Dingdong Downgraded to Neutral Amid Intensifying Online Commerce Rivalry in China

Dingdong's (DDL) rating has been downgraded to "Neutral" as the company faces intense competition in China's online commerce sector, which will negatively impact its near-term revenues. However, DDL is attempting to boost margins through business restructuring over the longer term.

Dingdong (DDL), a leading player in China's online grocery market, has seen its rating downgraded to "Neutral" by analysts, citing intense competition in the sector. While the company has been successful in maintaining its market position, the increasing rivalry from established players like JD.com and Alibaba is expected to negatively impact its near-term revenues.

In its FY24 20-F filing, DDL cautioned about growing threats from new entrants and existing internet companies in mainland China, which could potentially reduce its pricing power and market share [1]. This warning has materialized, as JD.com has begun competing with Meituan in food delivery, offering significant user subsidies. Similarly, Alibaba has made substantial investments to address the severe short-term lack of delivery capacity.

The increasing incentives from delivery platforms make it cheaper for consumers to have meals delivered, reducing the frequency of grocery purchases. Dingdong's smaller revenue base compared to its competitors makes it challenging for the company to absorb additional expenses linked to promotions and discounting. As a result, DDL's year-on-year sales growth has moderated, dropping from +16% in 2Q24 to +7% in the most recent three-month period.

However, DDL is not without strategies to bolster its position. The company has been implementing a "4G" strategy focused on good users, good products, good service, and good mindshare. This approach targets consumers who value product quality and are willing to pay for it, aiming to differentiate DDL from competitors who rely heavily on price-based promotions.

While external events, such as the technology giants' expansion into new business areas, are beyond DDL's control, the company is taking proactive measures to enhance its margins over the longer term. Analysts expect Dingdong's topline growth to halve from 15.5% last year to below 8% in FY25, but the self-help measures implemented by the company suggest that it is working to address the competitive pressures.

References:
[1] https://seekingalpha.com/article/4820043-dingdong-consider-both-external-and-internal-tailwinds-rating-downgrade