Tencent-backed Meituan-Dianping, China’s biggest on-demand food delivery mammoth, had a triumphal debut on the Hong Kong bourse this Thursday, with its shares climbed over 7% and ended its first trading day up 5%, dimissing earlier concerns over its floatation with a market cap of over US$50 billion,
As one of China’s largest internet service platforms, Meituan offers a wide plethora of services ranging from food deliveries, movie ticketing, hotel bookings to making restaurant reservations. It is considered a potential giant killer, in its fight to become the super app or China’s ‘’Amazon of services’’.
But, Meituan-Dianping’s bold growth ambitions – like Xiaomi’s vision of an internet company, Pinduoduo’s rise to compete against Alibaba & JD – might have to face a reality check soon amidst increasing profitability concerns.
Its updated prospectus revealed major losses in Mobike, in addition to a worrying disclaimer that the pre-profit firm cannot assure profitability in the future. Meituan is facing burgeoning losses as a fast-growing giant slayer that consistently nearly triples its revenue growth over the past 3 years. For that feat, Meituan incurred a total overall loss of RMB 14 billion ($2 billion).
And even the only consolation – a near 50% decline in overall losses in 2017 – was due to once-off net gains, rather than a systemic control of burgeoning losses. Its core operating expenses had, in fact, ballooned to nearly 3.3 times year-on-year.
Is the Meituan business model viable?
While Meituan has earned itself a reputation of spreading its tentacles in many areas, battling various opponents in many verticals, perhaps it is Meituan’s food delivery business segment – they account for 62% of its total revenue – that deserves the main focus.
After all, China’s food delivery business has been booming over the past few years and is expected to hit a market volume of US$90,491 million by 2022. Specifically, it has grown from US$18.5 billion in 2015 to $30.2 billion in 2017.
That’s the market size that Meituan is gunning for and it is now a market leader, owning up to 59% market share of China’s food delivery service sector for H1 2018, according to  Trust Data. Overall, this O2O platform giant saw its on-demand delivery service growing from just 31.7% of China’s market in 2015 to the current 59%. Key channels that drive traffic to Meituan’s food delivery app include the Meituan app, Dianping app, Tencent’s WeChat and also the Mobile QQ platforms.
As to some investors’ concern whether Tencent’s WeChat and Mobile QQ platforms are the main drivers for user traffic, Meituan currently has close to 340 million active users who use its platform. And they are using it to book hotel rooms, and arrange various forms of transport, in addition to just order food. This combination of services and targeted marketing via the huge pool of data can go a long way to increase the stickiness of the app to Meituan’s users.
Furthermore, Tencent’s partnership with Meituan came at a time when there was a fallout between Alibaba and Meituan. The former might lose its edge to tap into China’s lucrative space and is likely to continue working closely with Meituan, and the boost in traffic will not be once-off.
Meituan’s Profitability Dilemma
Stellar traction and quick acquisition of market share have attracted investors and could have fueled Meituan’s rise as a unicorn and now as a soon-to-be public entity. But these aggressive strategies are fundamentally backed by huge selling and marketing expenses that include consumer subsidies. And this figure has nearly doubled year-on-year to $600 million in 2017.
Therein lies the problem: While the subsidies erode Meituan’s profits, it is a necessary evil to persist with Meituan’s dominance. If these subsidies stop, Meituan is likely to lose its market share, according to Steven Zhu, an analyst at research firm Pacific Epoch.
And before a solution can be thought of, in comes a new formidable competitor –  a new entity formed via the merger of Alibaba’s Ele.me and Koubei. That development saw a US$3b capital injection and possibly more to fund the war chest to battle Meituan for the $1.3 trillion food delivery and on-demand services sector. This creates another worry if Meituan’s IPO will raise sufficient funds to fight the new entity.
However, the truth is this competitor is only playing catch up.
Even if more cash is stocked up to finance the immense burn rates, Meituan’s market leadership, other complementary services, and Tencent’s support could still offer some respite.
The final conclusion or verdict from investors whether to bet on Meituan to eventually profit in the long run is really a personal one and the gamble can go either way.
James Tan, the Managing Partner of Quest Ventures, sees profitability concerns as a valid part of the whims when a private company transits to become a public entity. Having seen through the Nasdaq listing of the then 55tuan – a startup he founded – despite the market onslaught and delays, he believes that Meituan, which has a good track record of growth thus far, will be able to weather the current storm.
Furthermore, China’s food delivery market is huge. Just like the case in the global food delivery space, it is likely that the market is sufficient to accommodate at least two dominant players.
Nevertheless, believers in the Meituan growth story abound. The company has attracted five cornerstone investors such as Tencent and the New York-based Oppenheimer Holdings and counts the likes of Li Ka-shing, Hong Kong’s richest and Thomas Lau, the chairman of department store operator as investors, according to a Forbes article.
Proceeds from this IPO will be used to fund the upgrade of the Company’s technology via R&D, develop new products and services, acquire or invest in complementary services and also for its working capital.
These would help Meituan in its push and create the necessary moat around its business to continue to grow amidst strong competition. However, only time will tell if Meituan is indeed the ‘right’ gamble.
Editor: Ben Jiang
