Food delivery: still a cash burning business

March 14, 2019 16:41
China's food delivery market is characterized by cut-throat competition between Meituan and Photo: Reuters

Meituan Dianping, the Chinese online food delivery-to-ticketing firm, posted a jaw-dropping full-year unadjusted loss of 115.5 billion yuan for 2018.

Most of that loss was due to the fair value changes of convertible redeemable preferred shares. But even stripping away that accounting, the company still booked a huge operating loss of 11.1 billion yuan.

The platform had 6.39 billion orders last year. By rough calculation, Meituan lost 1.73 yuan for each delivery transaction.

Benefits of the food delivery app model have led to its popularity in recent years. We’ve seen similar platforms in Hong Kong, such as Deliveroo, Foodpanda, UberEATS, etc.

The services offer customers far more choices, and cover restaurants that are far away or little known. They also enable restaurant operators to expand their business coverage.

Food is usually delivered within half an hour, offering great convenience.

But most food delivery apps have yet to make profit. For example, these apps charge HK$10 to HK$20 service charge for each order in Hong Kong. Considering the hourly wage of delivery staff is typically above HK$55, or even more than HK$100 during busy hours, it’s hard to break even.

Don't forget, there are other expenses related to vehicles, fuel, marketing, administration, etc.

In China, the food delivery market is characterized by the heated rivalry between Meituan and

Meituan, which is backed by Tencent, holds 60 percent market share. Despite its leading position, it’s challenged by a strong number two, the Alibaba-owned, which controls about 30 percent of the market.

The ongoing battle between the two further undermines their pricing power.

Meituan’s loss per delivery, around HK$2, is much lower than that of Hong Kong players, due to much bigger scale and lower labor costs on the mainland.

Still, it adds to a huge amount given the scale of the operation.

So if the food delivery business is hardly profitable, why are so many companies rushing into the market?

Theoretically, a final winner will have a strong grip on the market and can start to reap the rewards. But no one can tell who is going to be the survivor.

This article appeared in the Hong Kong Economic Journal on March 14

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist