Meituan Dianping (03690.HK), China’s largest online food delivery-to-ticketing services platform, has surged over 120 percent year-to-date. It’s one of the very few successful examples of the cash-burning business model.
Online food delivery platforms actually originated in China. In 2009, several students at Shanghai Jiao Tong University got fed up with the food at the canteen and consequently created Ele.me.
Meituan first started as a group-buying website similar to Groupon in 2010, and expanded into food delivery in 2013. Britain’s Deliveroo was founded in 2013 and UberEATS was set up in 2014.
In the past, not too many investors thought food delivery platforms would be a promising business. Ele.me only offered services in big cities like Beijing and Shanghai due to high costs and low profit margins.
However, things began to change in 2015, when Alibaba and Tencent stepped up their rivalry and ventured into new areas. That year, Alibaba bought a stake in Ele.me while Tencent became a shareholder of Meituan. They began to provide massive capital and online traffic for the food delivery platforms.
The so-called new economy model means burning a lot of cash to lure customers and change their consumption habits.
Huge amounts need to be spent before the market becomes big enough for the operation to scale up.
Businesses are often subsidized in the initial stage to squeeze out competition and grab market share. Theoretically, the few survivors stand to reap huge profits.
That’s what Ele.me and Meituan did. They not only waived the delivery charge, they also offered a subsidy for every order. Soon, more and more people opted for ordering food online rather than cooking at home or eating out.
Now the industry is down to three major players. Meituan leads with a market share of 55 percent, Ele.me controls about 45 percent of the pie, and Baidu is a distant number three.
The trio have apparently agreed to a ceasefire. They stopped giving subsidies and started to charge users and eateries.
This enabled Meituan to reverse its losing streak and report a net profit of 450 million yuan (US$64.32 million) in the first half of this year, compared with a loss of 4.2 billion yuan in the same period last year.
The platform has built up 420 million active users. Revenue from its food delivery unit surged 48 percent to 23.6 billion yuan in the first half of this year from a year ago, and its gross profit margin edged up to 18.7 percent.
Improved profitability fueled demand for the stock and Meituan’ s market value zoomed beyond HK$570 billion on Monday.
Meituan’s case by no means suggests the cash-burning approach of new economy companies always works. Bike-sharing and office-sharing, for instance, have yet to find a sustainable revenue model.
This article appeared in the Hong Kong Economic Journal on Nov 4
Translation by Julie Zhu
[Chinese version 中文版]
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