Amazon-Backed Yummy77 A Victim Of Grocery Wars?

| About: Amazon.com, Inc. (AMZN)

Bottom line: Reports of the insolvency of online grocer Yummy77 are probably correct, but the company could still engineer an emergency rescue that would see it emerge as a wholly-owned subsidiary of a big backer like Amazon (NASDAQ:AMZN).

Just a week after 2 major new fundings highlighted the big potential for online grocers, a new headline is shining a spotlight on the darker side of a market that has rapidly overheated as new companies rush to cash in on the trend. That headline has media reporting that 2-year-old online grocer Yummy77, which is backed by global e-commerce giant Amazon, has run out of cash and become insolvent, making it the first major casualty in the space.

Before we go any further, I should note that the news on Yummy77 is all coming from media reports that haven't been confirmed by the company. But at least one of those reports comes from the highly reputable China Business Network (CBN), which cites a number of sources that seem to indicate the news is true. My own visit to Yummy77's site, www.yummy77.com, showed no signs of anything unusual, and I was able to select items for sale and put them into my shopping cart as normal.

I suspect we'll hear some more definitive news next week, when Yummy77 will either come out and completely deny the earlier reports or formally shutter its site. The company's silence in the face of all the media reports certainly seems to indicate that something is happening behind the scenes, though it's unclear if it is really on the verge of shutting down or perhaps is trying to engineer an emergency bailout.

We'll return to discussion of that point later, but first let's review the headlines that say Yummy77 disclosed its insolvency in an internal email. (Chinese article) The message reportedly said Yummy77 lacked sufficient funds to pay its employee salaries for March, and the report said a video of the company's worried suppliers gathered outside its Shanghai offices was making the rounds on the Internet.

The same CBN report cites unnamed industry insiders confirming the reports are true, adding that Yummy77 was unable to raise more funds to keep operating after burning through all of its cash. At least one of its early backers was Amazon, which reportedly invested $20 million for a minority stake in 2014 just a year after its founding.

Amazon's name still appears at the top of Yummy77's web page, and clicking on the name takes you to a Yummy77 food section on Amazon's own China page. But Amazon's China page also contains its own Amazon-branded food section with extensive offerings. That would seem to indicate that Yummy77 was still operating independently and was only getting marketing assistance from Amazon as a strategic partner.

Lacking Major Backer

This particular development comes just a week after 2 online fresh food sellers, Yiguo and FruitDay, raised $260 million and $100 million in new funding, respectively, showing the big growth potential of the industry. (previous post) In both cases, the 2 companies were backed by China's top e-commerce names, with Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD) supporting the fund-raising for Yiguo and FruitDay, respectively.

This latest case looks slightly different, since Yummy77 chose to remain independent rather than becoming Amazon China's main grocery platform. By comparison, FruitDay and Yiguo appeared to be tying their prospects directly to their big, cash-rich backers, which now looks like a smart move in China's cut-throat e-commerce market.

The CBN report adds that Yummy77 has severed all relations with its employees, which certainly indicates that at the very least a major reorganization is taking place. The fact that its site is still operating amid all the controversy indicates some desperate talks may be taking place behind the scenes. That means perhaps we'll see Amazon step in with emergency funds that give it control of Yummy77. That would allow Yummy77 to keep operating its online storefront as a wholly-owned Amazon subsidiary, with Amazon's own online grocery operation stepping in to provide back-end support.

Disclosure: None.