of attention, so let me respond to them one by one. In regards to your first question, first of all, we would like to express our full support for the regulatory changes, and we understand that all of the rationale behind these policies and regulation updates actually following the needs of time and development trends. We'll strive to do our part to increase people's well-being.
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From the consumer's perspective, actually China's fresh groceries and daily necessity market is very big. It's big enough with diversified needs that allows multiple players. There's no potential or very little potential for monopoly in this space. Our goal is to capitalize on the growth potential of China's consumption upgrades, which is in line with the domestic development trend of dual circulation in China. In terms of our business model, we are a 1P consumption company, which essentially is a new type of supply chain company, and this is part of the real economy, generally supported by the Chinese government. Dingdong has been continuously increasing our investment in the agriculture industry. Through our proprietary D-GAP and agricultural technology, actually, we have enabled the upstream agricultural industry for a long time.
We are the advanced collectives in poverty alleviation, especially honored by the Shanghai government through 2018 to 2020. We are also a pioneer in the field of rural revitalization. In terms of data security, we've been actively and proactively communicating with the relevant regulators to ensure our data acquisition and data usage complies with the government requirements and ensure data security for our consumers.
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In terms of flexible employment, the newly issued laws and regulations in China require that companies should pay according to the standards, the social insurance, and housing funds for their employees. We have done so, fully complying with the national laws and regulations. We have also increased investment in solving employment problems, and we have trained talents in the field of rural revitalization, and we have achieved great results. In regards to your second question, thank you for your interest.
I'll try my best to answer it from two aspects. The first one is, as we discussed earlier, actually, the gross margin and average order value for our private label products are both higher than the average level, which I'm not going to repeat here. We actually launched our private labels back in July 2020, and our GMV derived from the private label product account for 1.9% of total GMV back then from July to December 2020. In the second quarter this year, the GMV contribution from our private label products increased to 4.9%, and we expect it to further increase to 8% in the fourth quarter this year. In the long run, it is actually easier to develop private label products for fresh groceries and food products compared to other categories. We expect to achieve 30% of GMV contribution from our private label products.
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In terms of the operating model for private label products, we'll try our best to self-produce those product category in-house with higher sales volumes and barrier to entry in order to improve efficiency and capture the markup of processing and production processes. For some of the products that we outsource to third-party companies for processing, we'll take responsibility in research and development and product iteration. We'll also send our staff, our own team, to the manufacturing sites to strictly control the quality and to oversee various details to make sure that all food safety and quality leadership are prioritized.
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Thank you.
The next question comes from Ashley Xu from Credit Suisse. Please go ahead.
Hello, [Non-English content]
There are two from me. First, I want to check about the reason of gross margin volatility and how is the outlook both in third quarter and in the long term, and what would be the driver of improvement? My second question is on, for the second half of the year, what strategies would be implement for both growth and efficiency optimization? Thank you.
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Thank you for your question. I would like to address your first question regarding gross margin first. You asked about two fronts, one is the cause of its fluctuation and also the drivers for future improvement. About the cause of fluctuation. First of all, for the short term, gross margin changes was mainly due to three reasons. The first one is our geographic expansion into seven new cities in this quarter, and the adoption of more competitive pricing in the new markets to attract new customers, which we have achieved great results with.
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The second reason is that during the second quarter, we proactively adjusted our pricing strategy to cultivate users consumption habits, to allow them and encourage them, incentivize them to purchase cross categories, which significantly increase our users purchase frequency and GMV contribution, and it has resulted in long term value for the company. In second quarter, average monthly orders per transacting user increased by 10% quarter-over-quarter. The members of our program actually place an average of 7.3 orders per month, compared to 6.7 orders per month in the previous quarter this year.
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In addition to that, we have launched a drip marketing system in the second quarter to refine the management of our marketing expenses. During its learning stage, although the ROI of coupon was continuously improving, the coupon as a percentage of revenue actually still increased to a certain extent. The system, the marketing system actually is evolving day by day. We significantly reduce our marketing expenses as a result, while we are able to maintain a strong growth momentum in July and August. We expect to achieve 100% year-over-year growth in our GMV in the third quarter.
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Now for the second half of this year, we expect our gross margin to improve significantly. On a quarter-over-quarter basis, the gross margin will improve from the third quarter compared to the second quarter and even more in the fourth quarter of 2021. There are mainly the following three drivers.
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The first driver is essentially the gross margin derived from the markup throughout the traditional value chain. In addition to that, actually for Dingdong's roadmap, we will be more and more involved in the processing and production processes in the upstream, and we will utilize the advanced manufacturing equipment to improve production efficiency so that we can further enhance the gross margin.
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The second driver is our proprietary D-GAP and order-based farming, which will generate stable and higher gross margin for vegetables, fruits, and seafood products on a yearly basis. We have been paving the way for a long time, and we believe that we can see significant results and outcomes from gross margin improvement in Q3 and Q4 this year. Especially in Q4, where we will expect a high gross margin improvement, and especially in the long run, which will be a great result and benefit from these initiatives. The 3rd driver is that we will continue to optimize our product mix to improve the gross margin. The revenue contribution from the 3R foods, which are the ready-to-cook, ready-to-eat, and ready-to-heat categories, increased by 5% year-over-year, and they will continue to increase in the future.
Gross margin for 3R products is actually higher than our average gross margin by over 10 percentage points. The average order value for orders, including those 3R products, is also 33.6% higher than average order value of total orders. We believe these newer categories, the 3R categories, actually meet the demand of future consumption, especially for the younger generation. Based on the above mentioned, we expect that the non-GAAP loss margin will narrow by approximately 4 percentage points by the third quarter. Unaudited non-GAAP net loss margin in July 2021 will narrow by 3.2 percentage points from that in the second quarter. We expect the non-GAAP loss margin to be further narrowed in the fourth quarter this year.
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In response to your second question, I would like to highlight, first of all, in terms of product capability, we'll continue to optimize our product offerings to better serve the needs of young households. We are increasing our efforts to develop private label products to provide our customers with more unique and higher quality products. Meanwhile, we'll continue to invest in the upstream agriculture industry to ensure better cost performance of our products.
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We will also further increase user penetration rate and user purchase frequency. As of today, we have entered 36 cities, but only six of them are fully covered in all urban areas. We'll continue to increase our coverage for urban areas in the existing geographic footprints.
At the same time, we'll work hard to increase our order density and improve the purchase frequency and GMV contribution by the users in the existing markets through improvement of our product and service offerings.
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Also, by increasing our user penetration and order density, we can further improve the efficiency of the frontline fulfillment team and optimize the fulfillment expense ratio of our frontline fulfillment stations.
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We actually have seen great results in July and August from the above mentioned three aspects, and we believe that there will be further improvement in the future. Thank you so much.
As there are no further questions at this time, I'd like to hand the conference back to our management for closing remarks.
Thank you again for joining our call today. If you have any further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next earnings call. Have a good day. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.