Meituan Dianping shows route to food delivery profits
Jackie Wu needed customers for his new dumpling stall in a Beijing food court.
So he turned to China’s top food delivery app, Meituan Dianping, paying 100 yuan ($14) a day to promote his $3-a-plate pork and chive dumplings to its users, as well as a 19 per cent commission on any sales.
“It’s good extra business. I’m aiming for 2,000 deliveries a month,” said Mr Wu, as the printer on his counter spat out another delivery order to prepare.
Just 12 months ago, Meituan losses were growing faster than its sales as it tried to convince restaurants to sign up to its app, spent heavily on couriers, and flooded users with discounts.
But with the likes of Mr Wu now sold on its ability to generate orders, it has started to charge more for ads, take larger commissions and its main food delivery business is now profitable. Its achievement is a beacon of hope for lossmaking food delivery apps elsewhere, from Uber Eats to DoorDash to Swiggy and Deliveroo.
Meituan, which listed in Hong Kong in September 2018, also has a string of other businesses, including a booming travel booking and group-shopping service, which David Dai of Bernstein Research described as its “cash cow” for the segment’s 89 per cent gross profit margin. Meituan has again grown the commission it takes from bookings from 10.4 per cent in early 2018 to 14.1 per cent last quarter.
Even as the Chinese economy slows overall, Meituan has managed to reverse net losses that peaked at Rmb83bn ($12bn) in the third quarter of last year after it booked changes in the value of its convertible preferred shares.
The bounce has triggered a 145 per cent rise in its share price and its market value, now $75bn, now makes it China’s third biggest public tech company, cementing a reordering of the long dominant triumvirate of search giant Baidu, social platform Tencent and ecommerce titan Alibaba.
Started in 2010 as a Chinese version of Groupon, the group discounting app, by 40-year-old founder Wang Xing, Meituan first moved into food delivery and then into so many other businesses that there are now more than 200 services aggregated into its “superapp”, from train bookings to grocery delivery to payments.
Food delivery, which accounts for more than half the company’s sales, is the hook for new users. “I won a Meituan lottery for free nail painting at this shop,” said 23-year-old student Dai Yining, who credited her seven restaurant reviews on the company’s app for the chance to win a session at Means Beauty Nails. She said she used the app for food delivery, tickets to tourist attractions and hotel bookings.
“Eventually this company is very likely to dominate the entire services industry. If you think of buying physical goods you go to Alibaba, if you think of using any type of service you go to Meituan,” said Mr Dai, the analyst. If his prediction holds, tensions are likely to rise with the company’s largest shareholder, Tencent, which has a superapp of its own.
Meituan’s outlook has improved as China’s food delivery market matures. At the end of last year, its main rival Ele.me was on a Rmb3bn spending spree to expand its user base, funded by its deep-pocketed owner Alibaba. Meituan was forced to splurge to keep up.
A year later, it appears to have weathered the storm. Meituan has 5.9m food sellers on its app, roughly double Ele.me’s count, and its share of the delivery market rose to nearly two-thirds at the end of the second quarter, up from 59 per cent a year earlier, according to research firm Trustdata. Its 436m users each make 26.5 purchases a year, 17 per cent more than in the previous year.
It has a particular grip on China’s smaller cities, and its users are more loyal, according to Mr Wang, the founder. “When other players use heavy subsidy for price-sensitive users . . . it’s not going to be sustainable,” he said in May. “So when a subsidy campaign stops, these orders will vanish.”
Ella Ji, an analyst at China Renaissance, agreed that Ele.me’s subsidies had been ineffective and noted that food delivery was becoming ingrained. “The use cases are expanding, it used to be lunchtime at work or students in school ordering delivery,” she said. This year “breakfast is the fastest growing meal within food delivery”.
Meanwhile, the company has stemmed its profligacy in its newer businesses, such as bike-sharing and ride-hailing. The $2.7bn purchase of global bike-sharing leader Mobike last year was a particular problem and, this year, Meituan closed it down in some countries and sold off operations elsewhere. The company is more concerned with fully divesting from the European arm than with the price it will fetch, according to a person briefed on the deal.
The international restructuring, coupled with bikes hitting the end of their depreciation schedule, has helped trim costs. The company also pulled back from the huge subsidies needed to operate its own ride-hailing business, instead moving to aggregate other providers in its app. In the last two quarters, its new initiatives unit turned gross margin positive.
Payments are now a focus, and Meituan has installed a point-of-sale machine at Mr Wu’s dumpling stand, giving it data on all of his sales. It is also trying to sell ingredients to restaurants, so it will have a reasonable idea of costs too.
For Mr Wu, the calculation is simple. With fees at the current level, being on Meituan is a valuable source of additional business. But “it’s not worth the added headache if the fees go up any more”, Mr Wu said, noting some of the bigger restaurants had already ended delivery.
Josh Spero contributed reporting from Tokyo and Nian Liu from Beijing