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Meituan’s community group-buying expansion mires firm in losses

Written by AJ Cortese Published on     2 mins read

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Despite regulatory concerns and intense competition, Meituan is doubling down on its community group-buying business.

Chinese on-demand services giant Meituan (HKEX:3690) generated RMB 37.92 billion (USD 5.8 billion) in total revenue for the fourth quarter of 2020, up 34.7% year-on-year (YoY) and surpassing market expectations of RMB 36 billion, according to the company’s latest financial results announced on Friday.

However, Meituan’s top-line revenue growth was tempered by a widening net loss, which reached RMB 2.2 billion (USD 343.1 million) during the December quarter following two consecutive quarterly profits for the Beijing-based firm.

The loss was mostly driven by the company’s costly expansion of its Meituan Youxuan community group-buying business, which heavily relies on subsidies to compete against resource-rich competitors like Alibaba, Pinduoduo, and Didi Chuxing.

Meituan explained in the earnings release that it will continue to invest in Meituan Youxuan to further penetrate China’s more rural areas, where consumption power is rising compared to saturated urban centers. Meituan Youxuan now covers more than 90% of cities and counties in China.

“Increasing investments in new initiatives may continue to cause significant negative impacts on our overall financial results, and we may continue to record operating losses in the next few quarters as we ramp up our community e-commerce business,” the company said in its earnings release.

Over 9.5 million delivery riders earned income on Meituan’s platform in 2020. Photo:Shutterstock.com

Meituan seems undeterred after it was one of five companies fined by Chinese regulators for undercutting market prices through the abusive use of subsidies in its community group-buying business.

Revenue from Meituan’s core food delivery business reached RMB 21.5 billion (USD 3.29 billion) in the fourth quarter, up 37% YoY as the number of food delivery transactions grew by 33% YoY to 36.2 million orders daily.

The company has also come under pressure from antitrust regulators for squeezing small and medium-sized restaurant merchants on its platform, deploying agreements with exorbitant commission structures that erode merchants’ margins.

“For our food delivery segment, we are going to make modifications for how we charge the merchants because we are providing two kinds of services. One is the transaction service on our platform and the second is the actual physical on-demand delivery. In the past, we blended these two services, so some people misunderstand the overall take rate,” the company told investors on the earnings call.

“They think [the take rate] is quite high compared to other e-commerce marketplaces like Taobao. That is an unfair comparison because we are providing not just a marketplace transaction but also the actual physical delivery. I hope that merchants and regulatory authorities will understand our take rate going forward,” the firm added.

The company’s in-store, hotel, and travel business continued to recover from its nadir during the COVID-19 pandemic but has yet to return to pre-pandemic levels. In the fourth quarter, this segment’s revenue increased by 12.2% YoY to RMB 7.1 billion (USD 1.09 billion). Domestic hotel room nights booked dropped by 9.7% YoY for the full year of 2020.

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