Can Douyin Grab a Slice of The Food Delivery Market From Meituan?

Consumer Staples Author: Yongqian Yang, Qinqie He Mar 30, 2023 06:12 PM (GMT+8)

On March 24th, Meituan (Chinese: 美团) had its Q4 2022 earnings call. This article reviews its key performance under the context of Douyin's entry into local services and future strategy outlook.

food delivery

Q4 2022 Earnings Result Highlight 

In the background of the quarter-on-quarter decline in the core indicators of most Internet companies in the fourth quarter of 2022, Meituan's revenue maintained a rapid growth of 21.4% year-on-year, reaching CNY 60.13 billion. Meituan also realized a profit of CNY 829 million, substantially exceeding market expectations. As a key operating metric, Meituan Instashopping, the consumer mindshare of delivering everything to their doorsteps, has further strengthened to be a core growth source.

In 2022, Meituan's core delivery services were still growing steadily, with its revenue increasing from CNY 14.99 billion in 2021 to CNY 19.77 billion, a year-on-year increase of 31.9%. Meituan Instashopping (Chinese: 闪购) shows significant growth. Its formal integration into the largest business segment also means that Meituan Instashopping has become the third core of Meituan local commerce besides the two major food delivery and in-store businesses. According to the earnings release, in 2022, both annual transacting users and active annual merchants of Meituan Instashopping increased by nearly 30% on a year-over-year basis, with the highest daily order volume exceeding 11 million in December and daily order volume of medicine peaking at 5.8 million in the fourth quarter.

In the fourth quarter, Meituan's commission revenue was CNY 14.6 billion, a year-on-year increase of 13.7%, and the growth rate matched the increase in order volume. However, revenue from online marketing services (mainly in-store and hotel & travel) performed poorly, with revenue of only CNY 7.74 billion, a year-on-year decrease of 4.8%. Meituan attributes this decrease primarily to the reduction in the average revenue of quarterly online marketing active merchants of the in-store, hotel & travel businesses as their demands were significantly restrained due to the pandemic. However, in Q2 2022, when the whole country was locked down, Meituan's growth rate in this category still reached 1.4%.

Screenshot 2023-03-30 at 5.59.42 PM.png.png

 How much of a threat is Douyin to Meituan? 

Under normal circumstances, the growth rate gap between Meituan's commission and online marketing service revenue is about 5%. In Q2 2022, that gap was 2%, but in Q4, online marketing service was outpaced by commission growth (13.7%) by 18 points. The loss in Meituan's online marketing service is speculated to have flown to the short video platform Douyin (Chinese: 抖音). In other words, Douyin, with its huge traffic advantage and advertising budgets, stands to become a challenger in a market dominated by Meituan. According to the latest data from the National Bureau of Statistics, the national food and beverage consumption reached CNY 842.9 billion from January to February 2023. Undoubtedly, companies could expect huge rewards if they can grab a slice of the food delivery market.

During the earnings call, Wang Xin, Meituan CEO, addressed the investor concern about the competition in the local life service market: "Compared to other platforms, Meituan has differentiated value. In 2023, Meituan focuses on synergies between food delivery and in-store businesses and building on existing strengths."

The 'differentiated value' comes from several factors, such as user preferences and strong distribution services. Specifically, Meituan's food delivery service depends on a customer-driven ordering model, requiring users to search for desired food providers actively. In comparison, Douyin's model relies on short videos or live streams made by merchants or influencers, which calls for a more sophisticated algorithm. The different business models could bring the following challenges for Douyin:

1. Most Douyin users may scroll videos merely for pleasure, and turning online traffic into actual orders would require changing user habits. On the other hand, consumers would naturally open the Meituan APP when they have food delivery needs. Additionally, a significant portion of Meituan content comes from the graphic evaluation submitted by consumers through the years. It is a different story in the Douyin platform, as restaurant owners need to pay extra effort working on content. 

2. Douyin may expect short-lived business growth with a low-price strategy. However, such growth would not last, as Douyin and the merchants would not benefit from the intense price war. The strategy could work in the short run, as rational consumers would always choose the package with a lower price. But the profitability could suffer. Suppose the merchants want to profit while subsidizing users. In that case, they may sacrifice the user experience by providing inferior food and service, which is suicidal behavior in the long run. Even though Douyin has set up a group to investigate these business owners' performance, such as making occasional phone calls and randomly visiting the restaurants or stores, the difficulty and cost of such governance remain unsustainable. In the long run, consumers and business owners will choose the platform with larger supply/demand, generating stickiness. In addition, Douyin has recently reduced the service fee rebate ratio from 50% to 5%, narrowing the price gap between these two platforms.

Screenshot 2023-03-30 at 5.59.31 PM.png.png

3. Meituan users showed higher order verification rates, as their consumption behaviors are mainly self-driven. Meituan's in-store order verification rate is around 83%. In contrast, Douyin users' consumption behaviors are more passive, which leads to lower order verification rates of approximately 62%. In addition, users of Meituan are more likely to have repurchase behaviors when compared to Douyin, which could be explained by the fact that the video content of Douyin was created more appealingly and has raised the expectations of customers. Once the customers find the goods or services differ from what they expected, they would feel tricked and unlikely to repurchase. 

4. Unlike the unilateral traffic-oriented short video platforms like Douyin, Meituan developed efficient ways of dispatching orders and a strong distribution network through more than ten years of accumulation. Customers usually order take-outs within three to five kilometers considering the time and delivery fee. This fact suggests that even if particular content on Douyin attracts users, they are still unlikely to consume if it is beyond the delivery range. The situation would be worse if Douyin's delivery system could not satisfy customers' needs.

Overall, gaining momentum in the land of local service is not easy for Douyin, whose businesses are mostly online. Simply cutting prices to starve and rob Meituan's market share is not a panacea for Douyin in the long run. With years of accumulation, Meituan has already developed solid barriers that are difficult to surpass in the short term. Douyin's current efforts are more like testing the waters, posing no immediate challenge to Meituan's market dominance. Regardless of the ambitions behind the venture, however, the competition between these two parties will ultimately benefit consumers.

Organizational Structure, New Initiatives Segment, and Strategy Outlook

One of the most important pieces of news this week is Alibaba's most significant restructuring in its 24-year history, plans split the company into six units. Looking at Meituan's organizational structure, compared with other large Internet companies, Meituan's core team is more stable, and its decision-making power is more centralized. 

Institutionally, Meituan uses a core decision-making group + committee system to manage the company. Meituan currently has two core decision-making groups, s-team and g-team, and more than a dozen committees. The core decision-making group is responsible for significant business decisions of the company, and the committee is responsible for personnel training and knowledge accumulation.

The most notable structural change in recent years was in September 2021. Meituan upgraded its strategy from "food + platform" to "retail + technology," deepening the goal of entering from service e-commerce to physical e-commerce. As a result of the strategy upgrade, in October 2021, the three business units Meituan Grocery (Chinese: 美团买菜), Meituan Select (Chinese: 美团优选), and Kuailu (Chinese: 美团快驴) were integrated into a special group, managed by Chen Liang, responsible for the discussion and resolution of retail-related businesses. This retail group is the current g-team; the team members were five core management personnel.

Starting from Q2 2022, Meituan divided its business into the core local commerce and new initiatives segments. While the former includes the above-mentioned business such as food delivery, instashopping, in-store, and hotel&travel, all other various C-end services, such as Meituan Grocery, Meituan Select, together with B-end services such as catering supply chain (Kuailu) and restaurant management system, are all packaged in the new initiatives segment. With the end of the business testing period, Meituan has begun to optimize and adjust this new segment. 

For example, after Meituan Select was upgraded to "Next-day Supermarket, "it focused on strengthening the national next-day delivery logistics network. In Q4 2022, GTV contribution from centralized procurement increased notably, and the number of pick-up stations in low-tier markets exceeded 1.1 million.

Meituan Grocery, famous for its high average ticket size, did not rush into the sinking market. Instead, it focused on the supply of fresh produce, snacks, daily necessities, personal care, prepared meals and more, and polished user habits to increase transaction frequency. It was previously reported that Meituan Grocery had broken even. At the earnings call, Meituan predicted that as consumption further recovers this year, Meituan Grocery is expected to maintain a high-digit growth.

Looking ahead to 2023, Meituan announced to continue implementation of the "Retail + Technology" corporate strategy to provide consumers with rich selections of products and services, facilitate the recovery of local consumption, and create employment opportunities.