Optimism is growing at Meituan as losses narrow and orders increase following the turnaround in Q1

After more than a year of intense competition, Douyin’s aggression has waned over the past two quarters, giving Meituan some respite. After historically falling below its IPO price, Meituan’s shares have rebounded strongly over the past three months, helped not only by softening competition from Douyin but also by expectations of limiting losses in new business segments and organizational restructuring.

Morale in Meituan also appears to be improving. – said a Meituan employee 36 kr that optimism spreads internally and employees feel that the most difficult days are behind us. The first quarter results seem to confirm this opinion. As promised by Meituan management, new businesses that had been reducing profits for years saw significant improvement in the last quarter. Quarterly losses were reduced to just RMB 2.8 billion ($385.9 million), a significant 45.2% year-on-year decline and the best quarterly performance since Meituan entered the social group purchasing market.

The growth rate of immediate delivery orders also exceeded expectations, reaching 28% in the quarter, well above the market forecast of 22-24%. Conservative estimates suggest that the first quarter order growth rates for food delivery and Shangou (fast trading) orders exceeded 23% and 49%, respectively, with Pinhaofan, Meituan’s group order function for food delivery, playing a key role.

In the first quarter of last year, the share of household orders for food delivery and fast trading increased due to stockpiling during the pandemic, which resulted in an increase in the average transaction value. However, there was a decline this quarter, compounded by an increase in Pinhaofan’s order share – almost 10% – resulting in an average profit per order of approximately RMB 1.2 ($0.17).

The market isn’t worried about it. Entering the second quarter, Meituan has reduced food delivery subsidies and deliberately controlled the percentage of Pinhaofan orders, which is likely to improve both average transaction value and earnings performance.

Changing the service strategy in stores

Pu Yanzi’s appointment was a turning point in the competition between Douyin and Meituan for the local lifestyle sector.

Previously, Douyin’s aggressive approach caused market concerns for Meituan. However, the road giant also realized that its goal should not just be to take Meituan’s market share, but also to make money.

Since the beginning of the year, Douyin has shifted its focus from emphasizing gross merchandise value (GMV) to prioritizing commercialization. Traffic monetization is no longer an empty phrase. By the end of 2023, Douyin has set a GMV target of RMB 560-580 billion (USD 77.1-79.9 billion) for 2024, while confirming internally that a target of approximately RMB 500 billion (USD 68.9 billion) is more feasible.

Meituan adopted a more reactive strategy, implementing subsidy strategies that closely followed Douyin’s moves. Although subsidies from both sides continued in the first quarter, insiders say 36 kr that the intensity has dropped significantly compared to the hot scenes in the third and fourth quarters of last year. For example, although Meituan’s marketing expenditure of RMB 13.89 billion ($1.9 billion) was higher by 33.6% year-on-year, it recorded a significant quarter-on-quarter decline of 16.8%, well below market expectations for level of RMB 16 billion ($2.2 billion).

The subsidy strategy has also changed. In the first quarter, Meituan began shifting subsidies from tier one, two and three cities to KA and CKA cities, providing more traffic-based subsidies than direct cash subsidies. KA and CKA, representing key accounts and complex key accounts respectively, are two of several classifications used to define salesperson scale. Additionally, Meituan has increased subsidies in tier four and five cities to promote new seller onboarding and transaction conversion.

However, it will take several quarters to recover from the impact of price subsidies on Meituan’s profit margins in stores. In the first quarter of 2023, Meituan barely responded as margin in its hotel and travel in-store segments reached an astonishing 48%. However, in the following quarters this percentage dropped below 30%, only to rise above 31% again this quarter. Market analysts predicted that number could reach 32% in the second quarter, assuming an annual store operating profit margin of 35%.

These observations suggest that the competition between Douyin and Meituan has entered a more normalized stage.

Changing the perception of sellers

Merchants’ perception of Douyin, especially small and medium-sized ones, is also gradually changing. In 2023, Meituan’s average utilization rate was approximately 4.5%, with an additional commission of 5–8% for service providers. Douyin’s usage rate was less than 3%, but as a content e-commerce platform, Douyin’s operating costs were higher, with many sellers reporting 15% commission to service providers, resulting in overall operating costs 5–6% higher than Meituan.

This was Meituan’s early awareness. Its assessment is that for mainstream traders, Douyin may seem attractive as a platform for long-term operations, but for its core base – small and medium-sized traders – Meituan believes its position is difficult to shake.

This was reported by a service provider from Douyin 36 kr that since April, Douyin has started to increase its ad download rate, which may further influence sellers’ decisions. While major sellers can afford higher costs, smaller sellers may be more sensitive to cost changes and gradually withdraw from the market. Douyin recognizes this by creating a separate National Key Account (NKA) department at the beginning of the year to target major sellers.

Despite the slowdown in marketing subsidies, Meituan’s revenue from brick-and-mortar stores did not decline significantly, with local commerce revenue only down 0.9% quarter-over-quarter. This year, Meituan’s in-store business target is to achieve gross transaction value (GTV) of RMB 1 trillion (USD 137.8 billion), a growth rate of 50%.

Insiders said 36 kr that Meituan will focus on expansion in areas such as medical beauty, healthcare, weddings and parent-child services. Each of these areas has a common feature: high transaction value per customer and gross margins, helping to achieve the GTV target and recover profit margins.

Using low prices to increase the volume of food deliveries

In addition to significantly reducing losses incurred by new companies, Meituan’s biggest surprise this quarter was the higher-than-expected growth rate of orders for immediate delivery. The overall expectation was 22-24%, but this quarter the figure reached 28%.

Meituan orders with immediate delivery include food delivery and instant shopping (Shangou). The company’s average daily food delivery order volume was approximately 53 million this year, with a year-over-year growth rate of over 23%, the second-highest growth rate in the past two years. Flash orders averaged around 7.5 million per day, with a high growth rate of over 49%.

When the pandemic initially subsided, people stockpiled less, which led to slower order growth and an increase in transaction values. This situation was completely reversed in the first quarter of this year. The absence of the pandemic and the growth of Pinhaofan’s share led to a decline in the average value of food delivery transactions this quarter, causing the average profit per order to drop to about RMB 1.2.

36 kr also learned that Pinhaofan’s average daily order volume in the first quarter was close to 10% of all food delivery orders. Launched by Meituan in 2021 to penetrate downstream markets and solve order fulfillment issues during the pandemic, Pinhaofan unexpectedly helped break the food delivery order ceiling.

– said an employee of food delivery company Meituan 36 kr that in the beginning of Pinhaofan, due to low gross margins, the participation of traders was not high. Later, Meituan changed its strategy, allowing participating sellers to add Pinhaofan sales to their total food delivery sales, increasing their traffic, leading to a gradual increase in seller participation.

Nowadays, Pinhaofan sellers are not limited to downstream markets – some chain brands from first- and second-tier markets are joining and launching personalized meal packages. However, due to the low average transaction value, typically below RMB 15 (USD 2), Pinhaofan’s order growth weakened its food delivery performance. Internally, Meituan hopes to balance this situation by controlling the proportion of Pinhaofan orders, but more importantly, reducing food delivery subsidies and optimizing passenger costs.

Another tactic is a special membership system designed by Meituan to extend exclusive member benefits covering instant delivery, in-store, hotel and travel segments. Wang Xing, CEO of Meituan, said in a recent financial report that the membership plan has been improved in several pilot cities since mid-May, aiming to increase transaction frequency and spur the development of restaurant merchants.

Meituan Shangou also continues to experience strong growth, with order volume accounting for 15% of food delivery orders in the quarter. At the end of the first quarter, 7,000 warehouses were already operational for Shangou users, up from over 5,000 at the end of last year, further improving efficiency. However, due to the decline in average transaction value, unit economics (EU) have not yet improved significantly, and overall losses are still estimated at around RMB 100 million (USD 13.7 million).

With the significant reduction in losses for new businesses, Meituan’s narrative appears to have returned to the events of five years ago. During this time, Meituan’s store business stabilized and gradually became profitable, and food delivery emerged from competition with Ele.me. People began to predict the new development of Meituan, which led to the launch of Meituan Youxuan (also known as Meituan Select). Currently, market expectations for this business focus more on when it will become profitable than on whether it will be a source of new imagination for Meituan.

In terms of overseas expansion, Wang tempered expectations, suggesting that plans remain in the early stages and Meituan will be cautious in assessing its merits in terms of the company’s long-term growth and potential return on investment.

KrASIA Connection contains translated and adapted content that was originally published by 36Kr. This article was written by Dong Jie for 36 kr.