A post-IPO interview with China’s fourth largest internet company

Meituan remains optimistic amidst growing competition.

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A post-IPO interview with China’s fourth largest internet company

Living in Chinese cities these days have gotten cozier, thanks to services like food and grocery delivery. Just with a few swipes on your mobile, a meal will be delivered to your doorstep within half an hour.

The players enabling the said cosiness include Beijing-based Meituan, and Shanghai-based Ele.me. While the latter was acquired by Alibaba to complement its new retail strategy, Meituan, standing alone, buoyed by huge demand in the food delivery market, got listed in the Hong Kong stock exchange, becoming the fourth largest Chinese internet company by market cap, next only to the BAT trio.

More importantly, China’s on-demand food delivery market is still in its early days, with huge further potential for growth. The total market revenue to date stands at around US$33 billion and is forecasted to grow at a compound annual growth rate (CAGR) of 10.9% for the next 5 years, according to Statista.

KrASIA recently caught up with this newly-listed giant to learn more about its next steps after listing amidst mounting competition from Alibaba.

One of the key issues we discussed during the interview was: the anxieties in the market over Meituan’s business viability with the rise of a new challenger – the merger of Alibaba’s Ele.me and Koubei.

Armed with SoftBank and Alibaba as backers, it might not be all that surprising to see frantic investors considering their options. They seemed to have temporarily forgotten about Meituan’s amazing feat – evolving from a startup to a HK-listed public entity all in the span of 8 years.

Interestingly, Meituan has a different take and is not too bothered about this potent competitor. The plan, for now, is not to engage in a price war, which could easily hurt Meituan’s already burgeoning losses. Unlike the usual game of price that makes life cheaper and convenient for users, Meituan feels that high-frequency users or sticky users tend to look beyond just price. Service quality and other perks that make the user experience unique and attractive might be a better solution.

And to that end, this online-to-offline platform giant believes that its dominant position in China’s food delivery space, the wide spectrum of other lifestyle services and in-house technology would be able to provide unique and excellent services that users are willing to pay for. In other words, the goal now is to leverage on its advantages to help users ‘’eat better and live better’’, as opposed to just cheaper.

While this mighty method is still unproven as yet, Meituan has had a track record of taking on giants at their own game and making waves in other verticals. The hotel booking space can be a good illustration.

After identifying the untapped portion of China’s fragmented hotel booking space, Meituan was swift, and effective, beating Chinese OTA giant Ctrip by Q1 2018 in terms of the number of hotel booking nights within a mere 3-years time frame.

Now listed with ammunition at disposal, Meituan is aiming higher and running faster, below is an excerpt from our recent conversation with Meituan, edited for clarity and brevity.

On post-listing business strategy

TAKEAWAYS

– Strong domestic growth opportunities, keep growing food delivery business to a massive scale

– Expand horizontally to in-store, hotel and travel business

– Dive deep into the value chain for good food

KrASIA (K):

Now that Meituan has become a public company, will there be changes to the business strategy and what are some of the potential challenges that you see going forward?

Meituan spokesperson (M):

In general, we continue to see significant growth opportunities in our domestic market and will continue to grow the number of food delivery transactions to a massive scale, increase the number of active merchants of our in-store, hotel and travel businesses, and expand deeper into the value chain for food.

As technology as our core, we will rely on our investments in AI, and data analytics capabilities to effectively utilize the massive amount of user and transaction data generated on our platform.

We also believe that by pursuing strategic alliances, investments and acquisitions to complement our organic growth strategy, we will be able to solidify and extend our market leadership position.

On Ele.me/Koubei’s challenge

TAKEAWAYS

– Good track recored of competing against rivals

– Price war is losing its momentum in growing new customers

– Believes in massive scale with the network effects is more effective in user acquisition

K: In terms of stellar revenue growth and traction, Meituan has proven itself over the past few years, especially in the food delivery space. Would potent competitors like Ele.me be a threat? Other than the subsidy game, what other factors Meituan is looking at to secure its market leadership position in China’s food delivery market? Such as new technologies, etc.

M: One thing that’s worth a mention on competition is this: Meituan has a track record of competing effectively against its competitors. Some examples include how we grow exponentially to increase our market share in China’s on-demand from 31.7% to 59.1% in the first 3 months ended March 31, 2018, according to iResearch.

As for the impact on the rising competition, it will be harder and harder to attract enough consumers through subsidies/incentives. High-frequency consumers are not price-sensitive. They care more about the offerings and user experience. Consumers who are price sensitive are less loyal customers and would easily switch to other platforms once subsidies are reduced.

After all, with present business scale – China’s food delivery market is expected to grow from RMB305 billion to RMB479 billion (around US$44 billion to US$69 billion) from 2017 to 2018 – even RMB1 billion (US$144 million) subsidy per month would be marginal relative to the overall market size, and might not have much impact.

The objective is to couple our massive scale with the network effects to allow us to acquire consumers and merchants more cost-effectively and benefit from substantial economies of scale.

On strengths to lock horns with the giants

TAKEAWAYS

– Meituan strength comes from 1) food delivery market leadership, 2) massive merchants onboarded, and 3) synergies with Tencent and other LBS services

K: Alibaba, Ctrip, and Didi Chuxing are big players, but these did not deter Meituan’s foray into other verticals. What are the driving factors that give Meituan the confidence to compete with other giants in different verticals simultaneously?

M: Overall, the driving factors are our dominant market leadership position in China’s food delivery market, key structural advantages with the merchants onboard, synergies with other location-based services (LBS) and Tencent.

Dominant market leadership

Meituan Dianping is China’s largest e-commerce platform for in-store dining services in terms of the number of transactions for 2017, in addition to being a major on-demand food delivery service provider in China, according to iResearch. Leveraging on our leadership in the food delivery space, we will have the ability to use the data and services to attract a large and growing consumer base to increase user stickiness and cater to the evolving habits of consumers.

Key Structural Advantages

By being equipped with a large on-demand delivery network with intelligent real-time dispatch system – we completed 2.9 billion deliveries last year which is equivalent to more than 70% of total on-demand delivery transactions on Meituan’s platform, we have become the restaurants’ preferred partner.

Synergies with other Location-based services and Tencent

Building on our established local search and information discovery system, we have great potential synergies between our food delivery services and other location-based services like in-store dining.

Tencent as one of our major ecosystem partners will also be helpful to channel more traffic to our app. Additionally, Tencent also has offline traffic from its offline new retail partners like Walmart, Carrefour, and Missfresh.

On business diversification

M: Maybe a better illustration to see how all of these come together can be reflected in our rise in China’s online travel sector where we recently overtook Ctrip group to become China’s largest online hotel platform by domestic room nights in 1Q 2018. Our market share saw consistent growth from 19.6% in 2015 to 33.6% in 1Q 2018, becoming No.1 in the market.

This ascent against China’s OTA giant is an example of how we leverage our existing ~30k local sales crew from offline marketing to penetrate into fragmented independent hotels. By cross-selling from high-frequency services, we managed to reduce the cost to efficiently enter this new space, after identifying the market gap of fragmented non-mainstream hotels in China. As a matter of fact, 80+% of our new hotel-booking consumers were converted from food delivery and in-store dining in 2017.

Our diversified user base and a wide spectrum of services like wedding services, conference room booking, etc. will allow us to create new growth drivers and can also bring incremental revenue streams, which provide us with the valuable edge against Ctrip.

“We believe Mobike is complementary to our existing services”

K: While Meituan incurred huge losses from the acquisition of Mobike, would the acquisition add value to Meituan’s ecosystem play in the long run?

M: We acquired Mobike to execute our strategy of investing in high frequency, location-based services that benefit from high transaction density in the urban environment. We believe that Mobike is complementary to our existing suite of services and can create synergies on our platform.

Some ways of possible integrations would be rationalizing the deployment and maintenance of bikes, streamlining operational personnel and potentially optimizing pricing strategies. The plan is to continue to expand Mobike’s user base, enhance user experience and increase user stickiness in order to improve operational efficiency.

The long-term goal is to add on complementary services to promote cross-selling and user stickiness.

On investments in SEA and India

K: Some examples of Meituan’s investments in overseas markets include Indonesia’s Go-Jek and India’s food delivery startup Swiggy. The reason was mainly to take Meituan’s innovations and experience overseas. Could you explain the rationale behind this move and also about the possible synergies that these investments can add to Meituan’s ecosystem?

M: While China is still our business focus, we have made some strategic investments in other Asia markets to expand our customer base and add complementary services and technologies which can help to improve operational efficiency within the industry value chain.

Creating value over longterm 

K: What is the most compelling reason you can give investors to continue to believe in Meituan’s future given the present loss-making state?

M: The fundamental measure of our success will be the value we create over the long-term rather than short-term profitability. Our established position in these categories allows us to expand into lower-frequency service categories quickly and efficiently. A strong presence in the high-frequency service categories and expansion into the lower-frequency service categories will drive the increase of Gross Transaction Volume on our platform and thus our revenue and lay a solid foundation for our further growth and long-term value.

Editor: Ben Jiang