Meituan, a leading SuperApp for local lifestyle services in China, is celebrating its 10th anniversary this year, with 575 billion HKD /74 billion USD market capitalization and a stellar performance after its IPO in Hong Kong in 2018.
As both an early adopter and an innovator of local lifestyle services in China, the case of Meituan gives very interesting dynamics that we believe would bring valuable insights to many other startups across the globe. This is why we would like to share our observations on Meituan with you in this blog.
Evolution of Meituan
Initially started as a similar company to ‘Groupon’ in China, Meituan has gone through a long journey to where it stands in the local lifestyle service industry in China – no doubt it is a pioneer, an early-adopter and now a leader with a SuperApp model that encompasses almost every aspect of our life, ranging from on-demand food (and non-food) delivery, movie ticketing, ride hailing to hotel and travel booking. Here is a snapshot that shows a variety of local services available on the Meituan APP.
As a matter of fact, Meituan is not the only player who sees the upsides of the scale effect and tries to take advantage of it as much as possible. From a global landscape standpoint, Grab is leading the game in Southeast Asia, whereas Glovo, a European startup based in Madrid, has recently expanded into Sub-Saharan Africa to provide tailored food, drink, and grocery delivery solutions for local customers.
Despite the increasingly intense competition from every corner of the world, Meituan remains strong in the domestic market. As of Q3 2019, the annual transacting users reached 435.8 million with 26.5 transactions each on average annually, which indicates an YOY increase of 14% and 17% in terms of number of users and transactions respectively.
(Data Source: Meituan Investor Relations)
So, what is the secret recipe that has made Meituan so attractive to the mass market in China? What lessons can we learn from Meituan?
Before jumping into detailed analysis, we would like to reiterate the disclaimer here: All the data points are collected from publicly available resources, including the annual/quarter reports disclosed by Meituan on its investor relations website, and some other secondary sources such as equity research reports that we will leave links for your reference at the end of this video – for those who are interested, feel free to check those sources or reach out to us if you have any question.
Unfolding the Meituan Story
Rome is not built in one day. The graph below is a simplified visualization of how and when Meituan picked up the essential building blocks of its empire.
In 2010, when Groupon proved the feasibility of its model on the other end of the planet, many entrepreneurs started testing water for the same idea in China, and Meituan was one among the first batch of enthusiasts. However, very quickly the race got extremely tense and by 2011, there were more than 5,000 Groupon-like startups in China. Many companies were aiming at massive expansion within a very short period of time to win over other competitors, by offering consumers a lot more subsidies and burning cash at an unsustainable speed, and only ended up with failure to secure follow-up capital injection from investors.
Meituan, luckily, who survived after the fierce fight, consolidated its foundation, and started to reach out for more areas and business lines.
Year by year, piece by piece, step by step, it realized that with the strong user base, a lot more services can benefit from the scale of its network that enables not only low cost of user acquisition but also the multiplier effect – this is particularly true for those even unconnected and infrequent services and scenarios.
Maybe Meituan already had the vision of a SuperApp back in 2011. Maybe the ‘Aha moment ’did not occur to the management until the synergy presented itself. We do not know. But that does not matter. What is more important to note is that, now Meituan is positioning itself as the‘e-commerce platform for services’(analogy to Alibaba: the e-commerce for goods), and is taking forward the ‘food plus platform ’strategy. As indicated in its prospectus, Meituan’s mission is to ‘help people eat better, live better’, which views the demand for better food as the anchor of their business, and leverages it to connect with the desire for better life (experience) in other O2O scenarios.
Beyond the ‘Aha moment’:
Unpacking Meituan’s Business Model
As laid out in the prospectus, the management of Meituan view their business as a three-segment entity by the nature of operation and business model, which are (1) on-demand food delivery, (2) in-store dining and purchase, hotel and travel booking, and (3) new initiatives and other, including the biking-sharing service that they recently bought from Mobike. Let’s break it down and take a deeper look.
1. On-demand food delivery
Prior to 2015, Meituan relied on external and third-party manpower to deliver food to consumers, but it was not cost-effective at all, and on average, one rider can only deliver 8 to 10 order per day.
In recognition of the importance of having its own delivery network and streamlining the entire process, Meituan started to build its in-house delivery team, and an AI-powered dispatch system that optimizes the route planning for riders. Although there remains a small proportion of riders who are outside their network (either provided by the merchant or crowd-sourced), the majority of the riders are trained by and dedicated only to Meituan. In 2017, there were 2.9 billion orders within the Meituan delivery network, which accounted for 70% of total orders. The AI runs about 2.9 billion times of route planning during peak hours in 2017 and the average intra-city delivery time is less than 30 minutes.
In addition, given that riders have to multi-task while riding the scooters, in 2017, Meituan launched the smart earphone which allows riders to interact with the dispatch system without checking the phone manually. Previously, riders had to multi-task while riding the scooter, which increases security risks. For example, the rider had to find out the location of the merchant and the consumer, and set aside time for elevators or stairs, and in most cases, the info displayed on the screen is delayed – all these procedures are now integrated into this interactive voice system and riders can now focus on maximizing the utilization of time to earn bonus from extra deliveries.
As of 2018, Meituan had over 2.7 million riders within its network, and 77% of them were rural migrants, born after 80s, and dominantly male.
With such a huge network of riders, you might be wondering, how does Meituan make money if it has to bear such a huge human resource burden?
Currently, merchants opting out from Meituan’s delivery system will only be charged for the commission fee, whereas for those who rely on Meituan’s network, they will be responsible for the delivery fee in addition to the commission, and then part of the delivery fee is passed on to the consumers.
However, it is notoriously known that food delivery is a human-capital-intensive business with relatively low margin. If you take a look at the financial report of Meituan, it is even more obviously true. As disclosed in its interim report as of Q2 2019, food-delivery accounts for 56% of the total revenue, while taking up more than 67% of total cost.
(Data period: 12 months as of June 2019
Data Source: Meituan 2019 Midterm Report)
The main reason behind this is that, the unit delivery cost of each order is not entirely absorbed by the merchant or the consumer. In fact, in order to keep riders to stay in their network, Meituan has to subsidize them, especially in harsh seasons or under extreme weather, and this certainly drives up the cost. Besides the subsidy offered to riders, Meituan still keeps some level of subsidy to consumers as consumers tend to be price-sensitive to takeout food and some big players such as Ele.me are still in the race. But the good thing about that, is that competition is no longer that brutal as few years ago when food delivery attracted many startups, and cash subsidies were again overwhelming as in the price war seen in the case of Groupon-like startups in China.
As of Q2 2018, Meituan has become the leading food delivery platform and earned much more market share than the old player Eleme. In addition, it also started on-demand delivery for non-food products such as medicine, flowers, fruit, among many others.
(Data Source: TrustData)
In the conference call of Q3 2019, the management stated clearly that, although the growth is very positive in Q3, they do not expect the growth to be sustained going forward. The growth was accredited to the increase in market share (which may already have reached the highest point), and without further expansion of this industry, the growth could be slower in the coming quarters. However, the management viewed the delivery segment as an infrastructural tool to get in touch with consumers, and believed that it could play a bigger role in converting existing consumers to low-frequency local service customers. They strategically decided not to monetize the food delivery business, rather to focus on its connection with other segments. In a second we will see how this plays out in its in-store dining or purchase, and hotel/travel booking business
2. In-store purchase hotel and travel
As stated in its prospectus, ‘Transacting users are not our customers’, the core value proposition of Meituan’s in-store dining, purchase, hotel and travel business is to serve the corporate/merchant customers, and to bring in more target consumers through its big data algorithm which enables tailored marketing and advertisements sent to users. This pretty much inherited the DNA from Meituan version 1.0, which was a group discount platform that eventually improves the user traffic and offset revenue losses from discounts and coupons. Advertising fees and transaction commission fees are therefore the main revenue streams generated from this line of business.
In contrast with the food-delivery services, this line of business does not require significant labor inputs, very asset-light and can have relatively less volatile cash flows. Typically, once the merchant signs a contract with Meituan, it can access the digital marketing and other ancillary services for a year/or a certain period of time, and in return Meituan receives the advertising fees up-front and can move on to acquire the next merchant customer.
Currently, in-store dining and purchase, hotel and travel accounts for the smallest proportion of total COGS (4%). The accompany numbers may further explain how lucrative this segment is, which is that the gross margin for this segment is about 88%, whereas the food delivery can only generate a gross margin of 22%.
Strengths and Challenges
Some may argue that such digital marketing business has low entry barriers and that any platform that is willing to dedicate resources to acquire as many merchant customers as possible can have an edge over Meituan in the future. In the latest conference call (Q3 2019), one question from the audience was about the differentiator of Meituan from industry-specific platforms or mapping APPs (such as Baidu Map) that are catching up and providing location-based recommendations for restaurants, shopping malls, trip tips, etc.
The answer from the management was that, the high-quality user-generated content (mostly reviews), along with the coupons and free trials has contributed to the solid performance of Meituan in terms of keep attracting traffic and maintaining the leadership position. The acquisition of Dianping in 2015 has greatly leveled up the foundation of Meituan in terms of UGC and it is the strength, or the ‘moat’as we mentioned earlier that others cannot easily break through.
Conventional players such as Ctrip (which started its hotel and travel booking business back in 1999) has already feeling the pressure of losing over to this late-comer and disrupter, Meituan.
3. New initiatives and other services
In 2017, Meituan started providing homestay and ride-hailing services. Following that, before Meituan went public, it acquired the bike-sharing company, Mobike in 2018. It looked like Meituan has restlessly taking on new businesses that either has already a dominant player in the market or yet to prove profitability. In fact, it was not until 2019 that Meituan has achieved overall profitability, and it was largely held back by the new initiatives that were money-losing at that time.
However, investors have demonstrated strong confidence in Meituan at and after its IPO, which lies not only in the fact that Meituan had a very good cash/liquidity position but also the alignment with the Meituan’s ‘food plus platform’ strategy (A.K.A SuperApp strategy), which leverages the scale effect of high-frequency consumption scenarios and converts the users to services that are less frequently needed while have much higher profit margins. Afterall, the fact that new initiatives have started to gain profits is the best proof of synergies and multiplier effects that Meituan was planning to see.
Reflections: recapping the success factors and future prospects
When it comes to the success factors of Meituan, different people might come to very different answers. Some attribute it to the years of experience of the founding team, while some others would point to the acquisition/fundraising strategies.
We, in this blog, would like to focus on the scale effect of the SuperApp for the sake of facilitating broader discussion on similar platforms all over the world.
We think that, on its road toward a leading Super App, building up the high frequency user interaction scenario enables Meituan to achieve low user acquisition cost, improves user stickiness, and increases the user lifetime value. Additionally, it creates room for cross selling products. In 2017, over 80% of hotel-booking service and 74% of other lifestyle services were converted from food delivery and in-store dining consumer categories.
Equally importantly, data is an integral part to every aspect of the business, from on-demand delivery route planning to marketing for local lifestyle merchants, data analytics and tailored user experience have made it possible for Meituan to gain a high retention rate, to maximize the value of repeat consumers and to become the household brand for local lifestyle services.
What does it mean to startups that aspire to be such a SuperApp in other emerging markets? Is the initial strategic loss for aggressive expansion readily replicable anywhere else? Meituan survived the brutal price war and that laid a good foundation for the scale and multiplier effect in other segments. Can other startups follow this model?
It may require a case-by-case analysis. But the high-level argument that we tend to agree, is that, to make that happen, strong financial conditions and well-calculated and executed cash-burning plans are extremely critical. It is not a new strategy at all, but very few across the globe can match the amount that Meituan has burned to get larger market share.
What is your take? Leave comments if interested. We look forward to hearing from you.
Author: Olivia Gao from Future Hub
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