After over a year of intense competition, Douyin’s aggression has slowed in the past two quarters, giving Meituan some breathing room. Following a historic drop below its IPO price, Meituan’s stock saw a strong rebound over the past three months, driven not only by eased competition with Douyin but also by expectations of reduced losses in new business segments and organizational restructuring.
Morale within Meituan seems to be improving as well. A Meituan employee told 36Kr that optimism is spreading internally, with workers feeling that the toughest days are over. The first-quarter results appear to support this sentiment. As promised by Meituan’s management, the new businesses that had been dragging down profits for years saw a significant turnaround in the latest quarter. Quarterly losses were reduced to just RMB 2.8 billion (USD 385.9 million), representing a substantial year-on-year decrease of 45.2% and the best quarterly performance since Meituan entered the community group-buying business.
The growth rate of instant delivery orders also exceeded expectations, reaching 28% this quarter, well above the market forecast of 22–24%. Conservative estimates suggest that Q1 growth rates for food delivery and Shangou (quick commerce) orders exceeded 23% and 49%, respectively, with Pinhaofan, Meituan’s group order feature for food deliveries, playing a crucial role.
Last year’s Q1 saw a rise in the proportion of household orders for food delivery and quick commerce due to stockpiling during the pandemic, which boosted the average transaction value. This quarter, however, saw a decline, compounded by the increased share of Pinhaofan orders—nearly 10%—resulting in an average profit per order of about RMB 1.2 (USD 0.17).
The market is not worried about this. Entering the second quarter, Meituan has reduced subsidies for food delivery and intentionally controlled the proportion of Pinhaofan orders, which will likely improve both the average transaction value and profit performance.
Shifting strategy for in-store services
The appointment of Pu Yanzi marked a turning point in the competition between Douyin and Meituan for the local lifestyle sector.
Previously, Douyin’s aggressive approach had caused market concerns for Meituan. However, the traffic giant also recognized that its aim should not merely be to snatch Meituan’s market share but to make money.
Since the beginning of the year, Douyin has shifted its focus from emphasizing gross merchandise value (GMV) to prioritizing commercialization. Traffic monetization is no longer an empty phrase. By the end of 2023, Douyin set a GMV target of RMB 560–580 billion (USD 77.1–79.9 billion) for 2024, while acknowledging internally that a goal of around RMB 500 billion (USD 68.9 billion) is more feasible.
Meituan adopted a more reactive strategy, deploying subsidy strategies that closely followed Douyin’s moves. Although subsidies from both sides continued in the first quarter, insiders told 36Kr that the intensity had greatly diminished compared to the heated scenes of Q3 and Q4 last year. For instance, while Meituan’s marketing expenses of RMB 13.89 billion (USD 1.9 billion) were higher by 33.6% year-on-year, they saw a significant quarter-on-quarter decline of 16.8%, much lower than the market’s expectation of RMB 16 billion (USD 2.2 billion).
The subsidy strategy has also changed. In Q1, Meituan began shifting subsidies from tier-one, tier-two, and tier-three cities to KAs and CKAs, providing more traffic-based subsidies rather than direct cash subsidies. KA and CKA, representing key accounts and complex key accounts, respectively, are two of several classifications used to indicate the scale of a merchant. Additionally, Meituan boosted subsidies in tier-four and tier-five cities to promote merchant onboarding and transaction conversion.
However, it will take several quarters to recover from the impact of price subsidies on Meituan’s in-store profit margins. In Q1 2023, Meituan barely responded as the margin of its in-store hotel and travel segments reached an astonishing 48%. In the following quarters, however, this figure dropped below 30%, before rebounding above 31% this quarter. Market analysts have predicted that this figure might reach 32% in Q2, aiming for a 35% annual in-store operating profit margin.
These observations suggest that the competition between Douyin and Meituan has entered a more normalized stage.
Changing merchant perceptions
Merchants’ perceptions of Douyin are also gradually changing, especially small- and medium-sized merchants. In 2023, Meituan’s average take rate was about 4.5%, with an additional 5–8% commission for service providers. Douyin’s take rate was less than 3%, but as a content e-commerce platform, Douyin’s operating costs were higher, with many merchants reporting a 15% commission to service providers, resulting in overall operating costs that are 5–6% higher than Meituan’s.
This was an early realization for Meituan. Its judgment is that, for major merchants, Douyin can appear attractive as a platform for long-term operations, but for the core base—small and medium-sized merchants—Meituan believes its position is hard to be shaken.
A Douyin service provider told 36Kr that, since April, Douyin has started to increase the advertising take rate, which might further influence merchants’ decisions. While major merchants might be able to afford higher costs, smaller-sized merchants might be more sensitive to cost changes and gradually exit. Douyin is cognizant of this, establishing a separate department for national key accounts (NKAs) at the beginning of the year to target major merchants for advertising.
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Despite a slowdown in marketing subsidies, Meituan’s in-store revenue did not decline significantly, with local commerce revenue only down 0.9% quarter-on-quarter. This year, Meituan’s target for its in-store business is to achieve RMB 1 trillion (USD 137.8 billion) in gross transaction value (GTV), representing a 50% growth rate.
Insiders told 36Kr that Meituan will focus on expanding in areas such as medical beauty, healthcare, weddings, and parent-child services. Each of these areas shares common characteristics: high per-customer transaction value and gross margins, aiding the achievement of the GTV target and profit margin recovery.
Using low prices to drive food delivery volume growth
Aside from the significant reduction in losses incurred by its new businesses, Meituan’s biggest surprise this quarter came from the higher-than-expected growth rate of instant delivery orders. The general expectation was 22–24%, but this quarter the figure reached 28%.
Meituan’s instant delivery orders include food deliveries and flash purchases (Shangou). The company’s average daily order volume for food delivery was around 53 million this year, with a year-on-year growth rate of over 23%, the second-highest growth rate in the past two years. Flash purchase orders averaged around 7.5 million daily, with a high growth rate of over 49%.
When the pandemic initially eased, people stockpiled less, which led to slower order growth while transaction values hiked. This situation has reversed completely in Q1 this year. The absence of the pandemic and the increase in Pinhaofan’s share led to a decline in the average transaction value for food delivery this quarter, causing the average profit per order to fall to about RMB 1.2.
36Kr also learned that Pinhaofan’s average daily order volume in Q1 was close to 10% of the total food delivery orders. Launched by Meituan in 2021 to penetrate lower-tier markets and address fulfillment issues during the pandemic, Pinhaofan has unexpectedly helped break the ceiling for food delivery orders.
A Meituan food delivery employee told 36Kr that, in the early days of Pinhaofan, due to low gross margins, merchant participation was not high. Later, Meituan changed its strategy, allowing participating merchants to add Pinhaofan sales to their total food delivery sales, boosting their traffic weight, leading to a gradual increase in merchant participation.
Now, Pinhaofan merchants are not limited to lower-tier markets, with some chain brands in first- and second-tier markets joining and launching customized meal packages. However, due to the low average transaction value, generally below RMB 15 (USD 2), the increase in Pinhaofan orders has diluted the profit performance of food delivery. Internally, Meituan hopes to balance this by controlling the proportion of Pinhaofan orders, but more importantly, to reduce food delivery subsidies and optimize rider costs.
Another tactic is a special membership system designed by Meituan to extend exclusive member benefits spanning the instant delivery, in-store, and hotel and travel segments. Wang Xing, CEO of Meituan, said in the recent financial report that, since mid-May, the membership plan has been upgraded in several pilot cities with the expectation of enhancing transaction frequency and spurring the growth of restaurant merchants.
Meituan Shangou has also continued to present significant growth, with its order volume accounting for 15% of food delivery orders this quarter. By the end of Q1, there were already 7,000 warehouses dedicated to Shangou users, up from over 5,000 at the end of last year, further improving efficiency. However, due to the decline in average transaction value, the unit economics (UE) have yet to significantly improve, with overall losses still estimated at around RMB 100 million (USD 13.7 million).
With the substantial reduction in losses incurred by its new businesses, Meituan’s narrative seems to have returned to five years ago. At that time, Meituan’s in-store business had stabilized and was gradually releasing profits, and food delivery emerged from the competition with Ele.me. People began to anticipate new growth from Meituan, leading to the launch of Meituan Youxuan (also known as Meituan Select). Now, the market’s expectation for this business is more about when it will turn profitable rather than being a source of new imagination for Meituan.
As for overseas expansion, Wang tempered expectations, suggesting that plans remain in the early stages, and Meituan will be cautious in considering its merits in terms of the company’s long-term growth and potential return on investment.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Dong Jie for 36Kr.